1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event report) August 11, 1997
LSB BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
North Carolina
(State or Other Jurisdiction of Incorporation)
0-11448 56-1348147
(Commission File Number) (I.R.S. Employer Identification No.)
One LSB Plaza, Lexington, North Carolina 27292
(Address of Principal Executive Offices) (Zip Code)
(910) 248-6500
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Effective August 11, 1997, Old North State Bank ("ONSB") merged with and into
Lexington State Bank (the "Merger"), a subsidiary of LSB Bancshares, Inc., a
bank holding company (the "Company"). The Merger occurred pursuant to an
Agreement and Plan of Reorganization and Merger (the "Merger Agreement") dated
as of March 14, 1997 by and among the Company, Lexington State Bank and ONSB.
Pursuant to the Merger Agreement, each outstanding share of ONSB common stock
was converted into .938 shares of the Company's common stock, $5 par value per
share. An aggregate of 1,507,719 shares of the Company's common stock were
issued in the Merger. The Company paid cash in lieu of fractional share
interests at $20.24 per fractional share of ONSB common stock. Outstanding
options and warrants to purchase ONSB's common stock were converted into
options and warrants to purchase shares of the Company's common stock based
upon the same exchange rate. The shareholders of the Company and ONSB approved
the Merger at meetings held on August 1, 1997. The Federal Deposit Insurance
Corporation approved the Merger on July 25, 1997, and the North Carolina
Banking Commission approved the Merger on July 23, 1997.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of businesses acquired.
Consolidated Balance Sheets of Old North State Bank for the years
ended December 31, 1996 and 1995
Consolidated Statements of Income of Old North State Bank for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity of Old
North State Bank for the years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows of Old North State Bank for the
years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements of Old North State Bank
Independent Auditor's Report of Larrowe, Cardwell & Company, LC
Consolidated Balance Sheets of Old North State Bank for the
six months ended June 30, 1997
Consolidated Statements of Income of Old North State Bank for the
six months ended June 30, 1997 and June 30, 1996
Consolidated Statements of Cash Flows of Old North State Bank for the
six months ended June 30, 1997 and June 30, 1996
Consolidated Statements of Changes in Stockholders' Equity of
Old North State Bank for the six months ended June 30, 1997 and
June 30, 1996
Notes to Consolidated Financial Statements of Old North State Bank
(b) Pro forma financial information.
Pro Forma Condensed Balance Sheet June 30, 1997
Pro Forma Condensed Balance Sheet December 31, 1996
Pro Forma Condensed Income Statement for the six months ended
June 30, 1997
Pro Forma Condensed Income Statement for the six months ended
June 30, 1996
Pro Forma Condensed Income Statement for the year ended
December 31, 1996
Pro Forma Condensed Income Statement for the year ended
December 31, 1995
Pro Forma Condensed Income Statement for the year ended
December 31, 1994
Notes to Pro Forma Condensed Financial Information
(c) The following exhibits are filed herewith:
Exhibit No. Description of Exhibit
- ----------- ----------------------
2 Agreement and Plan of Reorganization and Merger dated March 14,
1997 by and among LSB Bancshares, Inc., Lexington State Bank, and
Old North State Bank.
23 Consent of Larrowe, Cardwell & Company, LC
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
LSB BANCSHARES, INC.
Date: October 27, 1997 By: /s/ Robert F. Lowe
---------------------- -------------------------------
Robert F. Lowe
Chairman, President and
Chief Executive Officer
4
OLD NORTH STATE BANK
================================================================================
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
ASSETS 1996 1995
------------ ------------
Cash and due from banks $ 4,409,195 $ 5,054,158
Interest-bearing deposits with banks 154,964 845,155
Federal funds sold - 1,765,000
Investment securities available for sale 33,338,179 33,378,767
Investment securities to be held to maturity,
approximate market value $4,100,003 in 1996;
and $2,257,430 in 1995 4,146,321 2,292,630
Loans, net of allowance for loan losses of $1,000,000
in 1996 and $980,993 in 1995 82,848,597 69,615,597
Property and equipment, net 2,424,074 2,426,839
Accrued income 1,014,675 985,038
Other assets 1,908,602 2,044,026
------------ ------------
$130,244,607 $118,407,210
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Demand deposits 18,532,416 14,920,476
Interest-bearing demand deposits 12,830,570 12,035,926
Savings deposits 15,795,893 16,297,078
Large denomination time deposits 15,057,971 12,767,541
Other time deposits 47,884,021 48,722,028
------------ ------------
Total deposits 110,100,871 104,743,049
Federal funds purchased and securities sold under
agreements to repurchase 2,824,832 2,096,354
Long-term debt 4,908,333 -
Accrued interest payable 941,875 1,115,243
Other liabilities 292,951 207,924
------------ ------------
119,068,862 108,162,570
------------ ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock, $5 par value; 2,000,000 shares
authorized; 1,580,978 and 1,572,171 shares
issued in 1996 and 1995, respectively 7,904,890 7,860,855
Surplus 2,850,260 1,846,297
Retained earnings 529,325 503,016
Unrealized appreciation (depreciation) on investment
securities available for sale, net of income taxes (108,730) 34,472
------------ ------------
11,175,745 10,244,640
------------ ------------
$130,244,607 $118,407,210
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
OLD NORTH STATE BANK
================================================================================
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1996 1995 1994
---------- ---------- ----------
INTEREST INCOME:
Loans and fees on loans $7,468,187 $3,070,981 $2,277,591
Federal funds sold 67,344 88,714 27,834
Investment securities:
Taxable 2,294,255 1,098,182 621,908
Exempt from federal income tax 35,053 16,800 11,219
Deposits with banks 26,348 7,711 6,658
---------- ---------- ----------
9,891,187 4,282,388 2,945,210
---------- ---------- ----------
INTEREST EXPENSE:
Deposits 4,046,643 1,947,386 1,137,024
Federal funds purchased and securities
sold under agreements to repurchase 77,258 3,624 2,859
Other borrowed funds 265,406 26,975 23,261
---------- ---------- ----------
4,389,307 1,977,985 1,163,144
---------- ---------- ----------
Net interest income 5,501,880 2,304,403 1,782,066
PROVISION FOR LOAN LOSSES 243,079 115,000 63,563
---------- ---------- ----------
Net interest income after provision for loan losses 5,258,801 2,189,403 1,718,503
---------- ---------- ----------
NONINTEREST INCOME:
Service charges on deposit accounts 524,731 314,128 229,870
Securities gains (losses) (36,961) (5,174) (20,243)
Other income 231,440 45,775 38,701
---------- ---------- ----------
719,210 354,729 248,328
---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits 2,501,906 1,057,269 801,979
Occupancy expense 487,699 167,665 121,427
Equipment expense 283,018 136,021 103,539
Other expense 1,284,686 617,555 485,016
---------- ---------- ----------
4,557,309 1,978,510 1,511,961
---------- ---------- ----------
Income before income taxes 1,420,702 565,622 454,870
INCOME TAX EXPENSE 394,393 187,252 156,099
---------- ---------- ----------
Net income $1,026,309 $ 378,370 $ 298,771
========== ========== ==========
EARNINGS PER COMMON SHARE $ .65 $ .50 $ .44
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 1,576,623 750,659 686,611
========== ========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
OLD NORTH STATE BANK
================================================================================
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
COMMON STOCK UNREALIZED
------------ RETAINED DEPRECIATION
SHARES AMOUNT SURPLUS EARNINGS ON SECURITIES TOTAL
------ ------ ------- -------- ------------- -----
BALANCE, DECEMBER 31, 1993 335,087 $1,675,435 $1,825,721 $113,382 $ - $3,614,538
Net income - - - 298,771 - 298,771
Dividends paid
($.08 per share) - - - (29,487) - (29,487)
Stock options exercised 33,502 167,510 201,012 - - 368,522
Stock dividend (5%) 18,430 92,150 165,870 (258,020) - -
Fractional shares purchased (121) (605) (1,080) - - (1,685)
Fractional shares reissued 121 605 1,210 - - 1,815
Unrealized depreciation
on investment securities
available for sale, net
of taxes - - - - (290,624) (290,624)
--------- ---------- ----------- ----------- --------- ----------
BALANCE, DECEMBER 31, 1994 387,019 1,935,095 2,192,733 124,646 (290,624) 3,961,850
Net income - - - 378,370 - 378,370
Stock split (1.922 for 1)
effected in the form of a
dividend 356,832 1,784,160 (1,784,160) - - -
Fractional shares purchased (437) (2,185) (5,236) - - (7,421)
Fractional shares reissued 437 2,185 1,683 - - 3,868
Stock issued in affiliation 828,320 4,141,600 1,441,277 - - 5,582,877
Net change in unrealized
depreciation on investment
securities available for sale,
net of taxes - - - - 325,096 325,096
--------- ---------- ----------- ----------- --------- ----------
BALANCE, DECEMBER 31, 1995 1,572,171 7,860,855 1,846,297 503,016 34,472 10,244,640
Net income - - - 1,026,309 - 1,026,309
Transfer of capital - - 1,000,000 (1,000,000) - -
Stock options exercised 8,807 44,035 3,963 - - 47,998
Net change in unrealized
depreciation on investment
securities available for sale,
net of taxes - - - - (143,202) (143,202)
--------- ---------- ----------- ----------- --------- ----------
BALANCE, DECEMBER 31, 1996 1,580,978 $7,904,890 $2,850,260 $ 529,325 $(108,730) $11,175,745
========= ========== =========== =========== ========= ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
OLD NORTH STATE BANK
================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1996 1995 1994
------------ ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,026,309 $ 378,370 $ 298,771
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 286,926 120,495 101,676
Amortization of intangibles 107,797 14,280 1,805
Accretion on loans and deposits purchased (251,923) - -
Provision for loan losses 243,079 115,000 63,563
Deferred income taxes 214,985 17,188 1,382
Net realized (gains) losses on securities 36,961 5,174 20,243
Accretion of discount on securities, net (40,071) (15,525) (20,634)
Changes in assets and liabilities:
Accrued income (29,637) (119,213) (134,835)
Other assets (113,588) (80,427) 162,481
Accrued interest payable (173,368) 415,802 47,843
Other liabilities 85,027 (27,352) 143,102
------------ ----------- ------------
Net cash provided by operating activities 1,392,497 823,792 685,397
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits in banks 690,191 (10,977) 90,000
Net (increase) decrease in federal funds sold 1,765,000 (865,000) -
Purchases of securities (23,637,985) (7,439,877) (9,224,292)
Sales of securities 7,306,448 2,750,000 1,940,030
Maturities of securities 14,304,572 3,868,236 726,129
Net increase in loans (13,286,231) (7,208,723) (4,237,801)
Purchases of properties and equipment (284,161) (136,267) (198,090)
------------ ----------- ------------
Net cash used in investing activities (13,142,166) (9,042,608) (10,904,024)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, savings and NOW deposits 3,905,399 3,043,791 4,106,676
Net increase in time deposits 1,514,498 6,931,073 5,307,147
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase 728,478 (299,320) 200,000
Proceeds from (repayment of) long-term debt 4,908,333 (375,000) 375,000
Dividends paid - - (29,487)
Proceeds from issuance of common stock 47,998 2,249,891 368,652
------------ ----------- ------------
Net cash provided by financing activities 11,104,706 11,550,435 10,327,988
------------ ----------- ------------
Net increase (decrease) in cash and cash equivalents (644,963) 3,331,619 109,361
CASH AND CASH EQUIVALENTS, BEGINNING 5,054,158 1,722,539 1,613,178
------------ ----------- ------------
CASH AND CASH EQUIVALENTS, ENDING $ 4,409,195 $ 5,054,158 $ 1,722,539
============ =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 4,624,750 $ 1,562,183 $ 1,115,301
============ =========== ============
Taxes paid $ 208,323 $ 269,335 $ 41,039
============ =========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Other real estate acquired in settlement of loans $ - $ - $ 137,780
============ =========== ============
Net noncash assets acquired for common stock $ - $ 2,845,138 $ -
============ =========== ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
OLD NORTH STATE BANK
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Old North State Bank (the Bank) was organized and incorporated under the laws
of the State of North Carolina on June 30, 1989. The Bank commenced operations
on August 14, 1989, and currently serves the counties of Forsyth and Stokes,
and the city of Winston-Salem, North Carolina, through seven banking offices.
As a state chartered, Federal Reserve member bank, the Bank is subject to
regulation by the State of North Carolina Banking Commission and the Federal
Reserve. Old North State Bank Investments, Inc. is a wholly-owned subsidiary
of the Bank which sells mutual funds and annuities.
The accounting and reporting policies of the Bank and its subsidiary follow
generally accepted accounting principles and general practices within the
financial services industry. Following is a summary of the more significant
policies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Bank and it
subsidiary. All significant, intercompany transactions and balances have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for loan and
foreclosed real estate losses, management obtains independent appraisals for
significant properties.
Substantially all of the Bank's loan portfolio consists of loans in its market
area. Accordingly, the ultimate collectibility of a substantial portion of the
Bank's loan portfolio and the recovery of a substantial portion of the carrying
amount of foreclosed real estate are susceptible to changes in local market
conditions. The regional economy is diverse with the primary employers being
health care, manufacturing and financial services.
While management uses available information to recognize loan and foreclosed
real estate losses, future additions to the allowances may be necessary based
on changes in local economic conditions. In addition, regulatory agencies, as
a part of their routine examination process, periodically review the Bank's
allowances for loan and foreclosed real estate losses. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their
examinations. Because of these factors, it is reasonably possible that the
allowances for loan and foreclosed real estate losses may change materially in
the near term.
CASH AND CASH EQUIVALENTS
For the purposes of presentation in the statement of cash flows, cash and cash
equivalents are defined as those amounts included in cash and due from banks
(including items in process of clearing).
TRADING SECURITIES
The Bank does not hold securities for short-term resale and therefore does not
maintain a trading securities portfolio.
9
SECURITIES HELD TO MATURITY
Bonds, notes, and debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity or to call dates.
10
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
SECURITIES AVAILABLE FOR SALE
Available-for-sale securities are reported at fair value and consist of bonds,
notes, debentures, and certain equity securities not classified as trading
securities or as held-to-maturity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of
stockholders' equity. Realized gains and losses on the sale of
available-for-sale securities are determined using the specific-identification
method. Premiums and discounts are recognized in interest income using the
interest method over the period to maturity or to call dates.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below cost that are other than temporary are
reflected as write-downs of the individual securities to fair value. Related
write-downs are included in earnings as realized losses.
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal amount adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan. Discounts and
premiums on any purchased residential real estate loans are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Discounts and premiums on any purchased
consumer loans are recognized over the expected lives of the loans using
methods that approximate the interest method.
Interest is accrued and credited to income based on the principal amount
outstanding. The accrual of interest on impaired loans is discontinued when,
in management's opinion, the borrower may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued interest
is reversed. Interest income is subsequently recognized only to the extent
cash payments are received.
The allowance for loan losses is increased by charges to income and decreased
by charge-offs, net of recoveries. Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
PROPERTY AND EQUIPMENT
Land is carried at cost. Bank premises, furniture and equipment, and leasehold
improvements are carried at cost, less accumulated depreciation and
amortization computed principally by the straight-line method over the
following estimated useful lives:
Years
-----
Buildings and improvements 10-40
Furniture and equipment 3-20
FORECLOSED PROPERTIES
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value less anticipated cost to sell
at the date of foreclosure establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell.
Revenue and expenses from operations and changes in the valuation allowance are
included in loss on foreclosed real estate. The historical average holding
period for such properties is less than 12 months.
11
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans using the
accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. The Company is not required to adopt the fair
value based recognition provisions prescribed under SFAS No. 123, Accounting
for Stock-Based Compensation (issued in October 1995), but complies with the
disclosure requirements set forth in the Statement, which include disclosing
proforma net income as if the fair value method of accounting had been applied.
INCOME TAXES
Provision for income taxes is based on amounts reported in the statements of
income (after exclusion of non-taxable income such as interest on state and
municipal securities) and consists of taxes currently due plus deferred taxes
on temporary differences in the recognition of income and expense for tax and
financial statement purposes. Deferred tax assets and liabilities are included
in the financial statements at currently enacted income tax rates applicable to
the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.
Deferred income tax liability relating to unrealized appreciation (or the
deferred tax asset in the case of unrealized depreciation) on investment
securities available for sale is recorded in other liabilities (assets). Such
unrealized appreciation or depreciation is recorded as an adjustment to equity
in the financial statements and not included in income determination until
realized. Accordingly, the resulting deferred income tax liability or asset is
also recorded as an adjustment to equity.
EARNINGS PER COMMON SHARE
Net income per share is computed based on the weighted average number of shares
outstanding during the period, after giving retroactive effect to stock splits
and dividends.
FINANCIAL INSTRUMENTS
Any derivative financial instruments held or issued by the Bank are held or
issued for purposes other than trading.
In the ordinary course of business the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit and commercial
and standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received.
The Bank does not utilize interest-rate exchange agreements or interest-rate
futures contracts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet.
In cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
12
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate their fair values.
Interest-bearing deposits with banks: Fair values for time deposits are
estimated using a discounted cash flow analysis that applies interest rates
currently being offered on certificates to a schedule of aggregated contractual
maturities on such time deposits.
Available-for-sale and held-to-maturity securities: Fair values for
securities, excluding restricted equity securities, are based on quoted market
prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments. The
carrying values of restricted equity securities approximate fair values.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans are estimated using discounted cash flow
analysis, based on interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Loan fair value
estimates include judgments regarding future expected loss experience and risk
characteristics. Fair value for impaired loans are estimated using discounted
cash flow analysis or underlying collateral values, where applicable. The
carrying amount of accrued interest receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for demand and savings deposits
are, by definition, equal to the amount payable on demand at the reporting
date. The fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual maturities on
such time deposits. The carrying amount of accrued interest payable
approximates fair value.
Short-term debt: The carrying amounts of short-term debt approximate their
fair values.
Other liabilities: For fixed-rate loan commitments, fair value considers the
difference between current levels of interest rates and the committed rates.
The carrying amounts of other liabilities approximates fair value.
RECLASSIFICATION
Certain reclassifications have been made to the prior years' financial
statements to place them on a comparable basis with the current year. Net
income and stockholders' equity previously reported were not affected by these
reclassifications.
NOTE 2. BUSINESS COMBINATION
On December 28, 1995, Old North State Bank acquired Piedmont BancShares
Corporation and its consolidated subsidiary, Enterprise Bank and Trust Company,
in exchange for 828,320 shares of Old North State Bank common stock valued at
$5,582,877. In conjunction with the acquisition, Piedmont BancShares
Corporation and Enterprise Bank and Trust Company were merged with and into Old
North State Bank. Enterprise Financial Service Corporation, formerly a
wholly-owned subsidiary of Enterprise Bank and Trust Company, was renamed Old
North State Investments, Inc. and continues as a wholly-owned subsidiary of Old
North State Bank.
13
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. BUSINESS COMBINATION, CONTINUED
The acquisition was accounted for as a purchase transaction and accordingly the
results of operations attributable to the acquired companies are included in
the consolidated financial statements only from the date of acquisition. The
excess of purchase price over fair value of net tangible and identified
intangible assets acquired will be amortized on the straight-line basis over 15
years. The acquisition is summarized as follows:
Purchase price, including direct costs of $322,705 $ 5,905,582
------------
Loans, net 35,514,561
Investment securities 18,842,169
Identified intangible assets 461,731
Other assets 5,853,924
Deposits (53,087,187)
Other liabilities (2,486,616)
------------
Net tangible and identified intangible assets acquired
(at fair market value) 5,098,582
------------
Excess of purchase price over net tangible and identified
intangible assets acquired (at fair market value) $ 807,000
============
Results of operations for the years ending December 31, 1995 and 1994, as if
the combination had occurred on January 1, 1994, are summarized below:
PIEDMONT
BANCSHARES
OLD NORTH CORPORATION PRO FORMA
1995 STATE BANK & SUBSIDIARIES ADJUSTMENTS COMBINED
- ---- ---------- -------------- ----------- ---------
Interest income $4,246,819 $4,332,802 $ 168,451 $8,748,072
Interest expense 1,960,604 2,114,699 - 4,075,303
---------- ---------- --------- ----------
Net interest income 2,286,215 2,218,103 168,451 4,672,769
Provision for credit losses 115,000 308,975 - 423,975
Other income 351,186 431,091 - 782,277
Other expense 1,958,094 2,531,282 71,425 4,560,801
---------- ---------- --------- ----------
Income before income taxes 564,307 (191,063) 97,026 470,270
Income taxes (benefit) 187,252 (64,961) - 122,291
---------- ---------- --------- ----------
Net income (loss) $ 377,055 $ (126,102) $ 97,026 $ 347,979
========== ========== ========= ==========
1994
- ----
Interest income $2,945,210 $3,160,860 $168,451 $6,274,521
Interest expense 1,163,144 1,298,734 (44,561) 2,417,317
---------- ---------- --------- ----------
Net interest income 1,782,066 1,862,126 213,012 3,857,204
Provision for credit losses 63,563 47,395 - 110,958
Other income 248,328 372,050 - 620,378
Other expense 1,511,961 1,976,641 71,425 3,560,027
---------- ---------- --------- ----------
Income before income taxes 454,870 210,140 141,587 806,597
Income taxes (benefit) 156,099 (136,000) (207,448) 227,547
---------- ---------- --------- ----------
Net income $ 298,771 $ 346,140 $ (65,861) $ 579,050
========== ========== ========= ==========
14
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. RESTRICTIONS ON CASH
To comply with banking regulations, the Bank is required to maintain certain
average cash reserve balances. The daily average cash reserve requirement was
approximately $698,000 and $246,000 for the periods including December 31, 1996
and 1995, respectively.
NOTE 4. INVESTMENT SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities and
their approximate fair values at December 31 follow:
AMORTIZED UNREALIZED UNREALIZED FAIR
1996 COST GAINS LOSSES VALUE
- ---- ----------- ---------- ---------- -----------
AVAILABLE FOR SALE:
U.S. Treasury securities $ 5,260,412 $ 26,281 $ 15,395 $ 5,271,298
U.S. Government agency securities 19,047,084 35,566 151,533 18,931,117
Mortgage-backed securities 7,206,155 30,658 93,837 7,142,976
Other securities 1,108,071 4,861 1,344 1,111,588
Equity securities 881,200 - - 881,200
----------- ---------- ---------- -----------
$33,502,922 $ 97,366 $ 262,109 $33,338,179
=========== ========== ========== ===========
HELD TO MATURITY:
U.S. Government agency securities $ 1,000,000 $ - $ - $ 1,000,000
Mortgage-backed securities 1,744,931 - 32,096 1,712,835
Other securities 1,401,390 3,144 17,366 1,387,168
----------- ---------- ---------- -----------
$ 4,146,321 $ 3,144 $ 49,462 $ 4,100,003
=========== ========== ========== ===========
1995
- ----
AVAILABLE FOR SALE:
U.S. Treasury securities $10,426,829 $ 24,304 $ 229 $10,450,904
U.S. Government agency securities 15,457,345 92,501 81,738 15,468,108
Mortgage-backed securities 5,891,488 25,496 11,814 5,905,170
Other securities 1,093,775 4,427 717 1,097,485
Equity securities 457,100 - - 457,100
----------- ---------- ---------- -----------
$33,326,537 $ 146,728 $ 94,498 $33,378,767
=========== ========== ========== ===========
HELD TO MATURITY:
Mortgage-backed securities $ 1,744,490 $ - $ 32,565 $ 1,711,925
Other securities 548,140 2,079 4,714 545,505
----------- ---------- ---------- -----------
$ 2,292,630 $ 2,079 $ 37,279 $ 2,257,430
=========== ========== ========== ===========
Investment securities with amortized cost of approximately $14,503,000 and
$14,379,000 at December 31, 1996 and 1995, respectively, were pledged as
collateral on public deposits and for other purposes as required or permitted
by law.
Gross realized gains and losses for the years ended December 31, 1996, 1995 and
1994 are as follows:
1996 1995 1994
--------- -------- ---------
Realized gains $ 16,630 $ 17,009 $ 1,500
Realized losses (53,591) (22,183) (21,743)
-------- -------- --------
$(36,961) $ (5,174) $(20,243)
========= ======== =========
15
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. INVESTMENT SECURITIES, CONTINUED
The amortized cost and approximate fair value of investment securities by
scheduled maturity are shown below. Maturities may differ from scheduled
maturities in mortgage-backed securities because the mortgages underlying the
securities may be called or repaid without any penalties. Therefore, these
securities are not included in the maturity categories in the following
maturity summary:
AVAILABLE FOR SALE HELD TO MATURITY
------------------------ ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- ----------- ---------- ----------
Due in one year or less $ 2,994,386 $ 3,013,415 $ - $ -
Due after one year through five years 19,115,711 18,991,779 563,598 564,433
Due after five years through ten years 2,862,152 2,862,810 1,000,000 1,000,000
Due after ten years 443,318 446,000 837,792 822,735
Mortgage-backed securities 7,206,155 7,142,975 1,744,931 1,712,835
Equity securities 881,200 881,200 - -
----------- ----------- ---------- ----------
$33,502,922 $33,338,179 $4,146,321 $4,100,003
=========== =========== ========== ==========
NOTE 5. LOANS RECEIVABLE
The major components of loans in the consolidated balance sheets at December
31, 1996 and 1995 are as follows (in thousands):
1996 1995
-------- --------
Commercial $ 20,740 $ 19,730
Real estate:
Construction and land development 5,030 3,525
Residential, 1-4 families 23,128 19,258
Residential, 5 or more families 2,854 1,519
Farmland 255 250
Nonfarm, nonresidential 24,707 20,499
Agricultural 284 153
Consumer 6,527 5,618
Other 324 45
-------- --------
83,849 70,597
Less allowance for loan losses (1,000) (981)
-------- --------
$ 82,849 $ 69,616
======== ========
Nonperforming assets at December 31, 1996 and 1995 are detailed as follows:
1996 1995
-------- --------
Nonaccrual loans $259,002 $339,700
Restructured loans - -
Loans past due 90 days or more 138,000 -
-------- --------
Total nonperforming loans 397,002 339,700
Foreclosed, repossessed and idled properties 25,929 -
-------- --------
Total nonperforming assets $422,931 $339,700
======== ========
16
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. LOANS RECEIVABLE, CONTINUED
Gross interest income that would have been recognized for each year if the
nonaccrual loans and restructured loans had been current in accordance with
their original terms and had been outstanding throughout the period or since
origination, if held part of the period, is detailed below. Applicable interest
income that was actually collected and included in net income for each year is
also summarized below:
1996 1995
------- -------
NONACCRUAL LOANS:
Interest income, original terms $23,102 $17,397
======= =======
Interest income recognized $ 2,883 $ 3,932
======= =======
RESTRUCTURED LOANS:
Interest income, original terms $ - $ -
======= =======
Interest income recognized $ - $ -
======= =======
An allowance determined in accordance with SFAS No. 114 and No. 118 is provided
for all impaired loans. The total recorded investment in impaired loans and
the related allowance for loan losses at December 31, the average annual
recorded investment in impaired loans, and interest income recognized on
impaired loans for the year (all approximate) are summarized below.
1996 1995
-------- --------
Recorded investment at December 31 $964,000 $549,000
======== ========
Allowance for loan losses $278,000 $31,000
======== ========
Average recorded investment for the year $944,000 $224,000
======== ========
Interest income recognized for the year $ 69,000 $ 14,000
======== ========
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
NOTE 6. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
1996 1995 1994
---------- --------- --------
BALANCE, BEGINNING $ 980,993 $ 372,544 $321,168
Provision charged to expense 243,079 115,000 63,563
Recoveries of amounts charged off 24,146 33,430 11,425
Amounts charged off (248,218) (159,951) (23,612)
Allowance of acquired bank at date of acquisition - 619,970 -
---------- --------- --------
BALANCE, ENDING $1,000,000 $ 980,993 $372,544
========== ========= ========
NOTE 7. PROPERTY AND EQUIPMENT
Components of property and equipment and total accumulated depreciation at
December 31, 1996 and 1995, are as follows:
1996 1995
----------- ----------
Land $ 407,727 $ 407,727
Buildings and improvements 1,259,356 1,203,002
Equipment and fixtures 1,861,264 1,633,457
----------- ----------
3,528,347 3,244,186
Less accumulated depreciation (1,104,273) (817,347)
----------- ----------
$ 2,424,074 $2,426,839
=========== ==========
17
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. PROPERTY AND EQUIPMENT, CONTINUED
The Bank leases certain branch locations under operating leases which expire
through January 2005. Rental expense was $251,881, $46,872, and $15,488 in
1996, 1995, and 1994, respectively. Future minimum rental commitments under
the aforementioned noncancelable leases are as follows:
1997 $ 215,293
1998 163,560
1999 158,560
2000 151,560
2001 151,560
Thereafter 1,075,599
----------
$1,916,132
==========
NOTE 8. SHORT-TERM DEBT
Short-term debt consists of federal funds purchased and securities sold under
agreements to repurchase, which generally mature within one to four days from
the transaction date, and other short-term borrowings. Additional information
at December 31, 1996 and 1995 and for the years then ended is summarized below:
1996 1995
---------- ----------
Outstanding balance at December 31 $2,824,832 $2,096,354
========== ==========
Year-end weighted average rate 4.31% 3.94%
========== ==========
Daily average outstanding during the year $1,780,164 $63,513
========== ==========
Average rate for the year 4.25% 5.71%
========== ==========
Maximum outstanding at any month-end during the year $2,824,832 $2,096,354
========== ==========
The Bank has established various credit facilities to provide additional
liquidity if and as needed. These include unsecured lines of credit with
correspondent banks totaling $6,000,000.
NOTE 9. LONG-TERM DEBT
The Bank has a $16,000,000 secured credit availability arrangement with the
Federal Home Loan Bank which may be repaid over a period exceeding one year.
At December 31, 1996 the outstanding balance under this arrangement was
$4,908,333, which bears interest at 5.75%. There was no outstanding balance at
December 31, 1995.
Future maturities of long-term debt are detailed below:
YEAR AMOUNT
1997 $ 183,333
1998 383,333
1999 1,191,667
2000 700,000
2001 2,150,000
2002 300,000
----------
$4,908,333
==========
18
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Bank's financial instruments are as follows
(dollars in thousands):
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- ------
FINANCIAL ASSETS
Cash and cash equivalents $ 4,409 $ 4,409 $ 5,054 $ 5,054
Interest-bearing deposits with banks 155 155 845 845
Federal funds sold - - 1,765 1,765
Securities, available-for-sale 33,338 33,338 33,379 33,379
Securities, held to maturity 4,146 4,100 2,293 2,257
Loans, net of allowance for loan losses 82,849 83,291 69,616 71,212
FINANCIAL LIABILITIES
Deposits 110,101 110,357 104,743 105,582
Short-term debt 2,825 2,825 2,096 2,096
Long-term debt 4,908 4,633 - -
OFF-BALANCE SHEET ASSETS (LIABILITIES)
Commitments to extend credit and
standby letters of credit - - - -
NOTE 11. COMMON STOCK
OPTIONS AND WARRANTS
The Bank maintains a qualified incentive stock option plan which originally
reserved up to 67,624 shares for purchase by eligible employees. Options are
granted under the plan which are exercisable at $5.45 per share or the fair
market value of the Bank's common stock at the date of grant, whichever is
higher. Options generally vest at 20% per year and expire ten years from the
date of grant (from April 2000 through March 2004), except that expiration and
vesting may occur earlier as a result of death, disability, termination or
certain changes in control of the Bank. At December 31, 1996, no additional
options are available for grant under the plan.
The Bank also has common stock options outstanding at December 31, 1996 and
1995, issued under a non-qualified employee stock option plan of a company
acquired by the Bank. Options outstanding pursuant to this arrangement are
fully vested, exercisable at $9.09 per share and expire between July 1999 and
September 2001. At December 31, 1996, there were 66,098 of these options
outstanding.
At December 31, 1996 and 1995, the Bank had warrants outstanding to purchase
40,342 shares of its common stock. These warrants were issued to organizers
and founders of a company acquired by the Bank, are immediately exercisable at
$9.09 per share and expire on April 11, 2000.
The Bank maintained a nonqualified stock option plan which reserved up to
33,509 shares (before 1994 stock dividend and 1995 split) for purchase by
directors. During 1994 options to purchase 33,502 shares (all that were
granted under the plan) were exercised at $11 per share.
19
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. COMMON STOCK, CONTINUED
Activity (restated for stock dividends and splits) during the years ended
December 31, 1996 and 1995, is summarized below:
GRANTED AND OUTSTANDING
--------------------------------------------------
INCENTIVE NONQUALIFIED
STOCK STOCK EXERCISE(1)
WARRANTS OPTIONS OPTIONS PRICE EXERCISED
-------- --------- ------------ ----------- ---------
BALANCE DECEMBER 31, 1994 - 65,391 - $ 5.45 -
Granted - - - - -
Exercised - - - - -
Forfeited - - - - -
Expired - - - - -
Issued under plans of a company
acquired by the Bank 40,342 - 66,098 9.09 -
---------- ------- ------- ---------- --------
BALANCE DECEMBER 31, 1995 40,342 65,391 66,098 7.70 -
Granted - - - - -
Exercised - (8,807) - 5.45 8,807
Forfeited - (9,688) - 5.45 -
Expired - - - - -
---------- ------- ------- ---------- --------
BALANCE DECEMBER 31, 1996 40,342 46,896 66,098 $ 7.98 8,807
========== ======= ======= ========== ========
Additional information relating to the options and warrants is detailed below:
1996 1995
------------ ---------
OUTSTANDING OPTIONS AND WARRANTS AT DECEMBER 31:
Exercise price(1) $ 7.98 $ 7.70
Range of exercise prices:
From $ 5.45 $ 5.45
To $ 9.09 $ 9.09
Remaining contractual life in months(1) 38 54
EXERCISABLE OPTIONS AND WARRANTS AT DECEMBER 31:
Number 152,136 160,540
Exercise price(1) $ 8.00 $ 7.86
OPTIONS AND WARRANTS GRANTED DURING THE YEAR:
Grant-date fair value(1) $ - $ -
Exercise price(1) $ - $ -
SIGNIFICANT ASSUMPTIONS USED IN DETERMINING FAIR VALUE:
Risk-free interest rate n/a n/a
Expected life in years n/a n/a
Expected dividends n/a n/a
Expected volatility n/a n/a
RESULTS OF OPERATIONS:
Compensation cost recognized in income $ - $ -
============ =========
Pro forma net income(2) $ 1,026,309 $ 378,370
============ =========
Pro forma earnings per common share(2) $ .65 $ .50
============ =========
20
(1) Weighted average
(2) As if the fair value based method prescribed by SFAS No. 123 had been
applied
21
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. EMPLOYEE BENEFIT PLANS
The Bank has adopted a profit sharing plan pursuant to Section 401(k) of the
Internal Revenue Code. The plan covers substantially all employees who have
completed one year of service. Participants may contribute a percentage of
compensation, subject to a maximum allowed under the Code. In addition, the
Bank may make additional contributions at the discretion of the Board of
Directors. The Bank contribution was approximately $13,100 for 1996. There
was no expense to the Bank relating to this plan for 1995 or 1994, as the plan
was not adopted until December 28, 1995.
NOTE 13. INCOME TAXES
CURRENT AND DEFERRED INCOME TAX COMPONENTS
The components of income tax expense (substantially all Federal) are as
follows:
1996 1995 1994
-------- -------- --------
Current $179,408 $170,064 $154,717
Deferred 214,985 17,188 1,382
-------- -------- --------
$394,393 $187,252 $156,099
======== ======== ========
RATE RECONCILIATION
A reconciliation of income tax expense computed at the statutory federal income
tax rate to income tax expense included in the statements of income follows:
1996 1995 1994
-------- -------- --------
Tax at statutory federal rate $483,039 $192,311 $154,656
Tax exempt interest income (11,918) (5,712) (3,814)
Intangibles accretion, net of amortization (74,736) - -
State income tax, net of federal benefit 2,089 - 5,117
Other (4,081) 653 140
-------- -------- --------
$394,393 $187,252 $156,099
======== ======== ========
DEFERRED INCOME TAX ANALYSIS
The components of net deferred tax assets (all Federal) at December 31, 1996
and 1995 are summarized as follows:
1996 1995
--------- ---------
Deferred tax assets $ 598,300 $ 734,129
Deferred tax liabilities (131,675) (126,289)
--------- ---------
$ 466,625 $ 607,840
========= =========
The tax effects of each significant item creating deferred taxes are summarized below:
1996 1995
--------- ---------
Net unrealized (appreciation) depreciation on
securities available for sale $ 56,012 $ (17,758)
Allowance for loan losses 270,758 283,492
Net operating loss carryforwards 250,880 443,092
Amortization of deposit premiums 14,578 6,408
Deferred compensation 4,032 -
Contributions - 117
Depreciation (93,386) (83,384)
Accretion of discount on investment securities (38,289) (25,147)
Other 2,040 1,020
-------- ---------
$466,625 $ 607,840
======== =========
22
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. INCOME TAXES, CONTINUED
OPERATING LOSS AND CARRYFORWARDS
At December 31, 1996, the Bank had federal net operating loss carryforwards for
income tax purposes of approximately $737,900 which will expire from 2005
through 2008 if not previously utilized. State net economic loss
carryforwards, which expire in 1997 and 1998, amount to approximately $549,000
at December 31, 1996. The deferred tax benefit resulting from state net
economic loss carryforwards has been offset in full by a valuation allowance.
NOTE 14. COMMITMENTS AND CONTINGENCIES
LITIGATION
In the normal course of business the Bank is involved in various legal
proceedings. After consultation with legal counsel, management believes that
any liability resulting from such proceedings will not be material to the
consolidated financial statements.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, credit risk in
excess of the amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as for on-balance-sheet instruments. A summary of the
Bank's commitments at December 31, 1996 and 1995 is as follows:
1996 1995
----------- -----------
Commitments to extend credit $17,114,000 $16,079,000
Standby letters of credit 665,500 269,600
----------- -----------
$17,779,500 $16,348,600
=========== ===========
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the party. Collateral held varies, but may
include accounts receivable, inventory, property and equipment, residential
real estate and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Bank deems necessary.
23
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14. COMMITMENTS AND CONTINGENCIES, CONTINUED
CONCENTRATIONS OF CREDIT RISK
Substantially all of the Bank's loans, commitments to extend credit, and
standby letters of credit have been granted to customers in the Bank's market
area and such customers are generally depositors of the Bank. Investments in
state and municipal securities involve governmental entities within and outside
the Bank's market area. The concentrations of credit by type of loan are set
forth in Note 5. The distribution of commitments to extend credit approximates
the distribution of loans outstanding. Standby letters of credit were granted
primarily to commercial borrowers. The Bank's primary focus is toward consumer
and small business transactions, and accordingly, it does not have a
significant number of credits to any single borrower or group of related
borrowers in excess of $1,000,000.
The Bank has cash and cash equivalents on deposit with financial institutions
which exceed federally-insured limits.
OTHER COMMITMENTS
The Bank has entered into employment agreements with certain of its key
officers covering duties, salary, benefits, stock options, provisions for
termination and Bank obligations in the event of merger or acquisition.
NOTE 15. REGULATORY RESTRICTIONS
DIVIDENDS
The Bank, as a North Carolina banking corporation, may pay dividends only out
of undivided profits (retained earnings) as determined pursuant to North
Carolina General Statutes Section 53-87. However, regulatory authorities may
limit payment of dividends by any bank when it is determined that such a
limitation is in the public interest and is necessary to ensure financial
soundness of the Bank.
CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory (and possibly additional discretionary) actions by
regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets, as all those terms are defined in the regulations.
Management believes, as of December 31, 1996, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal Reserve
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
24
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. REGULATORY RESTRICTIONS, CONTINUED
CAPITAL REQUIREMENTS, CONTINUED
The Bank's actual capital amounts and ratios are also presented in the
following table:
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------ --------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----- ---------- --------- ---------- ---------
DECEMBER 31, 1996:
Total Capital
(to Risk-Weighted Assets) $11,039,625 12.3% >$7,180,704 >8.0% >$8,975,880 >10.0%
- - - -
Tier I Capital
(to Risk-Weighted Assets) $10,039,625 11.2% >$3,590,352 >4.0% >$5,385,528 > 6.0%
- - - -
Tier I Capital
(to Average Assets) $10,039,625 7.8% >$5,141,480 >4.0% >$6,426,850 > 5.0%
- - -
DECEMBER 31, 1995:
Total Capital
(to Risk-Weighted Assets) $9,838,514 12.5% >$6,312,766 >8.0% >$7,890,958 >10.0%
- - - -
Tier I Capital
(to Risk-Weighted Assets) $8,857,521 11.2% >$3,156,383 >4.0% >$4,734,575 > 6.0%
- - - -
Tier I Capital
(to Average Assets) $8,857,521 7.5% >$4,711,293 >4.0% >$5,889,116 > 5.0%
- - -
NOTE 16. TRANSACTIONS WITH RELATED PARTIES
The Bank has entered into transactions with its directors, significant
shareholders and their affiliates (related parties). Such transactions were
made in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present other
unfavorable features. Aggregate transactions involving the purchase of goods
and services from related parties in 1996 amounted to approximately $32,230.
Aggregate 1996 and 1995 loan transactions with related parties were as follows:
1996 1995
----------- ----------
BALANCE, BEGINNING $1,600,705 $825,808
New loans 2,836,075 680,141
Repayments (1,441,277) (630,748)
Relationship changes 24,821 725,504
----------- ----------
BALANCE, ENDING $3,020,324 $1,600,705
=========== ==========
25
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 17. SUBSIDIARY CONDENSED FINANCIAL STATEMENTS
Old North State Investments, Inc., formerly Enterprise Financial Service
Corporation, is a wholly-owned subsidiary of the Bank which sells annuities and
mutual funds. Old North State Investments, Inc.'s condensed financial
statements as of December 31, 1996 and 1995 and for the years then ended are
presented below. The assets, liabilities, equity, results of operations and
cash flows noted therein are included in Old North State Bank's consolidated
financial statements only from December 28, 1995 (the date of acquisition)
forward.
BALANCE SHEETS
- ---------------------------------------------------------------------------------------------
1996 1995
-------- --------
Cash $238,618 $87,767
Equipment, net 2,304 4,080
Commissions receivable 14,202 30,430
Other assets 753 4,006
-------- --------
$255,877 $126,283
======== ========
Due to Old North State Bank 117,033 -
Other liabilities 3,130 15,004
Stockholder's equity 135,714 111,279
-------- --------
$255,877 $126,283
======== ========
STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------------
Commission income $143,021 $185,466
-------- --------
Personnel and employee benefits 66,577 102,085
Occupancy expense 7,494 8,949
Furniture and equipment expense 2,331 2,137
Other operating expense 25,779 24,915
-------- --------
102,181 138,086
-------- --------
Net income before income taxes 40,840 47,380
Income taxes 16,405 3,555
-------- --------
Net income $24,435 $43,825
======== ========
STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $24,435 $43,825
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,776 2,481
Net changes in assets and liabilities 124,640 (1,167)
-------- --------
Net cash provided by operating activities and net increase in cash 150,851 45,139
CASH, BEGINNING 87,767 42,628
-------- --------
CASH, ENDING $238,618 $87,767
======== ========
26
NOTE 18. PENDING AFFILIATION
On March 14, 1997, the Bank entered an agreement to affiliate with LSB
Bancshares, Inc. through an arrangement whereby Old North State Bank would be
merged into Lexington State Bank, a subsidiary of LSB Bancshares, Inc.
Completion of the transaction is subject to a number of conditions, including
approval by the shareholders of Old North State Bank and appropriate regulatory
authorities.
NOTE 19. LITIGATION
On March 11, 1997, the Bank filed a lawsuit in Forsyth County against two
individuals and a related business to collect the balance of amounts paid by
the Bank (approximately $94,000) to a supplier of the business for purchases
made by the business.
On May 9, 1997, the defendants filed an answer to the lawsuit and included
counterclaims against the Bank on the basis of allegations that the Bank
(i) unlawfully converted assets of the defendants by placing an administrative
freeze on the defendants' accounts with the Bank (amounting to approximately
$67,000) and (ii) engaged in unfair and deceptive trade practices. The
counterclaims seek compensatory damages in excess of $10,000 and an award of
punitive damages or, in the alternative, that the compensatory damages be
trebled.
The management of Old North State Bank denies the validity of these
counterclaims and intends to vigorously defend these matters in addition to
aggressively pursuing its own claims against the defendants. However, the
litigation is in too early a stage to determine the outcome of this
contingency.
27
[LARROWE, CARDWELL & COMPANY, LC LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Old North State Bank
Winston-Salem, North Carolina
We have audited the consolidated balance sheets of Old North State Bank and
subsidiary as of December 31, 1996 and 1995, 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, 1996. These consolidated
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting amounts and disclosures in the 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Old North State
Bank and subsidiary at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Larrowe, Cardwell & Company, LC
Galax, Virginia
January 30, 1997, except for Note 18,
as to which the date is March 14, 1997 and Note 19
as to which the date is May 9, 1997
28
OLD NORTH STATE BANK
- ----------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ----------------------------------------------------------------------------------------------
June 30 December 31
ASSETS 1997 1996
------------- -------------
Cash and due from banks $ 7,286,424 $ 4,409,195
Interest-bearing deposits with banks 67,373 154,964
Federal funds sold 675,000 0
Investment securities available for sale 33,070,814 33,338,179
Investment securities to be held to maturity; market
value of $4,142,355 in 1997 and $4,100,003 in 1996 4,145,966 4,146,321
Loans, net of allowance for credit losses of $1,076,053
in 1997 and $1,000,000 in 1996 86,245,900 82,848,597
Property and equipment 2,101,108 2,424,074
Accrued income 1,115,895 1,014,675
Other assets 2,021,688 1,908,602
------------- -------------
$ 136,730,168 $ 130,244,607
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Demand deposits $ 14,406,701 $ 18,532,416
Interest-bearing demand deposits 15,379,958 12,830,570
Savings deposits 17,121,803 15,795,893
Large denomination time deposits 18,569,921 15,057,971
Other time deposits 48,586,355 47,884,021
------------- -------------
Total deposits 114,064,738 110,100,871
Federal funds purchased and securities sold under
agreements to repurchase 1,768,503 2,824,832
Short-term debt 3,583,000 0
Long-term debt 4,433,667 4,908,333
Accrued interest payable 919,465 941,875
Other liabilities 141,235 292,951
------------- -------------
124,910,608 119,068,862
============= =============
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Common stock, $5, par value; 2,000,000 shares
authorized; 1,582,678 and 1,580,978 issued in 1997
and 1996 respectively 7,913,390 7,904,890
Surplus 2,851,025 2,850,260
Retained earnings 1,112,719 529,325
Unrealized appreciation (depreciation) on investment
securities available for sale, net of income taxes (57,574) (108,730)
------------- -------------
11,819,560 11,175,745
------------- -------------
$ 136,730,168 $ 130,244,607
============= =============
29
OLD NORTH STATE BANK
- -------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997, 1996
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 1997 JUNE 1996 JUNE 1997 JUNE 1996
---------------- --------------- ---------------- ----------------
Interest income:
Loans and fees on loans $ 2,097,399 $ 1,877,152 $ 4,098,593 $ 3,581,790
Federal funds sold 29,097 8,693 50,968 41,870
Investment securities:
Taxable 573,234 554,679 1,132,280 1,145,497
Exempt from federal income tax 35,220 6,006 61,076 10,206
Deposits with banks 9,499 6,985 14,467 13,702
----------- ----------- ----------- -----------
2,744,449 2,453,515 5,357,384 4,793,065
Interest expense:
Interest on deposits 1,109,548 930,106 2,141,859 1,961,827
Interest on federal funds purchased
and securities sold under
agreements to repurchase 21,855 16,670 53,233 31,113
Interest on other borrowed funds 134,378 71,452 263,651 123,192
----------- ----------- ----------- -----------
1,265,781 1,018,228 2,458,743 2,116,132
----------- ----------- ----------- -----------
Net interest income 1,478,668 1,435,287 2,898,641 2,676,933
Provision for credit losses 95,000 60,000 120,000 120,000
----------- ----------- ----------- -----------
Net interest income after provision
for credit losses 1,383,668 1,375,287 2,778,641 2,556,933
----------- ----------- ----------- -----------
Other Income:
Service charges on deposit accounts 137,299 119,400 271,867 237,003
Securities gains (losses) 0 (22,581) (29,002) (22,581)
Other income (8,093) (37,244) 19,476 103,307
----------- ----------- ----------- -----------
129,206 59,575 262,341 318,719
----------- ----------- ----------- -----------
Other expense:
Salaries and employee benefits 507,571 565,554 1,074,333 1,101,974
Occupancy expense 129,574 120,446 250,859 237,928
Equipment expense 70,075 64,544 145,083 134,475
Other expense 449,463 279,924 751,244 588,401
----------- ----------- ----------- -----------
1,156,683 1,030,468 2,221,519 2,062,778
----------- ----------- ----------- -----------
Income before income taxes and
cumulative effect of a change in
accounting principle 356,191 404,394 819,463 812,874
Income tax expense 98,655 102,388 236,069 219,433
----------- ----------- ----------- -----------
Net income $ 257,536 $ 302,006 $ 583,394 593,441
----------- ----------- ----------- -----------
Per share amounts:
Net income $ 0.16 $ 0.19 $ 0.37 $ 0.38
----------- ----------- ----------- -----------
30
OLD NORTH STATE BANK
- ----------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997, 1996
- ----------------------------------------------------------------------------------------------------------
1997 1996
----------- ------------
Cash flows from operating activities:
Net income $ 583,394 $ 593,441
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation and amortization 154,432 137,269
Provision for credit losses 120,000 120,000
Other valuation provision 0 0
Deferred income taxes (20,489) 242,702
Net realized (gains) losses on securities 29,002 22,581
Accretion of discount on securities, net of amortization of
premiums 3,855 (44,326)
Changes in assets and liabilities:
Accrued income (101,220) (74,109)
Other assets (113,086) (434,375)
Accrued interest payable (22,410) (152,691)
Other liabilities (151,716) 2,218
----------- ------------
Net cash provided by operating activities 481,762 412,710
----------- ------------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits in banks 87,591 106,783
Net (increase) decrease in federal funds sold (675,000) 1,765,000
Purchases of securities (3,993,547) (13,478,597)
Sales of securities 1,891,466 3,029,266
Maturities of securities 2,408,589 8,103,540
Net increase in loans (3,517,303) (6,738,598)
Purchases of property and equipment 168,534 (145,054)
----------- ------------
Net cash used in investing activities (3,629,670) (7,357,660)
----------- ------------
Cash flows from financing activities:
Net increase (decrease) in demand, savings and NOW deposits (250,417) 2,324,187
Net increase (decrease) in time deposits 4,214,284 (681,149)
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase (1,056,329) 724,804
Proceeds from (repayment of) long-term debt 3,108,334 5,000,000
Dividends paid 0 0
Proceeds from issuance of common stock 9,265 35,190
----------- ------------
Net cash provided by financing activities 6,025,137 7,403,032
----------- ------------
Net increase in cash and cash equivalents 2,877,229 458,082
Cash and cash equivalents, beginning 4,409,195 5,054,158
----------- ------------
Cash and cash equivalents, ending $ 7,286,424 $ 5,512,240
=========== ============
Supplemental disclosure of cash flow information:
Interest paid $ 2,481,153 $ 2,330,897
=========== ============
Taxes paid $ 105,524 $ 119,973
=========== ============
Supplemental schedule of noncash investing activities:
Other real estate acquired in settlement of loans $ 0 $ 0
----------- ------------
Net noncash assets acquired for common stock $ 0 $ 0
=========== ============
31
OLD NORTH STATE BANK
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997, 1996
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
UNREALIZED
APPRECIATION
RETAINED (DEPRECIATION)
SHARES AMOUNT SURPLUS EARNINGS ON SECURITIES TOTAL
------------ ------------ ------------- ------------- --------------- -------------
Balance, January 1,
1996 1,572,171 $7,860,855 $1,846,297 $503,016 $34,472 $10,244,640
Net income 0
Unrealized
depreciation on
investment
securities 0
available for
sale, net of taxes
------------ ------------ ------------- ------------- --------------- -------------
Balance, June 30, 1996 1,572,171 $7,860,855 $1,846,297 $503,016 $34,472 $10,244,640
------------ ------------ ------------- ------------- --------------- -------------
Balance, January 1, 1,580,978 $7,904,890 $2,850,260 $529,325 ($108,730) $11,175,745
1997
Net income 583,394 583,394
Stock options
exercised 1,700 8,500 765 9,265
Net changes in
unrealized
depreciation on
investment
securities
available for 51,156 51,156
sale, net of taxes
============ ============ ============= ============= =============== =============
Balance, June 30, 1997 1,582,678 $7,913,390 $2,851,025 $1,112,719 ($57,574) $11,819,560
============ ============ ============= ============= =============== =============
32
OLD NORTH STATE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION - The accompanying unaudited financial statements
were prepared in accordance with instructions for Form 10-QSB and therefore, do
not include all disclosures required by generally accepted accounting principals
for a complete presentation of financial statements. In the opinion of
management, the financial statements contain all adjustments necessary to
present fairly the financial condition of Old North State Bank as of June 30,
1997 and December 31, 1996, the results of operations for the six months and
three months ended June 30, 1997 and 1996, and its cash flows for the six months
ended June 30, 1997 and 1996. The results of operations for the six months ended
June 30, 1997 are not necessarily indicative of the results expected for the
full year.
Old North State Bank is located in Winston-Salem, North Carolina. Old North
State Investments, Inc. (a wholly-owned subsidiary of the Bank) sells mutual
funds and annuities. The accounting policies as set forth below are those
followed by the Bank in addition to the accounting policies as set forth in Note
1 of Old North State's annual financial statements previously furnished in
connection with the registration of filing to become a member of the Federal
Reserve Bank.
PRESENTATION OF CASH FLOWS: For purposes of reporting cash flows, cash and due
from banks includes cash and amounts due from depository institutions (including
cash items in process of clearing). Overnight interest-bearing deposits, and
federal funds sold are shown separately. Cash flows from demand deposits, NOW
accounts and savings accounts are reported net since their original maturities
are less than three months. Loans and time deposits are reported net per FASB
statement no. 104. Federal Funds purchased are shown separately.
INVESTMENTS SECURITIES: Investment securities classified as held to maturity are
those debt securities that the Bank has the ability and intent to hold to
maturity. Accordingly, these securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed by the
interest-method over their contractual lives.
Investments classified as available for sale are intended to be held for
indefinite periods of time and include those securities that management may
employ as part of asset/liability strategy or that may be sold in response to
changes in interest rates, prepayments, regulatory capital requirements or
similar factors. These securities are carried at the lower of amortized cost or
market value. Gains and losses on the sales of such securities are determined by
the specific-identification method.
LOANS: Loans are stated at the amount of unpaid principal, reduced by unearned
discount and fees, and an allowance for loan losses.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs. The Bank makes continuous credit reviews of the loan portfolio and
considers current economic conditions, historical loan loss experience, review
of specific problem loans and other factors in determining the adequacy of the
allowance balance.
Activity in the allowance for loan losses for the six months ended June 30, 1997
and June 30, 1996 follows:
June 30, 1997 June 30, 1996
------------- --------------
Balance at beginning of year 1,000,000 980,993
Add provision charged to expense 120,000 120,000
Loss loans charged-off net of recoveries (43,947) (81,791)
---------- ----------
1,076,053 1,019,202
========== ==========
Interest on all loans is accrued daily on the outstanding balance. Accrual of
interest is discontinued on a loan when management believes, after considering
collection efforts and other factors, that the borrower's financial condition is
such that collection of interest is doubtful.
NOTE 2. EARNINGS PER SHARE - Earnings per share for the six months ended June
30, 1997 and 1996, were calculated by dividing net income by the weighted
average number of shares outstanding during the period.
NOTE 3. BALANCE SHEETS - The Balance Sheet at December 31, 1996, has been taken
from the audited financial statements at that date.
NOTE 4. RECLASSIFICATIONS - For comparative purposes, there may be certain
amounts in the 1996 consolidated financial statements which have been
reclassified to conform with the classifications used in 1997. Such
reclassifications have no effect on net income or stockholders' equity as
previously reported.
33
PRO FORMA CONDENSED FINANCIAL INFORMATION
The following Pro Forma Condensed Financial Information and explanatory
notes are presented to show the impact of the Merger on LSB's historical
financial position and results of operations. The Merger is reflected in the Pro
Forma Condensed Financial Information under the pooling-of-interests method of
accounting.
The Pro Forma Condensed Balance Sheet presented assumes that the Merger
was consummated on December 31, 1996, and the Pro Forma Condensed Income
Statements assume that the Merger was consummated at the beginning of each
period presented.
ONSB acquired Piedmont BancShares Corporation and its consolidated
subsidiary, Enterprise Bank and Trust Company, in the fourth quarter of 1995.
The acquisition was accounted for under the purchase method of accounting, and,
accordingly, the consolidated financial statements of LSB reflected in the
following pro forma condensed financial information include the results of
operations of the acquired companies since the date of acquisition.
The pro forma earnings are not necessarily indicative of the results of
operations had the Merger occurred at the beginning of the periods presented,
nor are they necessarily indicative of the results of future operations.
14
34
PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
LSB AND
PRO FORMA ADJUSTMENTS ONSB
--------------------------- PRO FORMA
LSB ONSB LSB ONSB DEBIT
--------- --------- ---------- ---------- ---------
ASSETS
Cash and cash equivalents $ 18,847 $ 7,354 $ $ $ 26,201
Federal funds sold and securities
purchased under resale agreements
or similar arrangements 47,625 675 48,300
Securities at carrying value 82,149 37,217 119,366
Loans and leases, net of unearned
income 293,262 87,322 380,584
Allowance for loan and lease losses (3,542) (1,076) (4,618)
--------- --------- --------- --------- ---------
Loans and leases, net 289,720 86,246 375,966
--------- --------- --------- --------- ---------
Premises and equipment, net 9,105 2,101 11,206
Other assets 6,425 3,137 9,562
--------- --------- --------- --------- ---------
Total assets $ 453,871 $ 136,730 $ -- $ -- $ 590,601
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing demand deposits $ 51,887 14,407 $ $ $ 66,294
Interest-bearing deposits 323,170 99,658 422,828
--------- --------- --------- --------- ---------
Total deposits 375,057 114,065 489,122
Short-term borrowed funds 3,015 5,351 8,366
Long-term debt 19,500 4,434 23,934
Accounts payable and other 2,469 1,061 1,247(1) 4,777
liabilities --------- --------- --------- --------- ---------
Total liabilities 400,041 124,911 -- 1,247 526,199
--------- --------- --------- --------- ---------
Shareholders' equity:
Common stock, $5 par, 10,000,000
shares authorized, 5,405,177
issued and outstanding at June 30,
1997, 5,405,177 shares and 6,905,554
shares pro forma issued and
outstanding, respectively 27,026 7,913 411(2) 34,528
Additional paid-in capital 11,342 2,851 411(2) 14,604
Retained earnings 15,502 1,113 1,247(1) 15,368
Net unrealized appreciation
(depreciation) on securities
available for sale (40) (58) (98)
--------- --------- --------- --------- ---------
Total shareholders' equity 53,830 11,819 1,658 411 64,402
--------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity $ 453,871 $ 136,730 $ 1,658 $ 1,658 $ 590,601
========= ========= ========= ========= =========
See Notes for Pro Forma Condensed Financial Information.
15
35
PRO FORMA CONDENSED BALANCE SHEET
DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
LSB AND
PRO FORMA ADJUSTMENTS ONSB
--------------------------- PRO FORMA
LSB ONSB LSB ONSB DEBIT
--------- --------- ---------- ---------- ---------
ASSETS
Cash and cash equivalents $ 20,611 $ 4,564 $ $ $ 25,175
Federal funds sold and securities
purchased under resale agreements
or similar arrangements 26,720 -- 26,720
Securities at carrying value 90,617 37,484 128,101
Loans and leases, net of unearned
income 272,044 83,849 355,893
Allowance for loan and lease losses (3,075) (1,000) (4,075)
--------- --------- ---------- ---------- ---------
Loans and leases, net 268,969 82,849 351,818
--------- --------- ---------- ---------- ---------
Premises and equipment, net 8,840 2,424 11,264
Other assets 5,843 2,924 8,767
--------- --------- ---------- ---------- ---------
Total assets $ 421,600 $ 130,245 $ -- $ -- $ 551,845
========= ========= ========== ========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing demand deposits $ 43,987 18,532 $ $ $ 62,519
Interest-bearing deposits 310,833 91,569 402,402
--------- --------- ---------- ---------- ---------
Total deposits 354,820 110,101 464,921
Short-term borrowed funds 3,285 2,825 6,110
Long-term debt 9,167 4,908 14,075
Accounts payable and other liabilities 2,641 1,235 1,247(1) 5,123
--------- --------- ---------- ---------- ---------
Total liabilities 369,913 119,069 -- 1,247 490,229
--------- --------- ---------- ---------- ---------
Shareholders' equity:
Common stock, $5 par, 10,000,000
shares authorized, 5,403,539
issued and outstanding at December 31,
1996, 5,403,539 shares and 6,902,306
shares pro forma issued and
outstanding, respectively 27,018 7,905 411(2) 34,512
Additional paid-in capital 11,331 2,850 411(2) 14,592
Retained earnings 13,337 529 1,247(1) 12,619
Net unrealized appreciation
(depreciation) on securities
available for sale 1 (108) (107)
--------- --------- ---------- ----------- ---------
Total shareholders' equity 51,687 11,176 1,658 403 61,616
--------- --------- ---------- ----------- ---------
Total liabilities and
shareholders' equity $ 421,600 $ 130,245 $ 1,161 $ 1,161 $ 551,845
========= ========= ========== =========== =========
See Notes for Pro Forma Condensed Financial Information.
16
36
PRO FORMA CONDENSED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
LSB AND ONSB
PRO FORMA
LSB ONSB COMBINED (3)
----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans $ 13,101 $ 4,099 $ 17,200
Interest and dividends on securities 2,465 1,193 3,658
Interest on short-term investments 1,060 65 1,125
----------- ----------- -----------
Total interest income 16,626 5,357 21,983
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 6,442 2,142 8,584
Interest on short-term borrowed funds 45 53 98
Interest on long-term debt 404 263 667
----------- ----------- -----------
Total interest expense 6,891 2,458 9,349
----------- ----------- -----------
NET INTEREST INCOME 9,735 2,899 12,634
Provision for loan losses 188 120 308
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,547 2,779 12,326
----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 1,017 272 1,289
Other noninterest income 1,357 (10) 1,347
----------- ----------- -----------
Total noninterest income 2,374 262 2,636
----------- ----------- -----------
NONINTEREST EXPENSE
Personnel expense 4,040 1,075 5,115
Occupancy and equipment expense 802 396 1,198
Other noninterest expense 2,198 751 2,949
----------- ----------- -----------
Total noninterest expense 7,040 2,222 9,262
----------- ----------- -----------
EARNINGS
Income before income taxes 4,881 819 5,700
Income tax expense 1,527 236 1,763
----------- ----------- -----------
NET INCOME $ 3,354 $ 583 $ 3,397
=========== =========== ===========
PER SHARE
Net income $ 0.62 $ 0.37 $ 0.57
=========== =========== ===========
AVERAGE SHARES OUTSTANDING 5,404,045 1,582,395 6,904,155
=========== =========== ===========
See Notes to Pro Forma Condensed Financial Information.
17
37
PRO FORMA CONDENSED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
LSB AND ONSB
PRO FORMA
LSB ONSB COMBINED (3)
----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans $ 10,809 $ 3,582 $ 14,391
Interest and dividends on securities 3,251 1,156 4,407
Interest on short-term investments 222 55 277
----------- ----------- -----------
Total interest income 14,282 4,793 19,075
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 5,605 1,962 7,567
Interest on short-term borrowed funds 36 31 67
Interest on long-term debt -- 123 123
----------- ----------- -----------
Total interest expense 5,641 2,116 7,757
----------- ----------- -----------
NET INTEREST INCOME 8,641 2,677 11,318
Provision for loan losses 216 120 336
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,425 2,557 10,982
----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 999 238 1,237
Other noninterest income 1,084 81 1,165
----------- ----------- -----------
Total noninterest income 2,083 319 2,402
----------- ----------- -----------
NONINTEREST EXPENSE
Personnel expense 3,872 1,102 4,974
Occupancy and equipment expense 726 373 1,099
Other noninterest expense 2,434 588 3,022
----------- ----------- -----------
Total noninterest expense 7,032 2,063 9,095
----------- ----------- -----------
EARNINGS
Income before income taxes 3,476 813 4,289
Income tax expense 900 220 1,120
----------- ----------- -----------
NET INCOME $ 2,576 $ 593 $ 3,169
=========== =========== ===========
PER SHARE
Net income $ 0.48 $ 0.38 $ 0.46
=========== =========== ===========
AVERAGE SHARES OUTSTANDING 5,384,088 1,574,584 6,876,794
=========== =========== ===========
See Notes to Pro Forma Condensed Financial Information.
18
38
PRO FORMA CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
LSB AND ONSB
PRO FORMA
LSB ONSB COMBINED (3)
----------- ----------- ------------
INTEREST INCOME
Interest and fees on loans $ 23,104 $ 7,468 $ 30,572
Interest and dividends on securities 6,132 2,329 8,461
Interest on short-term investments 1,056 94 1,150
----------- ----------- -----------
Total interest income 30,292 9,891 40,183
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 11,776 4,047 15,823
Interest on short-term borrowed funds 104 77 181
Interest on long-term debt 272 265 537
----------- ----------- -----------
Total interest expense 12,152 4,389 16,541
----------- ----------- -----------
NET INTEREST INCOME 18,140 5,502 23,642
Provision for loan losses 562 243 805
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 17,578 5,259 22,837
----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 2,032 525 2,557
Other noninterest income 2,081 194 2,275
----------- ----------- -----------
Total noninterest income 4,113 719 4,832
----------- ----------- -----------
NONINTEREST EXPENSE
Personnel expense 7,656 2,502 10,158
Occupancy and equipment expense 1,500 771 2,271
Other noninterest expense 4,373 1,284 5,657
----------- ----------- -----------
Total noninterest expense 13,529 4,557 18,086
----------- ----------- -----------
EARNING
Income before income taxes 8,162 1,421 9,583
Income tax expense 2,323 395 2,718
----------- ----------- -----------
NET INCOME $ 5,839 $ 1,026 $ 6,865
=========== =========== ===========
PER SHARE
Net income $ 1.08 $ 0.65 $ 1.00
=========== =========== ===========
AVERAGE SHARES OUTSTANDING 5,393,813 1,576,623 6,888,452
=========== =========== ===========
See Notes to Pro Forma Condensed Financial Information.
19
39
PRO FORMA CONDENSED INCOME STATEMENT
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
LSB AND ONSB
PRO FORMA
LSB ONSB COMBINED (3)
----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans $ 20,290 $ 3,071 $ 23,361
Interest and dividends on securities 6,695 1,115 7,810
Interest on short-term investments 1,066 96 1,162
----------- ----------- -----------
Total interest income 28,051 4,282 32,333
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 11,402 1,947 13,349
Interest on short-term borrowed funds 46 4 50
Interest on long-term debt -- 27 27
----------- ----------- -----------
Total interest expense 11,448 1,978 13,426
----------- ----------- -----------
NET INTEREST INCOME 16,603 2,304 18,907
Provision for loan losses 252 115 367
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 16,351 2,189 18,540
----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 1,816 314 2,130
Other noninterest income 1,428 41 1,469
----------- ----------- -----------
Total noninterest income 3,244 355 3,599
----------- ----------- -----------
NONINTEREST EXPENSE
Personnel expense 7,469 1,057 8,526
Occupancy and equipment expense 1,444 304 1,748
Other noninterest expense 4,199 618 4,817
----------- ----------- -----------
Total noninterest expense 13,112 1,979 15,091
----------- ----------- -----------
EARNINGS
Income before income taxes 6,483 565 7,048
Income tax expense 1,701 187 1,888
----------- ----------- -----------
NET INCOME $ 4,782 $ 378 $ 5,160
=========== =========== ===========
PER SHARE
Net income $ 0.89 $ 0.50 $ 0.85
=========== =========== ===========
AVERAGE SHARES OUTSTANDING (4) 5,365,497 750,659 6,077,122
=========== =========== ===========
See Notes to Pro Forma Condensed Financial Information.
20
40
PRO FORMA CONDENSED INCOME STATEMENT
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
LSB AND ONSB
PRO FORMA
LSB ONSB COMBINED (3)
----------- ----------- ------------
INTEREST INCOME
Interest and fees on loans and leases $ 17,245 $ 2,278 $ 19,523
Interest and dividends on securities 6,205 633 6,838
Interest on short-term investments 943 34 977
----------- ----------- -----------
Total interest income 24,393 2,945 27,338
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 8,622 1,137 9,759
Interest on short-term borrowed funds 73 3 76
Interest on long-term debt -- 23 23
----------- ----------- -----------
Total interest expense 8,695 1,163 9,858
----------- ----------- -----------
NET INTEREST INCOME 15,698 1,782 17,480
Provision for loan and lease losses 219 63 282
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE 15,479 1,719 17,198
LOSSES
----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 1,812 230 2,042
Other noninterest income 791 18 809
----------- ----------- -----------
Total noninterest income 2,603 248 2,851
----------- ----------- -----------
NONINTEREST EXPENSE
Personnel expense 6,946 802 7,748
Occupancy and equipment expense 1,374 225 1,599
Other noninterest expense 3,878 485 4,363
----------- ----------- -----------
Total noninterest expense 12,198 1,512 13,710
----------- ----------- -----------
EARNINGS
Income before income taxes 5,884 455 6,339
Income tax expense 1,422 156 1,578
----------- ----------- -----------
NET INCOME $ 4,462 $ 299 $ 4,761
=========== =========== ===========
PER SHARE $ 0.84 $ 0.44 $ 0.79
=========== =========== ===========
Net income
AVERAGE SHARES OUTSTANDING 5,338,545 686,611 5,989,452
=========== =========== ===========
See Notes to Pro Forma Condensed Financial Information.
21
41
NOTES TO PRO FORMA CONDENSED FINANCIAL INFORMATION
Note 1. Certain material, nonrecurring adjustments of approximately
$1.5 million (pre-tax) will be recorded in conjunction with the Merger.
These adjustments include amounts to effect the settlement of
obligations under existing employment contracts and amounts associated
with the conversion of ONSB branches. It is estimated that
approximately $840 thousand of the expenses will be directly related to
effecting the Merger and therefore will not be deductible for income
tax purposes. The impact of these adjustments has been reflected in the
Pro Forma Condensed Balance Sheets as of June 30, 1997, and December
31, 1996, respectively.
Note 2. Based on an Exchange Rate of 0.948 for the conversion of ONSB Stock
into LSB Stock. At June 30, 1997, and December 31, 1996, ONSB had
1,582,678 and 1,580,978 shares of stock outstanding, respectively.
Note 3. No pro forma adjustments relating to the Merger are reflected in the
Pro Forma Condensed Income Statements.
Note 4. ONSB's weighted average shares outstanding at December 31, 1995 are
based on 750,659 average shares outstanding adjusted for a 1.922 for
one stock split paid January 1, 1995 and the acquisition of Piedmont
BancShares Corporation in exchange for 828,320 shares of ONSB Stock.
Note 5. ONSB's weighted average shares outstanding at December 31, 1996 are
based on 1,576,623 average shares outstanding adjusted for the exercise
of stock options of 8,807 shares.
22
42
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
2 Agreement and Plan of Reorganization and Merger dated March 14,
1997 by and among LSB Bancshares, Inc., Lexington State Bank, and
Old North State Bank.
23 Consent of Larrowe, Cardwell & Company, LC