Bylaws - NEWBRIDGE BANCORP - 3-28-1996

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					Exhibit 3.2 BYLAWS OF LSB BANCSHARES, INC. Effective March 12, 1996

INDEX TO BYLAWS of LSB BANCSHARES, INC.

ARTICLE 1 Offices . . . . . . . . . . . . . . . . . . . . -----Principal and Registered Office . . . . . . . . . . . . . . . . . . . . . . . . ------------------------------Other Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -------------

Section 1. Section 2.

ARTICLE 2 Meetings of Shareholders . . . . . . . . . . . . . . . . -----------------------. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Section 1. Section 2. Section 3. Section 4. Section 5. Section 6. Section 7. Section 8. Section 9.

Place of Meeting ---------------Annual Meeting . . . . . -------------Substitute Annual Meeting ------------------------Special Meetings . . . . ---------------Notice of Meetings . . . -----------------Quorum . . . . . . . . . -----Shareholders' List . . . -----------------Voting of Shares . . . . ---------------Proxies . . . . . . . . . -------

ARTICLE 3 Board of Directors . . . . . . . . . . . . . . . . . -----------------. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Section 1. Section 2. Section 3. Section 4. Section 5. Section 6. ARTICLE 4

General Powers -------------Number, Term and Qualification -----------------------------Removal . . . . . . . . . . . . ------Vacancies . . . . . . . . . . . --------Compensation . . . . . . . . . -----------Nomination of Directors . . . .

INDEX TO BYLAWS of LSB BANCSHARES, INC.

ARTICLE 1 Offices . . . . . . . . . . . . . . . . . . . . -----Principal and Registered Office . . . . . . . . . . . . . . . . . . . . . . . . ------------------------------Other Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -------------

Section 1. Section 2.

ARTICLE 2 Meetings of Shareholders . . . . . . . . . . . . . . . . -----------------------. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Section 1. Section 2. Section 3. Section 4. Section 5. Section 6. Section 7. Section 8. Section 9.

Place of Meeting ---------------Annual Meeting . . . . . -------------Substitute Annual Meeting ------------------------Special Meetings . . . . ---------------Notice of Meetings . . . -----------------Quorum . . . . . . . . . -----Shareholders' List . . . -----------------Voting of Shares . . . . ---------------Proxies . . . . . . . . . -------

ARTICLE 3 Board of Directors . . . . . . . . . . . . . . . . . -----------------. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Section 1. Section 2. Section 3. Section 4. Section 5. Section 6. ARTICLE 4

General Powers -------------Number, Term and Qualification -----------------------------Removal . . . . . . . . . . . . ------Vacancies . . . . . . . . . . . --------Compensation . . . . . . . . . -----------Nomination of Directors . . . .

Section 1. Section 2. Section 3. Section 4.

Meetings of Directors --------------------Annual and Regular Meetings . . . . . . . . . --------------------------Special Meetings . . . . . . . . . . . . . . ---------------Notice of Meetings . . . . . . . . . . . . . -----------------Quorum . . . . . . . . . . . . . . . . . . . ------

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

-iSection 5. Section 6. Manner of Acting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ---------------Presumption of Assent . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Section 5. Section 6. Section 7. Section 8.

Manner of Acting . . . . . . . . ---------------Presumption of Assent . . . . . . --------------------Action Without Meeting . . . . . ---------------------Meeting by Communications Device --------------------------------

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ARTICLE 5 Committees . . . . . . . . . . . . ---------Election and Powers . . . . . . . . . . . . . . . . . . . . . . . ------------------Removal; Vacancies . . . . . . . . . . . . . . . . . . . . . . . -----------------Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . -------Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Section 1. Section 2. Section 3. Section 4.

ARTICLE 6 Officers . . . . . . . . . . . . . . . . . . . . -------. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Section 1. Section 2. Section 3. Section 4. Section 5. Section 6. Section 7. Section 8. Section 9. Section 10. Section 11. Section 12. Section 13. Section 14.

Titles -----Election; Appointment . . . . . . . . . . . . . . . . . . . . . . . . --------------------Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --------Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . -----------Chairman of the Board of Directors . . . . . . . . . . . . . . . . . ---------------------------------President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --------Executive Vice Presidents, Senior Vice Presidents and Vice Presidents --------------------------------------------------------------------Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --------Assistant Secretaries . . . . . . . . . . . . . . . . . . . . . . . . --------------------Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --------Assistant Treasurers . . . . . . . . . . . . . . . . . . . . . . . . -------------------Controller and Assistant Controllers . . . . . . . . . . . . . . . . -----------------------------------Voting Upon Stocks . . . . . . . . . . . . . . . . . . . . . . . . . ------------------

ARTICLE 7 Capital Certificates . . . . . . . . . . . -----------Transfer of Shares . . . . . . . . -----------------Transfer Agent and Registrar . . . ---------------------------Regulations . . . . . . . . . . . . ----------Fixing Record Date . . . . . . . . -----------------Lost Certificates . . . . . . . . . ----------------Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Section 1. Section 2. Section 3. Section 4. Section 5. Section 6.

ARTICLE 8

-iiIndemnification of Directors and Officers ----------------------------------------. . . . . . . . . . .

Section 1. Section 2. Section 3. Section 4. Section 5. Section 6. Section 7. Section 8.

Indemnification of Directors and Officers . ----------------------------------------Indemnification Provisions . . . . . . . . . . . . . . . . -------------------------Definitions . . . . . . . . . . . . . . . . . . . . . . . . ----------Settlements . . . . . . . . . . . . . . . . . . . . . . . . ----------Litigation Expense Advances . . . . . . . . . . . . . . . . --------------------------Approval of Indemnification Payments . . . . . . . . . . . -----------------------------------Suits by Claimant . . . . . . . . . . . . . . . . . . . . . ----------------Consideration; Personal Representatives and Other Remedies ---------------------------------------------------------Scope of Indemnification Rights . . . . . . . . . . . . . . -------------------------------

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ARTICLE 9 General Dividends and other Distributions --------------------------------Seal . . . . . . . . . . . . . . ---Waiver of Notice . . . . . . . . ---------------Checks . . . . . . . . . . . . . -----Bond . . . . . . . . . . . . . . ---Fiscal Year . . . . . . . . . . . ----------Amendments . . . . . . . . . . . ---------Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Section 1. Section 2. Section 3. Section 4. Section 5. Section 6. Section 7.

ARTICLE 10 Antitakeover Statutes . . . . . . . . . . . . . . . .

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BYLAWS OF LSB BANCSHARES, INC. ARTICLE 1 Offices Section 1. Principal and Registered Office. The principal office of the corporation shall be located at One LSB Plaza, Lexington, North Carolina, which shall also be the registered office of the corporation Section 2. Other Offices. The corporation may have offices at such other places, either within the State of North Carolina, as the board of directors may from time to time determine. ARTICLE 2 Meetings of Shareholders Section 1. Place of Meeting. Meetings of shareholders shall be held at the principal office of the corporation, or at such other place, either within or without the State of North Carolina, as shall be designated in the notice of the meeting.

BYLAWS OF LSB BANCSHARES, INC. ARTICLE 1 Offices Section 1. Principal and Registered Office. The principal office of the corporation shall be located at One LSB Plaza, Lexington, North Carolina, which shall also be the registered office of the corporation Section 2. Other Offices. The corporation may have offices at such other places, either within the State of North Carolina, as the board of directors may from time to time determine. ARTICLE 2 Meetings of Shareholders Section 1. Place of Meeting. Meetings of shareholders shall be held at the principal office of the corporation, or at such other place, either within or without the State of North Carolina, as shall be designated in the notice of the meeting. Section 2. Annual Meeting. The annual meeting of shareholders shall be held at such time as shall be set by the board of directors on the third Wednesday in April of each year, if not a legal holiday, but if a legal holiday, then on the next business day which is not a legal holiday, for the purpose of electing directors of the corporation and the transaction of such other business as is properly brought before the meeting in accordance with these bylaws. To be properly brought before an annual meeting, business must be (i) specified in the notice of annual meeting (or any supplement thereto) given by or at the direction of the board of directors, (ii) otherwise properly brought before the annual meeting by or at the direction of the board of directors, or (iii) otherwise properly brought before the annual meeting by a shareholder. In addition to any other applicable requirements for business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the secretary. To be timely, a shareholder's notice must be in writing and delivered or mailed to and received by the secretary not less than sixty (60) days before the first anniversary of the date of the corporation's proxy statement in connection with the last annual meeting. A shareholder's notice to the secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the shareholder

proposing such business, (iii) the class, series, and number of the corporation's shares that are owned of record and beneficially by such shareholder, and (iv) any material interest of such shareholder in such business. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 2; provided, however, that nothing in this Section 2 shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting. In the event that a shareholder attempts to bring business before an annual meeting without complying with the provisions of this Section 2, the chairman of the meeting may, if the facts warrant, determine that the business was not properly brought before the meeting in accordance with the foregoing procedures, and, if he shall so determine, he shall so declare to the shareholders present at the meeting, and the extent permitted by law, any such business shall not be transacted. Section 3. Substitute Annual Meeting. If the annual meeting is not held on the day designated by these bylaws, a substitute annual meeting may be called in accordance with Section 4 of this Article. A meeting so called shall be designated and treated for all purposes as the annual meeting. Section 4. Special Meetings. Special meetings of the shareholders may be called at any time by the president or

proposing such business, (iii) the class, series, and number of the corporation's shares that are owned of record and beneficially by such shareholder, and (iv) any material interest of such shareholder in such business. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 2; provided, however, that nothing in this Section 2 shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting. In the event that a shareholder attempts to bring business before an annual meeting without complying with the provisions of this Section 2, the chairman of the meeting may, if the facts warrant, determine that the business was not properly brought before the meeting in accordance with the foregoing procedures, and, if he shall so determine, he shall so declare to the shareholders present at the meeting, and the extent permitted by law, any such business shall not be transacted. Section 3. Substitute Annual Meeting. If the annual meeting is not held on the day designated by these bylaws, a substitute annual meeting may be called in accordance with Section 4 of this Article. A meeting so called shall be designated and treated for all purposes as the annual meeting. Section 4. Special Meetings. Special meetings of the shareholders may be called at any time by the president or the board of directors. Section 5. Notice of Meetings. At least 10 and no more than 60 days prior to any annual or special meeting of shareholders, the corporation shall notify shareholders of the date, time and place of the meeting and, in the case of a special or substitute annual meeting or where otherwise required by law, shall briefly describe the purpose or purposes of the meeting. Only business within the purpose or purposes described in the notice may be taken at a special meeting. Unless otherwise required by the articles of incorporation or by law (for example, in the event of a meeting to consider the adoption of a plan of merger or share exchange, a sale of assets other than in the ordinary course of business or a voluntary dissolution), the corporation shall be required to give notice only to shareholders entitled to vote at the meeting. If an annual or special shareholders' meeting is adjourned to a different date, time or place, notice thereof need not be given if the new date, time or place is announced at the meeting before adjournment. If a new record date for the adjourned meeting is fixed pursuant to Article 7, Section 5 hereof, notice of the adjourned meeting shall be given to persons who are shareholders as of the new record date. It shall be the primary responsibility of the secretary to give the notice, but notice may be given by or at the direction of the president or other person or persons calling the meeting. If mailed, such notice shall be deemed to be effective when deposited in the United States mail with postage thereon prepaid, correctly addressed to the shareholder's address shown in the corporation's current record of shareholders. Section 6. Quorum. A majority of the votes entitled to be cast by a voting group on a matter, represented in person or by proxy at a meeting of shareholders, shall constitute a quorum for that voting group for any action on that matter, unless quorum requirements are otherwise fixed by a court of competent jurisdiction acting pursuant to Section 55-7-03 of the -2-

General Statutes of North Carolina. Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and any adjournment thereof, unless a new record date is or must be set for the adjournment. Action may be taken by a voting group at any meeting at which a quorum of that voting group is represented, regardless of whether action is taken at that meeting by any other voting group. In the absence of a quorum at the opening of any meeting of shareholders, such meeting may be adjourned from time to time by a vote of the majority of the shares voting on the motion to adjourn. Section 7. Shareholders' List. After fixing a record date for a meeting, the corporation shall prepare an alphabetical list of the names of all its shareholders who are entitled to notice of a shareholders' meeting. The list shall be arranged by voting group, if any (and within each voting group by class or series of shares), and shall show the address of and number of shares held by each shareholder. The shareholders' list shall be available for inspection by any shareholder, beginning two business days after notice of the meeting is given for which the list was prepared and continuing through the meeting, at the corporation's principal office or at a place identified in the meeting notice in the city where the meeting will be held. The corporation shall make the shareholders' list available at the meeting, and any shareholder or his agent or attorney is entitled to inspect the list at any time during the meeting or any adjournment.

General Statutes of North Carolina. Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and any adjournment thereof, unless a new record date is or must be set for the adjournment. Action may be taken by a voting group at any meeting at which a quorum of that voting group is represented, regardless of whether action is taken at that meeting by any other voting group. In the absence of a quorum at the opening of any meeting of shareholders, such meeting may be adjourned from time to time by a vote of the majority of the shares voting on the motion to adjourn. Section 7. Shareholders' List. After fixing a record date for a meeting, the corporation shall prepare an alphabetical list of the names of all its shareholders who are entitled to notice of a shareholders' meeting. The list shall be arranged by voting group, if any (and within each voting group by class or series of shares), and shall show the address of and number of shares held by each shareholder. The shareholders' list shall be available for inspection by any shareholder, beginning two business days after notice of the meeting is given for which the list was prepared and continuing through the meeting, at the corporation's principal office or at a place identified in the meeting notice in the city where the meeting will be held. The corporation shall make the shareholders' list available at the meeting, and any shareholder or his agent or attorney is entitled to inspect the list at any time during the meeting or any adjournment. Section 8. Voting of Shares. (a) Except as otherwise provided in the articles of incorporation or the bylaws, each outstanding share of voting capital stock of the corporation shall be entitled to one vote on each matter submitted to a vote at a meeting of the shareholders, except where cumulative voting for directors occurs as provided by the articles of incorporation or the bylaws. Action on a matter by a voting group for which a quorum is present is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, except that the affirmative vote of three-fourths of the outstanding shares shall be required for a merger, share exchange of the corporation or sale of all or substantially all of the corporation's assets, unless the vote of a greater number is required by law or by the articles of incorporation. Voting on all matters shall be by voice vote or by a show of hands, unless the holders of one-tenth of the shares represented at the meeting shall demand a ballot vote on a particular matter. Absent special circumstances, the shares of the corporation are not entitled to vote if they are owned, directly or indirectly, by a second corporation, domestic or foreign, and the corporation owns, directly or indirectly, a majority of the shares entitled to vote for directors of the second corporation, except that this provision shall not limit the power of the corporation to vote shares held by it in a fiduciary capacity. (b) Nominees for directors who receive the greatest number of votes shall be deemed to have been elected as directors. If required by law, every shareholder entitled to vote at an election of directors shall have the right to multiply the number of votes they are entitled to cast by the number of directors for whom they are entitled to vote and cast the product for a single candidate or distribute the product among two or more candidates. Shares otherwise entitled to -3-

vote cumulatively may not be voted cumulatively at a particular meeting unless the meeting notice or proxy statement accompanying the notice states conspicuously that cumulative voting is authorized, or unless some shareholder or proxy holder announces in open meeting, before the voting for the directors starts, his intention to vote cumulatively. If such announcement is made, the chair shall declare that all shares entitled to vote have the right to vote cumulatively and shall thereupon grant a recess of not less than one nor more than four hours, as he shall determine, or of such other period of time as is unanimously then agreed upon. Section 9. Proxies. A shareholder may appoint a proxy to vote or otherwise act for him by signing an appointment form, either personally or by his attorney-in-fact. An appointment is valid for 11 months unless a different period is expressly provided in the appointment form. ARTICLE 3 Board of Directors Section 1. General Powers. The business and affairs of the corporation shall be managed under the direction of

vote cumulatively may not be voted cumulatively at a particular meeting unless the meeting notice or proxy statement accompanying the notice states conspicuously that cumulative voting is authorized, or unless some shareholder or proxy holder announces in open meeting, before the voting for the directors starts, his intention to vote cumulatively. If such announcement is made, the chair shall declare that all shares entitled to vote have the right to vote cumulatively and shall thereupon grant a recess of not less than one nor more than four hours, as he shall determine, or of such other period of time as is unanimously then agreed upon. Section 9. Proxies. A shareholder may appoint a proxy to vote or otherwise act for him by signing an appointment form, either personally or by his attorney-in-fact. An appointment is valid for 11 months unless a different period is expressly provided in the appointment form. ARTICLE 3 Board of Directors Section 1. General Powers. The business and affairs of the corporation shall be managed under the direction of the board of directors except as otherwise provided by the articles of incorporation of the corporation or by a valid shareholders' agreement. Section 2. Number, Term and Qualification. (a) The number of directors of the corporation shall consist of not less than nine nor more than 24 shareholders, the exact number within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the board of directors, which number shall be stated in the notice of the call of meeting of shareholders, or by resolution of the shareholders at any meeting thereof; but in the absence of such resolution, the number of directors elected at the meeting shall constitute the number of directors of the corporation until the next annual meeting of shareholders, unless the number is previously changed by action of the shareholders. Directors need not be residents of the State or North Carolina. No person will be eligible to stand for election as a director after he shall have attained the age of 65 years, and all directors shall retire effective December 31 the year such director attains the age of 70 years. Upon retirement from the board of directors pursuant to the preceding sentence, the retiring director may continue as director emeritus and may serve on committees or advisory boards of the corporation and will receive such compensation as the board of directors may fix from time to time for actual service rendered. Honorary or advisory members of the board of directors may be appointed by the board of directors to act in an advisory capacity without the power of final decision in matters concerning the business of the corporation. (b) The board of directors shall be divided into three classes, class 1, class 2 and class 3, each class being as nearly equal in number as possible. Each director shall serve for -4-

a term ending on the date of the third annual meeting of shareholders following the annual meeting at which such director was elected. In the event of any increase or decrease in the authorized number of directors, (1) each director then serving as such shall nevertheless continue as a director of the class of which he is a member until the expiration of his current term or his earlier death, resignation, disqualification or removal, and (2) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the board of directors among the three classes of directors as nearly equal as possible. In the event of the death, resignation, retirement, removal or disqualification of a director during his elected term of office, his successor shall be elected to serve only until the expiration of the term of his predecessor. Notwithstanding the foregoing, in the event that preferred stock of the corporation is issued and if the articles of incorporation so provide, the holders of the preferred stock of the corporation may increase the board of directors by additional directors to serve as provided in the articles of incorporation. Should a vacancy occur among such directors elected by the preferred shareholders, such vacancy shall be filled, until the next election of directors by such shareholders, by the affirmative vote of the majority of the remaining directors elected by such shareholders. Section 3. Removal.

a term ending on the date of the third annual meeting of shareholders following the annual meeting at which such director was elected. In the event of any increase or decrease in the authorized number of directors, (1) each director then serving as such shall nevertheless continue as a director of the class of which he is a member until the expiration of his current term or his earlier death, resignation, disqualification or removal, and (2) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the board of directors among the three classes of directors as nearly equal as possible. In the event of the death, resignation, retirement, removal or disqualification of a director during his elected term of office, his successor shall be elected to serve only until the expiration of the term of his predecessor. Notwithstanding the foregoing, in the event that preferred stock of the corporation is issued and if the articles of incorporation so provide, the holders of the preferred stock of the corporation may increase the board of directors by additional directors to serve as provided in the articles of incorporation. Should a vacancy occur among such directors elected by the preferred shareholders, such vacancy shall be filled, until the next election of directors by such shareholders, by the affirmative vote of the majority of the remaining directors elected by such shareholders. Section 3. Removal. (a) Any director or the entire board of directors may be removed; however, such removal must be for cause and must be approved as set forth in this Article. Except as may otherwise be provided by law, cause for removal shall be construed to exist only if (1) the director whose removal is proposed has been convicted, or if a director was granted immunity to testify in a case in which another has been convicted, of a felony by a court of competent jurisdiction and such conviction is no longer subject to direct appeal; (2) such director has been adjudicated by a court of competent jurisdiction to be liable for negligence or misconduct in the performance of his duty to the corporation in a matter of substantial importance to the corporation and such adjudication is no longer subject to direct appeal; (3) such director has become mentally incompetent, whether or not so adjudicated, which mental incompetency directly affects his ability as a director of the corporation; (4) such director's actions or failure to act is deemed by the board of directors to be in derogation of the director's duties; or (5) such director ceases to fulfill the qualification requirements set forth in this Article. (b) Removal for cause, as cause is defined in (1) or (2) of subsection (a), must be approved by at least a majority of the total number of directors or by at least a majority vote of the shares of the corporation then entitled to be voted at an election for that director, and the action for removal must be brought within one year of such conviction or adjudication. Removal for cause, as cause is defined in (3), (4) and (5) of subsection (a), must be approved by at least two-thirds of the total number of directors. For purposes of this subsection, the total number of directors will not include the director who is the subject of the removal determination, nor will such director be entitled to vote thereon. Section 4. Vacancies. Except as otherwise provided in the articles of incorporation, a vacancy occurring in the board of directors, including, without limitation, a vacancy resulting -5-

from an increase in the number of directors or from the failure by the shareholders to elect the full authorized number of directors, may be filled by a majority of the remaining directors or by the sole director remaining in office. The shareholders may elect a director at any time to fill a vacancy not filled by the directors. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. Section 5. Compensation. The directors shall not receive compensation for their services as such, except that by resolution of the board of directors, the directors may be paid fees, which may include but are not restricted to fees for attendance at meetings of the board or of a committee, and they may be reimbursed for expenses of attendance. Any director may serve the corporation in any other capacity and receive compensation therefor. Section 6. Nomination of Directors. Subject to any rights of holders of preferred shares, only persons who are nominated in accordance with the procedures set forth in this Section 6 shall be eligible for election as directors. Nomination for election to the board of directors shall be made by the board of directors or a nominating committee of the board of directors. Nomination for election of any person to the board of directors may also be made by a shareholder if such nomination is made in compliance with the procedure set forth in this Section 6. Notice of nominations made by shareholders entitled to vote for the election of directors shall be received in

from an increase in the number of directors or from the failure by the shareholders to elect the full authorized number of directors, may be filled by a majority of the remaining directors or by the sole director remaining in office. The shareholders may elect a director at any time to fill a vacancy not filled by the directors. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. Section 5. Compensation. The directors shall not receive compensation for their services as such, except that by resolution of the board of directors, the directors may be paid fees, which may include but are not restricted to fees for attendance at meetings of the board or of a committee, and they may be reimbursed for expenses of attendance. Any director may serve the corporation in any other capacity and receive compensation therefor. Section 6. Nomination of Directors. Subject to any rights of holders of preferred shares, only persons who are nominated in accordance with the procedures set forth in this Section 6 shall be eligible for election as directors. Nomination for election to the board of directors shall be made by the board of directors or a nominating committee of the board of directors. Nomination for election of any person to the board of directors may also be made by a shareholder if such nomination is made in compliance with the procedure set forth in this Section 6. Notice of nominations made by shareholders entitled to vote for the election of directors shall be received in writing by the secretary not less than fifty (50) nor more than seventy-five (75) days before the first anniversary of the date of the corporation's proxy statement in connection with the last meeting of shareholders called for the election of directors. Each notice shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the nominee's qualifications to serve as director, (iv) a representation that the nominee has consented to his name being placed in nomination, (v) the number and class of capital shares of the corporation beneficially owned by each such nominee, (vi) the name and record address of the shareholder making the nomination, (vii) the class, series, and number of the corporation's shares that are owned of record or beneficially by such shareholder, and (viii) any material interest of the shareholder in the proposed nomination. The secretary shall deliver all such notices to the corporation's nominating committee, or such other committee as may be appointed by the board of directors from time to time for the purpose of recommending to the board of directors candidates to serve as director or, in the absence of such other committee, to the board of directors, for review. The nominating committee or such other committee shall thereafter make its recommendation with respect to nominees to the board of directors, and the board of directors shall thereafter make its determination as to whether such candidate should be nominated for election as director. The chairman of any meeting of shareholders called for election of directors may, if the facts warrant, determine that a nomination was not made in accordance with the foregoing procedures, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. -6-

ARTICLE 4 Meetings of Directors Section 1. Annual and Regular Meetings. The annual meeting of the board of directors shall be held immediately following the annual meeting of the shareholders. The board of directors may by resolution provide for the holding of regular meetings of the board on specified dates and at specified times. Notice of regular meetings held at the principal office of the corporation and at the usual scheduled time shall not be required. If any date for which a regular meeting is scheduled shall be a legal holiday, the meeting shall be held on a date designated in the notice of the meeting, if any, during either the same week in which the regularly scheduled date falls or during the preceding or following week. Regular meetings of the board shall be held at the principal office of the corporation or at such other place as may be designated in the notice of the meeting. Section 2. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the president or any two directors. Such meetings may be held at the time and place designated in the notice of the meeting. Section 3. Notice of Meetings. Unless the articles of incorporation provide otherwise, the annual and regular meetings of the board of directors may be held without notice of the date, time, place or purpose of the meeting. The secretary or other person or persons calling a special meeting shall give notice by any usual means of

ARTICLE 4 Meetings of Directors Section 1. Annual and Regular Meetings. The annual meeting of the board of directors shall be held immediately following the annual meeting of the shareholders. The board of directors may by resolution provide for the holding of regular meetings of the board on specified dates and at specified times. Notice of regular meetings held at the principal office of the corporation and at the usual scheduled time shall not be required. If any date for which a regular meeting is scheduled shall be a legal holiday, the meeting shall be held on a date designated in the notice of the meeting, if any, during either the same week in which the regularly scheduled date falls or during the preceding or following week. Regular meetings of the board shall be held at the principal office of the corporation or at such other place as may be designated in the notice of the meeting. Section 2. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the president or any two directors. Such meetings may be held at the time and place designated in the notice of the meeting. Section 3. Notice of Meetings. Unless the articles of incorporation provide otherwise, the annual and regular meetings of the board of directors may be held without notice of the date, time, place or purpose of the meeting. The secretary or other person or persons calling a special meeting shall give notice by any usual means of communication to be sent at least two days before the meeting if notice is sent by means of telephone, telecopy or personal delivery and at least five days before the meeting if notice is sent by mail. A director's attendance at, or participation in, a meeting for which notice is required shall constitute a waiver of notice, unless the director at the beginning of the meeting (or promptly upon arrival) objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. Section 4. Quorum. Except as otherwise provided in the articles of incorporation, a majority of the directors in office shall constitute a quorum for the transaction of business at a meeting of the board of directors. Section 5. Manner of Acting. Except as otherwise provided in the articles of incorporation or these bylaws, the act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors. Section 6. Presumption of Assent. A director of the corporation who is present at a meeting of the board of directors at which action on any corporate matter is taken is deemed to have assented to the action taken unless he objects at the beginning of the meeting (or promptly upon arrival) to holding, or transacting business at, the meeting, or unless his dissent or abstention is entered in the minutes of the meeting or unless he shall file written notice of his dissent or abstention to such action with the presiding officer of the meeting before its -7-

adjournment or with the corporation immediately after adjournment of the meeting. The right of dissent or abstention shall not apply to a director who voted in favor of such action. Section 7. Action Without Meeting. Unless otherwise provided in the articles of incorporation, action required or permitted to be taken at a meeting of the board of directors may be taken without a meeting if the action is taken by all members of the board. The action must be evidenced by one or more written consents signed by each director before or after such action, describing the action taken, and included in the minutes or filed with the corporate records. Action taken without a meeting is effective when the last director signs the consent, unless the consent specifies a different effective date. Section 8. Meeting by Communications Device. Unless otherwise provided in the articles of incorporation, the board of directors may permit any or all directors to participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting.

adjournment or with the corporation immediately after adjournment of the meeting. The right of dissent or abstention shall not apply to a director who voted in favor of such action. Section 7. Action Without Meeting. Unless otherwise provided in the articles of incorporation, action required or permitted to be taken at a meeting of the board of directors may be taken without a meeting if the action is taken by all members of the board. The action must be evidenced by one or more written consents signed by each director before or after such action, describing the action taken, and included in the minutes or filed with the corporate records. Action taken without a meeting is effective when the last director signs the consent, unless the consent specifies a different effective date. Section 8. Meeting by Communications Device. Unless otherwise provided in the articles of incorporation, the board of directors may permit any or all directors to participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting. ARTICLE 5 Committees Section 1. Election and Powers. Unless otherwise provided by the articles of incorporation, a majority of the board of directors may create one or more committees and appoint two or more directors to serve at the pleasure of the board on each such committee. To the extent specified by the board of directors or in the articles of incorporation, each committee shall have and may exercise the powers of the board in the management of the business and affairs of the corporation, except that no committee shall have authority to do the following: (a) Authorize distributions. (b) Approve or propose to shareholders action required to be approved by shareholders. (c) Fill vacancies on the board of directors or on any of its committees. (d) Amend the articles of incorporation. (e) Adopt, amend or repeal the bylaws. (f) Approve a plan of merger not requiring shareholder approval. -8-

(g) Authorize or approve the reacquisition of shares, except according to a formula or method prescribed by the board of directors. (h) Authorize or approve the issuance, sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, except that the board of directors may authorize the executive committee (or a senior executive officer of the corporation) to do so within limits specifically prescribed by the board of directors. Section 2. Removal; Vacancies. Any member of a committee may be removed at any time with or without cause, and vacancies in the membership of a committee by means of death, resignation, disqualification or removal shall be filled by a majority of the whole board of directors. Section 3. Meetings. The provisions of Article 4 governing meetings of the board of directors, action without meeting, notice, waiver of notice and quorum and voting requirements shall apply to the committees of the board and its members. Section 4. Minutes. Each committee shall keep minutes of its proceedings and shall report thereon to the board of

(g) Authorize or approve the reacquisition of shares, except according to a formula or method prescribed by the board of directors. (h) Authorize or approve the issuance, sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, except that the board of directors may authorize the executive committee (or a senior executive officer of the corporation) to do so within limits specifically prescribed by the board of directors. Section 2. Removal; Vacancies. Any member of a committee may be removed at any time with or without cause, and vacancies in the membership of a committee by means of death, resignation, disqualification or removal shall be filled by a majority of the whole board of directors. Section 3. Meetings. The provisions of Article 4 governing meetings of the board of directors, action without meeting, notice, waiver of notice and quorum and voting requirements shall apply to the committees of the board and its members. Section 4. Minutes. Each committee shall keep minutes of its proceedings and shall report thereon to the board of directors at or before the next meeting of the board. ARTICLE 6 Officers Section 1. Titles. The officers of the corporation shall be a president, a secretary and a treasurer and may include a chairman and vice chairman of the board of directors, one or more executive vice presidents, one or more senior vice presidents, one or more vice presidents, a controller, one or more assistant secretaries, one or more assistant treasurers, one or more assistant controllers, and such other officers as shall be deemed necessary. The officers shall have the authority and perform the duties as set forth herein or as from time to time may be prescribed by the board of directors or by the president (to the extent that the president is authorized by the board of directors to prescribe the authority and duties of officers). Any two or more offices may be held by the same individual, but no officer may act in more than one capacity where action of two or more officers is required. Section 2. Election; Appointment. The officers of the corporation shall be elected from time to time by the board of directors or appointed from time to time by the president (to the extent that the president is authorized by the board to appoint officers). Section 3. Removal. Any officer may be removed by the board at any time with or without cause whenever in its judgment the best interests of the corporation will be served, but removal shall not itself affect the officer's contract rights, if any, with the corporation. -9-

Section 4. Vacancies. Vacancies among the officers may be filled and new offices may be created and filled by the board of directors, or by the president (to the extent authorized by the board). Section 5. Compensation. The compensation of the officers shall be fixed by the board of directors. Section 6. Chairman of the Board of Directors. The chairman of the board of directors, if such officer is elected, shall preside at the meetings of the board of directors and shall have such other authority and perform such other duties as the board of directors shall designate. Section 7. President. The president shall be in general charge of the affairs of the corporation in the ordinary course of its business, and shall preside at meetings of the shareholders. The president may perform such acts, not inconsistent with applicable law or the provisions of these bylaws, as may be performed by the president or a corporation and may sign and execute all authorized notes, bonds, contracts and other obligations in the name of the corporation. The president shall have such other powers and perform such other duties as the board of

Section 4. Vacancies. Vacancies among the officers may be filled and new offices may be created and filled by the board of directors, or by the president (to the extent authorized by the board). Section 5. Compensation. The compensation of the officers shall be fixed by the board of directors. Section 6. Chairman of the Board of Directors. The chairman of the board of directors, if such officer is elected, shall preside at the meetings of the board of directors and shall have such other authority and perform such other duties as the board of directors shall designate. Section 7. President. The president shall be in general charge of the affairs of the corporation in the ordinary course of its business, and shall preside at meetings of the shareholders. The president may perform such acts, not inconsistent with applicable law or the provisions of these bylaws, as may be performed by the president or a corporation and may sign and execute all authorized notes, bonds, contracts and other obligations in the name of the corporation. The president shall have such other powers and perform such other duties as the board of directors shall designate or as may be provided by applicable law or elsewhere in these bylaws. Section 8. Executive Vice Presidents, Senior Vice Presidents and Vice Presidents. The executive vice presidents, senior vice presidents and vice presidents, if such offices are elected, shall have such powers and perform such duties as may be assigned by the board of directors or by the president (to the extent that the president is authorized by the board of directors to prescribe the authority and duties of other officers). Section 9. Secretary. The secretary shall keep accurate records of the acts and proceedings of all meetings of shareholders and of the board of directors and shall give all notices required by law and by these bylaws. The secretary shall have general charge of the corporate books and records and shall have the responsibility and authority to maintain and authenticate such books and records. The secretary shall have general charge of the corporate seal and shall affix the corporate seal to any lawfully executed instrument requiring it. The secretary shall have general charge of the stock transfer books of the corporation and shall keep at the principal office of the corporation a record of shareholders, showing the name and address of each shareholder and the number and class of the shares held by each. The secretary shall sign such instruments as may require the signature of the secretary, and in general shall perform the duties incident to the office of secretary and such other duties as may be assigned from time to time by the board of directors or the president (to the extent that the president is authorized by the board of directors to prescribe the authority and duties of other officers). Section 10. Assistant Secretaries. Each assistant secretary, if such officer is elected, shall have such powers and perform such duties as may be assigned by the board of directors or the president (if authorized by the board of directors to prescribe the authority and duties of -10-

other officers), and the assistant Secretaries shall exercise the powers of the secretary during that officer's absence or inability to act. Section 11. Treasurer. The treasurer shall have custody of all funds and securities belonging to the corporation and shall receive, deposit or disburse the same under the direction of the board of directors. The treasurer shall keep full and accurate accounts of the finances of the corporation, which may be consolidated or combined statements of the corporation and one or more of its subsidiaries as appropriate, that include a balance sheet as of the end of the fiscal year, an income statement for that year, and a statement of cash flows for the year unless that information appears elsewhere in the financial statements. If financial statements are prepared for the corporation on the basis of generally accepted accounting principles, the annual financial statements must also be prepared on that basis. The corporation shall mail the annual financial statements, or a written notice of their availability, to each shareholder within 120 days of the close of each fiscal year. The treasurer shall in general perform all duties incident to the office and such other duties as may be assigned from time to time by the board of directors or the president (to the extent that the president is authorized by the board of directors to prescribe the authority and duties of other officers). Section 12. Assistant Treasurers. Each assistant treasurer, if such officer is elected, shall have such powers and perform such duties as may be assigned by the board of directors or the president (to the extent that the president

other officers), and the assistant Secretaries shall exercise the powers of the secretary during that officer's absence or inability to act. Section 11. Treasurer. The treasurer shall have custody of all funds and securities belonging to the corporation and shall receive, deposit or disburse the same under the direction of the board of directors. The treasurer shall keep full and accurate accounts of the finances of the corporation, which may be consolidated or combined statements of the corporation and one or more of its subsidiaries as appropriate, that include a balance sheet as of the end of the fiscal year, an income statement for that year, and a statement of cash flows for the year unless that information appears elsewhere in the financial statements. If financial statements are prepared for the corporation on the basis of generally accepted accounting principles, the annual financial statements must also be prepared on that basis. The corporation shall mail the annual financial statements, or a written notice of their availability, to each shareholder within 120 days of the close of each fiscal year. The treasurer shall in general perform all duties incident to the office and such other duties as may be assigned from time to time by the board of directors or the president (to the extent that the president is authorized by the board of directors to prescribe the authority and duties of other officers). Section 12. Assistant Treasurers. Each assistant treasurer, if such officer is elected, shall have such powers and perform such duties as may be assigned by the board of directors or the president (to the extent that the president is authorized by the board of directors to prescribe the authority and duties of other officers), and the assistant treasurers shall exercise the powers of the treasurer during the officer's absence or inability to act. Section 13. Controller and Assistant Controllers. The controller, if such officer is elected, shall have charge of the accounting affairs of the corporation and shall have such other powers and perform such other duties as the board of directors or the president (to the extent that the president is authorized by the board of directors to prescribe the authority and duties of other officers) shall designate. Each assistant controller shall have such powers and perform such duties as may be assigned by the board of directors to prescribe the authority and duties of other officers), and the assistant controllers shall exercise the powers of the controller during that officer's absence or inability to act. Section 14. Voting Upon Stocks. Unless otherwise ordered by the board of directors, the president shall have full power and authority in behalf of the corporation to attend, act and vote at meetings of the shareholders of any corporation in which this corporation may hold stock, and at such meetings shall possess and may exercise any and all rights and powers incident to the ownership of such stock and which, as the owner, the corporation might have possessed and exercised if present. The board of directors may by resolution from time to time confer such power and authority upon any other person or persons. -11-

ARTICLE 7 Capital Stock Section 1. Certificates. Shares of the capital stock of the corporation shall be represented by certificates. The name and address of the persons to whom shares of capital stock of the corporation are issued, with the number of shares and date of issue, shall be entered on the stock transfer records of the corporation. Certificates for shares of the capital stock of the corporation shall be in such form not inconsistent with the articles of incorporation of the corporation as shall be approved by the board of directors. Each certificate shall be signed (either manually or by facsimile) by the president or any vice president and by the secretary, assistant secretary, treasurer or assistant treasurer. Each certificate may be sealed with the seal of the corporation or a facsimile thereof. Section 2. Transfer of Shares. Transfer of shares shall be made on the stock transfer records of the corporation, and transfers shall be made only upon surrender of the certificate for the shares sought to be transferred by the recordholder or by a duly authorized agent, transferee or legal representative. All certificates surrendered for transfer shall be cancelled before new certificates for the transferred shares shall be issued. Section 3. Transfer Agent and Registrar. The board of directors may appoint one or more transfer agents and

ARTICLE 7 Capital Stock Section 1. Certificates. Shares of the capital stock of the corporation shall be represented by certificates. The name and address of the persons to whom shares of capital stock of the corporation are issued, with the number of shares and date of issue, shall be entered on the stock transfer records of the corporation. Certificates for shares of the capital stock of the corporation shall be in such form not inconsistent with the articles of incorporation of the corporation as shall be approved by the board of directors. Each certificate shall be signed (either manually or by facsimile) by the president or any vice president and by the secretary, assistant secretary, treasurer or assistant treasurer. Each certificate may be sealed with the seal of the corporation or a facsimile thereof. Section 2. Transfer of Shares. Transfer of shares shall be made on the stock transfer records of the corporation, and transfers shall be made only upon surrender of the certificate for the shares sought to be transferred by the recordholder or by a duly authorized agent, transferee or legal representative. All certificates surrendered for transfer shall be cancelled before new certificates for the transferred shares shall be issued. Section 3. Transfer Agent and Registrar. The board of directors may appoint one or more transfer agents and one or more registrars of transfers and may require all stock certificates to be signed or countersigned by the transfer agent and registered by the registrar of transfers. Section 4. Regulations. The board of directors may make rules and regulations as it deems expedient concerning the issue, transfer and registration of shares of capital stock of the corporation. Section 5. Fixing Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other purpose, the board of directors may fix in advance a date as the record date for the determination of shareholders. The record date shall be not more than 70 days before the meeting or action requiring a determination of shareholders. A determination of shareholders entitled to notice of or to vote at a shareholders' meeting shall be effective for any adjournment of the meeting unless the board of directors fixes a new record date, which it shall do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. If no record date is fixed for the determination of shareholders, the record date shall be the day the notice of the meeting is mailed or the day the action requiring a determination of shareholders is taken. If no record date is fixed for action without a meeting, the record date for determining shareholders entitled to take action without a meeting shall be the date the first shareholder signs a consent to the action taken. -12-

Section 6. Lost Certificates. The board of directors must authorize the issuance of a new certificate in place of a certificate claimed to have been lost, destroyed or wrongfully taken, upon receipt of (a) an affidavit from the person explaining the loss, destruction or wrongful taking, and (b) a bond from the claimant in a sum as the corporation may reasonably direct to indemnify the corporation against loss from any claim with respect to the certificate claimed to have been lost, destroyed or wrongfully taken. The board of directors may, in its discretion, waive the affidavit and bond and authorize the issuance of a new certificate in place of a certificate claimed to have been lost, destroyed or wrongfully taken. ARTICLE 8 Indemnification of Directors and Officers Section 1. Indemnification Provisions. Any person who at any time serves or has served as a director or officer of the corporation or of any wholly owned subsidiary of the corporation, or in such capacity at the request of the corporation for any other foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or as a trustee or administrator under any employee benefit plan of the corporation or of any wholly owned subsidiary thereof (a "Claimant"), shall have the right to be indemnified and held harmless by the corporation to the fullest extent from time to time permitted by law against all liabilities and litigation expenses (as hereinafter

Section 6. Lost Certificates. The board of directors must authorize the issuance of a new certificate in place of a certificate claimed to have been lost, destroyed or wrongfully taken, upon receipt of (a) an affidavit from the person explaining the loss, destruction or wrongful taking, and (b) a bond from the claimant in a sum as the corporation may reasonably direct to indemnify the corporation against loss from any claim with respect to the certificate claimed to have been lost, destroyed or wrongfully taken. The board of directors may, in its discretion, waive the affidavit and bond and authorize the issuance of a new certificate in place of a certificate claimed to have been lost, destroyed or wrongfully taken. ARTICLE 8 Indemnification of Directors and Officers Section 1. Indemnification Provisions. Any person who at any time serves or has served as a director or officer of the corporation or of any wholly owned subsidiary of the corporation, or in such capacity at the request of the corporation for any other foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or as a trustee or administrator under any employee benefit plan of the corporation or of any wholly owned subsidiary thereof (a "Claimant"), shall have the right to be indemnified and held harmless by the corporation to the fullest extent from time to time permitted by law against all liabilities and litigation expenses (as hereinafter defined) in the event a claim shall be made or threatened against that person in, or that person is made or threatened to be made a party to, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and whether or not brought by or on behalf of the corporation, including all appeals therefrom (a "proceeding"), arising out of that person's status as such or that person's activities in any such capacity; provided, that such indemnification shall not be effective with respect to (a) that portion of any liabilities or litigation expenses with respect to which the Claimant is entitled to receive payment under any insurance policy or (b) any liabilities or litigation expenses incurred on account of any of the Claimant's activities which were at the time taken known or believed by the Claimant to be clearly in conflict with the best interests of the corporation. Section 2. Definitions. As used in this Article, (a) "liabilities" shall include, without limitation, (1) payments in satisfaction of any judgment, money decree, excise tax, fine or penalty for which Claimant had become liable in any proceeding and (2) payments in settlement of any such proceeding subject, however, to Section 3 of this Article; (b) "litigation expenses" shall include, without limitation, (1) reasonable costs and expenses and attorneys' fees and expenses actually incurred by the Claimant in connection with any proceeding and (2) reasonable costs and expenses and attorneys' fees and expenses in connection with the enforcement of rights to the indemnification granted hereby or by applicable law, if such enforcement is successful in whole or in part; and (c) "disinterested directors" shall mean directors who are not party to the proceeding in question. -13-

Section 3. Settlements. The corporation shall not be liable to indemnify the Claimant for any amounts paid in settlement of any proceeding effected without the corporation's written consent. The corporation will not unreasonably withhold its consent to any proposed settlement. Section 4. Litigation Expense Advances. (a) Except as provided in subsection (b) below, any litigation expenses shall be advanced to any Claimant within 30 days of receipt by the secretary of the corporation of a demand therefor, together with an undertaking by or on behalf of the Claimant to repay to the corporation such amount unless it is ultimately determined that Claimant is entitled to be indemnified by the corporation against such expenses. The secretary shall promptly forward notice of the demand and undertaking immediately to all directors of the corporation. (b) Within 10 days after mailing of notice to the directors pursuant to subsection (a) above, any disinterested director may, if desired, call a meeting of all disinterested directors to review the reasonableness of the expenses so requested. No advance shall be made if a majority of the disinterested directors affirmatively determines that the item of expense is unreasonable in amount; but if the disinterested directors determine that a portion of the expense item is reasonable, the corporation shall advance such portion.

Section 3. Settlements. The corporation shall not be liable to indemnify the Claimant for any amounts paid in settlement of any proceeding effected without the corporation's written consent. The corporation will not unreasonably withhold its consent to any proposed settlement. Section 4. Litigation Expense Advances. (a) Except as provided in subsection (b) below, any litigation expenses shall be advanced to any Claimant within 30 days of receipt by the secretary of the corporation of a demand therefor, together with an undertaking by or on behalf of the Claimant to repay to the corporation such amount unless it is ultimately determined that Claimant is entitled to be indemnified by the corporation against such expenses. The secretary shall promptly forward notice of the demand and undertaking immediately to all directors of the corporation. (b) Within 10 days after mailing of notice to the directors pursuant to subsection (a) above, any disinterested director may, if desired, call a meeting of all disinterested directors to review the reasonableness of the expenses so requested. No advance shall be made if a majority of the disinterested directors affirmatively determines that the item of expense is unreasonable in amount; but if the disinterested directors determine that a portion of the expense item is reasonable, the corporation shall advance such portion. Section 5. Approval of Indemnification Payments. Except as provided in Section 4 of this Article, the board of directors of the corporation shall take all such action as may be necessary and appropriate to authorize the corporation to pay the indemnification required by Section 1 of this Article, including, without limitation, making a good faith evaluation of the manner in which the Claimant acted and of the reasonable amount of indemnity due the Claimant. In taking any such action, any Claimant who is a director of the corporation shall not be entitled to vote on any matter concerning such Claimant's right to indemnification. Section 6. Suits by Claimant. No Claimant shall be entitled to bring suit against the corporation to enforce his rights under this Article until sixty days after a written claim has been received by the corporation, together with any undertaking to repay as required by Section 4 of this Article. It shall be a defense to any such action that the Claimant's liabilities or litigation expenses were incurred on account of activities described in clause (b) of Section 1, but the burden of proving this defense shall be on the corporation. Neither the failure of the corporation to have made a determination prior to the commencement of the action or the effect that indemnification of the Claimant is proper in the circumstances, nor an actual determination by the corporation that the Claimant had not met the standard of conduct described in clause (b) of Section 1, shall be a defense to the action or create a presumption that the Claimant has not met the applicable standard of conduct. Section 7. Consideration; Personal Representatives and Other Remedies. Any person who during such time as this Article or corresponding provisions of predecessor bylaws is or has been in effect serves or has served in any of the aforesaid capacities for or on behalf of the corporation shall be deemed to be doing so or to have done so in reliance upon, and as -14-

consideration for, the right of indemnification provided herein or therein. The right of indemnification provided herein or therein shall inure to the benefit of the legal representatives of any person who qualifies or would qualify as a Claimant hereunder, and the right shall not be exclusive of any other rights to which the person or legal representative may be entitled apart from this Article. Section 8. Scope of Indemnification Rights. The rights granted herein shall not be limited by the provisions of Section 55-8-51 of the General Statutes of North Carolina or any successor statute. ARTICLE 9 General Provisions Section 1. Dividends and other Distributions. The board of directors may from time to time declare, and the corporation may pay or make, dividends or other distributions with respect to its outstanding shares in the manner and upon the terms and conditions provided by law.

consideration for, the right of indemnification provided herein or therein. The right of indemnification provided herein or therein shall inure to the benefit of the legal representatives of any person who qualifies or would qualify as a Claimant hereunder, and the right shall not be exclusive of any other rights to which the person or legal representative may be entitled apart from this Article. Section 8. Scope of Indemnification Rights. The rights granted herein shall not be limited by the provisions of Section 55-8-51 of the General Statutes of North Carolina or any successor statute. ARTICLE 9 General Provisions Section 1. Dividends and other Distributions. The board of directors may from time to time declare, and the corporation may pay or make, dividends or other distributions with respect to its outstanding shares in the manner and upon the terms and conditions provided by law. Section 1. Dividends and other Distributions. The board of directors may from time to time declare, and the corporation may pay or make, dividends or other distributions with respect to its outstanding shares in the manner and upon the terms and conditions provided by law. Section 2. Seal. The seal of the corporation shall be in the form approved by the board of directors. Section 3. Waiver of Notice. Whenever notice is required to be given to a shareholder, director or other person under the provisions of these bylaws, the articles of incorporation or by applicable law, a waiver in writing signed by the person or persons entitled to the notice, whether before or after the date and time stated in the notice, shall be equivalent to giving the notice. Section 4. Checks. All checks, drafts or orders for the payment of money shall be signed by the officer or officers or other individuals that the board of directors may from time to time designate. Section 5. Bond. The board of directors may by resolution require any or all officers, agents and employees of the corporation to give bond to the corporation, with sufficient sureties, conditioned on the faithful performance of the duties of their respective offices or positions, and to comply with such other conditions as may from time to time be required by the board. Section 6. Fiscal Year. The fiscal year of the corporation shall be the calendar year. Section 7. Amendments. Unless otherwise provided in the articles of incorporation or a bylaw adopted by the shareholders or by law, these bylaws may be amended or repealed by the board of directors, except that a bylaw adopted, amended or repealed by the shareholders may not be readopted, amended or repealed by the board of directors if neither the articles of -15-

incorporation nor a bylaw adopted by the shareholders authorizes the board of directors to adopt, amend or repeal that particular bylaw or the bylaws generally. These bylaws may be amended or repealed by the shareholders even though the bylaws may also be amended or repealed by the board of directors. A bylaw that fixes a greater quorum or voting requirement for the board of directors may be amended of repealed (a) if originally adopted by the shareholders, only by the shareholders, unless such bylaw as originally adopted by the shareholders provides that such bylaw may be amended or repealed by the board of directors or (b) if originally adopted by the board of directors, either by the shareholders or by the board of directors. A bylaw that fixes a greater quorum or voting requirement may not be adopted by the board of directors by a vote less than a majority of the directors then in office and may not itself be amended by a quorum or vote of the directors less than the quorum or vote prescribed in such bylaw or prescribed by the shareholders. ARTICLE 10

incorporation nor a bylaw adopted by the shareholders authorizes the board of directors to adopt, amend or repeal that particular bylaw or the bylaws generally. These bylaws may be amended or repealed by the shareholders even though the bylaws may also be amended or repealed by the board of directors. A bylaw that fixes a greater quorum or voting requirement for the board of directors may be amended of repealed (a) if originally adopted by the shareholders, only by the shareholders, unless such bylaw as originally adopted by the shareholders provides that such bylaw may be amended or repealed by the board of directors or (b) if originally adopted by the board of directors, either by the shareholders or by the board of directors. A bylaw that fixes a greater quorum or voting requirement may not be adopted by the board of directors by a vote less than a majority of the directors then in office and may not itself be amended by a quorum or vote of the directors less than the quorum or vote prescribed in such bylaw or prescribed by the shareholders. ARTICLE 10 Antitakeover Statutes The provisions of Article 9 of the North Carolina Business Corporation Act shall not be applicable to the corporation. -16-

EXHIBIT 10.2 LSB BANCSHARES, INC. 1996 OMNIBUS STOCK INCENTIVE PLAN

ARTICLE I 1.01. 1.02. 1.03. 1.04. 1.05. 1.06. 1.07. 1.08. 1.09. 1.10. 1.11. 1.12. 1.13. 1.14. 1.15. 1.16. 1.17. ARTICLE II ARTICLE III ARTICLE IV ARTICLE V 5.01. 5.02. 5.03. ARTICLE VI 6.01. 6.02. 6.03. 6.04. 6.05. 6.06. 6.07.

DEFINITIONS Administrator . . Affiliate . . . . Agreement . . . . Board . . . . . . Code . . . . . . Committee . . . . Common Stock . . Company . . . . . Corresponding SAR Exchange Act . . Fair Market Value Initial Value . . Option . . . . . Participant . . . Plan . . . . . . SAR . . . . . . . Stock Award . . . PURPOSES ADMINISTRATION ELIGIBILITY

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STOCK SUBJECT TO PLAN Shares Issued . . . . . . . . . . . . . . . . . . . . . . . . . . Aggregate Limit . . . . . . . . . . . . . . . . . . . . . . . . . Reallocation of Shares . . . . . . . . . . . . . . . . . . . . . OPTIONS Award . . . . . . . . Option Price . . . . Maximum Option Period Nontransferability . Transferable Options Employee Status . . . Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EXHIBIT 10.2 LSB BANCSHARES, INC. 1996 OMNIBUS STOCK INCENTIVE PLAN

ARTICLE I 1.01. 1.02. 1.03. 1.04. 1.05. 1.06. 1.07. 1.08. 1.09. 1.10. 1.11. 1.12. 1.13. 1.14. 1.15. 1.16. 1.17. ARTICLE II ARTICLE III ARTICLE IV ARTICLE V 5.01. 5.02. 5.03. ARTICLE VI 6.01. 6.02. 6.03. 6.04. 6.05. 6.06. 6.07. 6.08. 6.09. 6.10. 6.11.

DEFINITIONS Administrator . . Affiliate . . . . Agreement . . . . Board . . . . . . Code . . . . . . Committee . . . . Common Stock . . Company . . . . . Corresponding SAR Exchange Act . . Fair Market Value Initial Value . . Option . . . . . Participant . . . Plan . . . . . . SAR . . . . . . . Stock Award . . . PURPOSES ADMINISTRATION ELIGIBILITY

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STOCK SUBJECT TO PLAN Shares Issued . . . . . . . . . . . . . . . . . . . . . . . . . . Aggregate Limit . . . . . . . . . . . . . . . . . . . . . . . . . Reallocation of Shares . . . . . . . . . . . . . . . . . . . . . OPTIONS Award . . . . . . . . Option Price . . . . Maximum Option Period Nontransferability . Transferable Options Employee Status . . . Exercise . . . . . . Payment . . . . . . . Installment Payment . Shareholder Rights. . Disposition of Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ARTICLE VII 7.01. 7.02. 7.03. 7.04. 7.05. 7.06. 7.07. 7.08. ARTICLE VIII 8.01. 8.02. 8.03. 8.04. 8.05. ARTICLE IX

SARS Award . . . . . . . Maximum SAR Period. Nontransferability. Transferable SARs . Employee Status. . Exercise . . . . . Settlement. . . . . Shareholder Rights. STOCK AWARDS

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Award. . . . . . . . . Vesting. . . . . . . . Performance Objectives. Employee Status. . . . Shareholder Rights. . . ADJUSTMENT UPON CHANGE IN COMMON STOCK

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ARTICLE I 1.01. 1.02. 1.03. 1.04. 1.05. 1.06. 1.07. 1.08. 1.09. 1.10. 1.11. 1.12. 1.13. 1.14. 1.15. 1.16. 1.17. ARTICLE II ARTICLE III ARTICLE IV ARTICLE V 5.01. 5.02. 5.03. ARTICLE VI 6.01. 6.02. 6.03. 6.04. 6.05. 6.06. 6.07. 6.08. 6.09. 6.10. 6.11.

DEFINITIONS Administrator . . Affiliate . . . . Agreement . . . . Board . . . . . . Code . . . . . . Committee . . . . Common Stock . . Company . . . . . Corresponding SAR Exchange Act . . Fair Market Value Initial Value . . Option . . . . . Participant . . . Plan . . . . . . SAR . . . . . . . Stock Award . . . PURPOSES ADMINISTRATION ELIGIBILITY

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STOCK SUBJECT TO PLAN Shares Issued . . . . . . . . . . . . . . . . . . . . . . . . . . Aggregate Limit . . . . . . . . . . . . . . . . . . . . . . . . . Reallocation of Shares . . . . . . . . . . . . . . . . . . . . . OPTIONS Award . . . . . . . . Option Price . . . . Maximum Option Period Nontransferability . Transferable Options Employee Status . . . Exercise . . . . . . Payment . . . . . . . Installment Payment . Shareholder Rights. . Disposition of Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ARTICLE VII 7.01. 7.02. 7.03. 7.04. 7.05. 7.06. 7.07. 7.08. ARTICLE VIII 8.01. 8.02. 8.03. 8.04. 8.05. ARTICLE IX

SARS Award . . . . . . . Maximum SAR Period. Nontransferability. Transferable SARs . Employee Status. . Exercise . . . . . Settlement. . . . . Shareholder Rights. STOCK AWARDS

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Award. . . . . . . . . Vesting. . . . . . . . Performance Objectives. Employee Status. . . . Shareholder Rights. . . ADJUSTMENT UPON CHANGE IN COMMON STOCK

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ARTICLE X

COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES GENERAL PROVISIONS 11.01. 11.02. 11.03. Effect on Employment and Service. . . . . . . . . . . . . . . . . Unfunded Plan. . . . . . . . . . . . . . . . . . . . . . . . . . Rules of Construction. . . . . . . . . . . . . . . . . . . . . . AMENDMENT

ARTICLE XI

ARTICLE XII

ARTICLE VII 7.01. 7.02. 7.03. 7.04. 7.05. 7.06. 7.07. 7.08. ARTICLE VIII 8.01. 8.02. 8.03. 8.04. 8.05. ARTICLE IX

SARS Award . . . . . . . Maximum SAR Period. Nontransferability. Transferable SARs . Employee Status. . Exercise . . . . . Settlement. . . . . Shareholder Rights. STOCK AWARDS

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Award. . . . . . . . . Vesting. . . . . . . . Performance Objectives. Employee Status. . . . Shareholder Rights. . . ADJUSTMENT UPON CHANGE IN COMMON STOCK

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ARTICLE X

COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES GENERAL PROVISIONS 11.01. 11.02. 11.03. Effect on Employment and Service. . . . . . . . . . . . . . . . . Unfunded Plan. . . . . . . . . . . . . . . . . . . . . . . . . . Rules of Construction. . . . . . . . . . . . . . . . . . . . . . AMENDMENT DURATION OF PLAN EFFECTIVE DATE OF PLAN

ARTICLE XI

ARTICLE XII ARTICLE XIII ARTICLE XIV

ARTICLE I DEFINITIONS 1.01. Administrator means the Committee and any delegate of the Committee that is appointed in accordance with Article III. 1.02. Affiliate means any "subsidiary" or "parent" corporation (within the meaning of Section 424 of the Code) of the Company. 1.03. Agreement means a written agreement (including any amendment or supplement thereto) between the Company and a Participant specifying the terms and conditions of a Stock Award or an Option or SAR granted to such Participant. 1.04. Board means the Board of Directors of the Company. 1.05. Code means the Internal Revenue Code of 1986, and any amendments thereto. 1.06. Committee means the Stock Option and Compensation Committee of the Board. 1.07. Common Stock means the common stock, $5.00 par value per share, of the Company. 1.08. Company means LSB Bancshares, Inc. 1.09. Corresponding SAR means an SAR that is granted in relation to a particular Option and that can be exercised only upon the surrender to the Company, unexercised, of that portion of the Option to which the SAR relates. 1.10. Exchange Act means the Securities Exchange Act of 1934, as amended.

ARTICLE I DEFINITIONS 1.01. Administrator means the Committee and any delegate of the Committee that is appointed in accordance with Article III. 1.02. Affiliate means any "subsidiary" or "parent" corporation (within the meaning of Section 424 of the Code) of the Company. 1.03. Agreement means a written agreement (including any amendment or supplement thereto) between the Company and a Participant specifying the terms and conditions of a Stock Award or an Option or SAR granted to such Participant. 1.04. Board means the Board of Directors of the Company. 1.05. Code means the Internal Revenue Code of 1986, and any amendments thereto. 1.06. Committee means the Stock Option and Compensation Committee of the Board. 1.07. Common Stock means the common stock, $5.00 par value per share, of the Company. 1.08. Company means LSB Bancshares, Inc. 1.09. Corresponding SAR means an SAR that is granted in relation to a particular Option and that can be exercised only upon the surrender to the Company, unexercised, of that portion of the Option to which the SAR relates. 1.10. Exchange Act means the Securities Exchange Act of 1934, as amended. 1.11. Fair Market Value means, on any given date, the last sales price of a share of Common Stock as reported on the NASDAQ National Market System. The

preceding sentence to the contrary notwithstanding, if the Common Stock is listed upon any established stock exchange, the Fair Market Value on any given day shall be the closing price of the Common Stock on such exchange. If the Common Stock was not traded on the NASDAQ National Market System or on an established stock exchange on such day, then the Fair Market Value is determined with reference to the next preceding day that the Common Stock was so traded. 1.12. Initial Value means, with respect to an SAR, the Fair Market Value of one share of Common Stock on the date of grant. 1.13. Option means a stock option that entitles the holder to purchase from the Company a stated number of shares of Common Stock at the price set forth in an Agreement. 1.14. Participant means an employee of the Company or an Affiliate, including an employee who is a member of the Board, who satisfies the requirements of Article IV and is selected by the Administrator to receive a Stock Award, an Option, an SAR or a combination thereof. 1.15. Plan means the LSB Bancshares, Inc. 1996 Omnibus Stock Incentive Plan. 1.16. SAR means a stock appreciation right that in accordance with the terms of an Agreement entitles the holder to receive, with respect to each share of Common Stock encompassed by the exercise of such SAR, the amount determined by the Administrator and specified in an Agreement. In the absence of such a determination, the holder shall be entitled to receive, with respect to each share of Common Stock encompassed by the exercise of such SAR, the excess of the Fair

preceding sentence to the contrary notwithstanding, if the Common Stock is listed upon any established stock exchange, the Fair Market Value on any given day shall be the closing price of the Common Stock on such exchange. If the Common Stock was not traded on the NASDAQ National Market System or on an established stock exchange on such day, then the Fair Market Value is determined with reference to the next preceding day that the Common Stock was so traded. 1.12. Initial Value means, with respect to an SAR, the Fair Market Value of one share of Common Stock on the date of grant. 1.13. Option means a stock option that entitles the holder to purchase from the Company a stated number of shares of Common Stock at the price set forth in an Agreement. 1.14. Participant means an employee of the Company or an Affiliate, including an employee who is a member of the Board, who satisfies the requirements of Article IV and is selected by the Administrator to receive a Stock Award, an Option, an SAR or a combination thereof. 1.15. Plan means the LSB Bancshares, Inc. 1996 Omnibus Stock Incentive Plan. 1.16. SAR means a stock appreciation right that in accordance with the terms of an Agreement entitles the holder to receive, with respect to each share of Common Stock encompassed by the exercise of such SAR, the amount determined by the Administrator and specified in an Agreement. In the absence of such a determination, the holder shall be entitled to receive, with respect to each share of Common Stock encompassed by the exercise of such SAR, the excess of the Fair -2-

Market Value on the date of exercise over the Initial Value. References to "SARs" include both Corresponding SARs and SARs granted independently of Options, unless the context requires otherwise. 1.17. Stock Award means Common Stock awarded to a Participant under Article VIII. ARTICLE II PURPOSES The Plan is intended to assist the Company and each Affiliate in recruiting and retaining individuals with ability and initiative by enabling such persons to participate in the future success of the Company and its Affiliates and to associate their interests with those of the Company and its shareholders. The Plan is intended to permit the grant of both Options qualifying under Section 422 of the Code ("incentive stock options") and Options not so qualifying, and the grant of SARs and Stock Awards. No Option that is intended to be an incentive stock option shall be invalid for failure to qualify as an incentive stock option. The proceeds received by the Company from the sale of Common Stock pursuant to the Plan shall be used for general corporate purposes. -3-

ARTICLE III ADMINISTRATION The Plan shall be administered by the Administrator. The Administrator shall have authority to grant Stock Awards, Options and SARs upon such terms (not inconsistent with the provisions of the Plan) as the Administrator may consider appropriate. Such terms may include conditions (in addition to those contained in the Plan) on the exercisability of all or any part of an Option or SAR or on the transferability or forfeitability of a Stock Award. Notwithstanding any such conditions, the Administrator may, in its discretion, accelerate the time at which any Option or SAR may be exercised, or the time at which a Stock Award may become transferable or nonforfeitable. In addition, the Administrator shall have complete authority to interpret all provisions of the Plan;

Market Value on the date of exercise over the Initial Value. References to "SARs" include both Corresponding SARs and SARs granted independently of Options, unless the context requires otherwise. 1.17. Stock Award means Common Stock awarded to a Participant under Article VIII. ARTICLE II PURPOSES The Plan is intended to assist the Company and each Affiliate in recruiting and retaining individuals with ability and initiative by enabling such persons to participate in the future success of the Company and its Affiliates and to associate their interests with those of the Company and its shareholders. The Plan is intended to permit the grant of both Options qualifying under Section 422 of the Code ("incentive stock options") and Options not so qualifying, and the grant of SARs and Stock Awards. No Option that is intended to be an incentive stock option shall be invalid for failure to qualify as an incentive stock option. The proceeds received by the Company from the sale of Common Stock pursuant to the Plan shall be used for general corporate purposes. -3-

ARTICLE III ADMINISTRATION The Plan shall be administered by the Administrator. The Administrator shall have authority to grant Stock Awards, Options and SARs upon such terms (not inconsistent with the provisions of the Plan) as the Administrator may consider appropriate. Such terms may include conditions (in addition to those contained in the Plan) on the exercisability of all or any part of an Option or SAR or on the transferability or forfeitability of a Stock Award. Notwithstanding any such conditions, the Administrator may, in its discretion, accelerate the time at which any Option or SAR may be exercised, or the time at which a Stock Award may become transferable or nonforfeitable. In addition, the Administrator shall have complete authority to interpret all provisions of the Plan; to prescribe the form of Agreements; to adopt, amend, and rescind rules and regulations pertaining to the administration of the Plan; and to make all other determinations necessary or advisable for the administration of the Plan. The express grant in the Plan of any specific power to the Administrator shall not be construed as limiting any power or authority of the Administrator. Any decision made, or action taken, by the Administrator or in connection with the administration of the Plan shall be final and conclusive. Neither the Administrator nor any member of the Committee shall be liable for any act done in good faith with respect to the Plan or any Agreement, Option, SAR or Stock Award. All expenses of administering the Plan shall be borne by the Company. -4-

The Committee, in its discretion, may delegate to one or more officers of the Company or the Executive Committee of the Board, all or part of the Committee's authority and duties with respect to grants and awards to individuals who are not subject to the reporting and other provisions of Section 16 of the Exchange Act. The Committee may revoke or amend the terms of a delegation at any time but such action shall not invalidate any prior actions of the Committee's delegate or delegates that were consistent with the terms of the Plan. ARTICLE IV ELIGIBILITY Any employee of the Company or an Affiliate (including a corporation that becomes an Affiliate after the adoption of the Plan) is eligible to participate in the Plan if the Administrator, in its sole discretion, determines that such person has contributed significantly or can be expected to contribute significantly to the profits or growth of the Company or an Affiliate. Directors of the Company who are employees of the Company or an Affiliate may

ARTICLE III ADMINISTRATION The Plan shall be administered by the Administrator. The Administrator shall have authority to grant Stock Awards, Options and SARs upon such terms (not inconsistent with the provisions of the Plan) as the Administrator may consider appropriate. Such terms may include conditions (in addition to those contained in the Plan) on the exercisability of all or any part of an Option or SAR or on the transferability or forfeitability of a Stock Award. Notwithstanding any such conditions, the Administrator may, in its discretion, accelerate the time at which any Option or SAR may be exercised, or the time at which a Stock Award may become transferable or nonforfeitable. In addition, the Administrator shall have complete authority to interpret all provisions of the Plan; to prescribe the form of Agreements; to adopt, amend, and rescind rules and regulations pertaining to the administration of the Plan; and to make all other determinations necessary or advisable for the administration of the Plan. The express grant in the Plan of any specific power to the Administrator shall not be construed as limiting any power or authority of the Administrator. Any decision made, or action taken, by the Administrator or in connection with the administration of the Plan shall be final and conclusive. Neither the Administrator nor any member of the Committee shall be liable for any act done in good faith with respect to the Plan or any Agreement, Option, SAR or Stock Award. All expenses of administering the Plan shall be borne by the Company. -4-

The Committee, in its discretion, may delegate to one or more officers of the Company or the Executive Committee of the Board, all or part of the Committee's authority and duties with respect to grants and awards to individuals who are not subject to the reporting and other provisions of Section 16 of the Exchange Act. The Committee may revoke or amend the terms of a delegation at any time but such action shall not invalidate any prior actions of the Committee's delegate or delegates that were consistent with the terms of the Plan. ARTICLE IV ELIGIBILITY Any employee of the Company or an Affiliate (including a corporation that becomes an Affiliate after the adoption of the Plan) is eligible to participate in the Plan if the Administrator, in its sole discretion, determines that such person has contributed significantly or can be expected to contribute significantly to the profits or growth of the Company or an Affiliate. Directors of the Company who are employees of the Company or an Affiliate may be selected to participate in the Plan. A member of the Committee may not participate in the Plan during the time that his participation would prevent the Committee from being "disinterested" for purposes of Securities and Exchange Commission Rule 16b-3 as in effect from time to time. -5-

ARTICLE V STOCK SUBJECT TO PLAN 5.01. Shares Issued. Upon the award of shares of Common Stock pursuant to a Stock Award, the Company may issue shares of Common Stock from its authorized but unissued Common Stock. Upon the exercise of any Option or SAR, the Company may deliver to the Participant (or the Participant's broker if the Participant so directs), shares of Common Stock from its authorized but unissued Common Stock. 5.02. Aggregate Limit. The maximum aggregate number of shares of Common Stock that may be issued under the Plan pursuant to the exercise of SARs and Options and the grant of Stock Awards is 250,000 shares. The maximum aggregate number of shares that may be issued under the Plan as Stock Awards is 125,000 shares. The maximum aggregate number of shares that may be issued under the Plan and the maximum number of shares

The Committee, in its discretion, may delegate to one or more officers of the Company or the Executive Committee of the Board, all or part of the Committee's authority and duties with respect to grants and awards to individuals who are not subject to the reporting and other provisions of Section 16 of the Exchange Act. The Committee may revoke or amend the terms of a delegation at any time but such action shall not invalidate any prior actions of the Committee's delegate or delegates that were consistent with the terms of the Plan. ARTICLE IV ELIGIBILITY Any employee of the Company or an Affiliate (including a corporation that becomes an Affiliate after the adoption of the Plan) is eligible to participate in the Plan if the Administrator, in its sole discretion, determines that such person has contributed significantly or can be expected to contribute significantly to the profits or growth of the Company or an Affiliate. Directors of the Company who are employees of the Company or an Affiliate may be selected to participate in the Plan. A member of the Committee may not participate in the Plan during the time that his participation would prevent the Committee from being "disinterested" for purposes of Securities and Exchange Commission Rule 16b-3 as in effect from time to time. -5-

ARTICLE V STOCK SUBJECT TO PLAN 5.01. Shares Issued. Upon the award of shares of Common Stock pursuant to a Stock Award, the Company may issue shares of Common Stock from its authorized but unissued Common Stock. Upon the exercise of any Option or SAR, the Company may deliver to the Participant (or the Participant's broker if the Participant so directs), shares of Common Stock from its authorized but unissued Common Stock. 5.02. Aggregate Limit. The maximum aggregate number of shares of Common Stock that may be issued under the Plan pursuant to the exercise of SARs and Options and the grant of Stock Awards is 250,000 shares. The maximum aggregate number of shares that may be issued under the Plan as Stock Awards is 125,000 shares. The maximum aggregate number of shares that may be issued under the Plan and the maximum number of shares that may be issued as Stock Awards shall be subject to adjustment as provided in Article X. 5.03. Reallocation of Shares. If an Option is terminated, in whole or in part, for any reason other than its exercise or the exercise of a Corresponding SAR that is settled with Common Stock, the number of shares of Common Stock allocated to the Option or portion thereof may be reallocated to other Options, SARs and Stock Awards to be granted under the Plan. If an SAR is terminated, in whole or in part, for any reason other than its exercise or the exercise of a related Option, the number -6-

of shares of Common Stock allocated to the SAR or portion thereof may be reallocated to other Options, SARs and Stock Awards to be granted under the Plan. ARTICLE VI OPTIONS 6.01. Award. In accordance with the provisions of Article IV, the Administrator will designate each individual to whom an Option is to be granted and will specify the number of shares of Common Stock covered by such awards. 6.02. Option Price. The price per share for Common Stock purchased on the exercise of an Option shall be

ARTICLE V STOCK SUBJECT TO PLAN 5.01. Shares Issued. Upon the award of shares of Common Stock pursuant to a Stock Award, the Company may issue shares of Common Stock from its authorized but unissued Common Stock. Upon the exercise of any Option or SAR, the Company may deliver to the Participant (or the Participant's broker if the Participant so directs), shares of Common Stock from its authorized but unissued Common Stock. 5.02. Aggregate Limit. The maximum aggregate number of shares of Common Stock that may be issued under the Plan pursuant to the exercise of SARs and Options and the grant of Stock Awards is 250,000 shares. The maximum aggregate number of shares that may be issued under the Plan as Stock Awards is 125,000 shares. The maximum aggregate number of shares that may be issued under the Plan and the maximum number of shares that may be issued as Stock Awards shall be subject to adjustment as provided in Article X. 5.03. Reallocation of Shares. If an Option is terminated, in whole or in part, for any reason other than its exercise or the exercise of a Corresponding SAR that is settled with Common Stock, the number of shares of Common Stock allocated to the Option or portion thereof may be reallocated to other Options, SARs and Stock Awards to be granted under the Plan. If an SAR is terminated, in whole or in part, for any reason other than its exercise or the exercise of a related Option, the number -6-

of shares of Common Stock allocated to the SAR or portion thereof may be reallocated to other Options, SARs and Stock Awards to be granted under the Plan. ARTICLE VI OPTIONS 6.01. Award. In accordance with the provisions of Article IV, the Administrator will designate each individual to whom an Option is to be granted and will specify the number of shares of Common Stock covered by such awards. 6.02. Option Price. The price per share for Common Stock purchased on the exercise of an Option shall be determined by the Administrator on the date of grant; provided, however, that the price per share for Common Stock purchased on the exercise of any Option shall not be less than eighty-five percent (85%) of the Fair Market Value on the date the Option is granted. Notwithstanding the preceding sentence, the price per share for Common Stock purchased on the exercise of any Option that is an incentive stock option shall not be less than the Fair Market Value on the date the Option is granted. 6.03. Maximum Option Period. The maximum period in which an Option may be exercised shall be determined by the Administrator on the date of grant, except that no Option that is an incentive stock option shall be exercisable after the expiration of ten years from the date such Option was granted. The terms of any Option that is an incentive stock option may provide that it is exercisable for a period less than such maximum period. -7-

6.04. Nontransferability. Except as provided in Section 6.05, each Option granted under the Plan shall be nontransferable except by will or by the laws of descent and distribution. In the event of any such transfer, the Option and any Corresponding SAR that relates to such Option must be transferred to the same person or persons or entity or entities. Except as set forth in Section 6.05, during the lifetime of the Participant to whom the Option is granted, the Option may be exercised only by the Participant. No right or interest of a Participant in any Option shall be liable for, or subject to, any lien, obligation, or liability of such Participant. 6.05. Transferable Options. Section 6.04 to the contrary notwithstanding, if the Agreement provides, an Option

of shares of Common Stock allocated to the SAR or portion thereof may be reallocated to other Options, SARs and Stock Awards to be granted under the Plan. ARTICLE VI OPTIONS 6.01. Award. In accordance with the provisions of Article IV, the Administrator will designate each individual to whom an Option is to be granted and will specify the number of shares of Common Stock covered by such awards. 6.02. Option Price. The price per share for Common Stock purchased on the exercise of an Option shall be determined by the Administrator on the date of grant; provided, however, that the price per share for Common Stock purchased on the exercise of any Option shall not be less than eighty-five percent (85%) of the Fair Market Value on the date the Option is granted. Notwithstanding the preceding sentence, the price per share for Common Stock purchased on the exercise of any Option that is an incentive stock option shall not be less than the Fair Market Value on the date the Option is granted. 6.03. Maximum Option Period. The maximum period in which an Option may be exercised shall be determined by the Administrator on the date of grant, except that no Option that is an incentive stock option shall be exercisable after the expiration of ten years from the date such Option was granted. The terms of any Option that is an incentive stock option may provide that it is exercisable for a period less than such maximum period. -7-

6.04. Nontransferability. Except as provided in Section 6.05, each Option granted under the Plan shall be nontransferable except by will or by the laws of descent and distribution. In the event of any such transfer, the Option and any Corresponding SAR that relates to such Option must be transferred to the same person or persons or entity or entities. Except as set forth in Section 6.05, during the lifetime of the Participant to whom the Option is granted, the Option may be exercised only by the Participant. No right or interest of a Participant in any Option shall be liable for, or subject to, any lien, obligation, or liability of such Participant. 6.05. Transferable Options. Section 6.04 to the contrary notwithstanding, if the Agreement provides, an Option that is not an incentive stock option may be transferred by a Participant to the Participant's children, grandchildren, spouse, one or more trusts for the benefit of such family members or a partnership in which such family members are the only partners; provided, however, that Participant may not receive any consideration for the transfer. In addition to transfers described in the preceding sentence the Administrator may grant Options that are not incentive stock options that are transferable on other terms and conditions as may be permitted under Securities Exchange Commission Rule 16b-3 as in effect from time to time. The holder of an Option transferred pursuant to this section shall be bound by the same terms and conditions that governed the Option during the period that it was held by the Participant. In the event of any such transfer, the Option and any Corresponding SAR that relates to such Option must be transferred to the same person or persons or entity or entities. -8-

6.06. Employee Status. For purposes of determining the applicability of Section 422 of the Code (relating to incentive stock options), or in the event that the terms of any Option provide that it may be exercised only during employment or within a specified period of time after termination of employment, the Administrator may decide to what extent leaves of absence for governmental or military service, illness, temporary disability, or other reasons shall not be deemed interruptions of continuous employment. 6.07. Exercise. Subject to the provisions of the Plan and the applicable Agreement, an Option may be exercised in whole at any time or in part from time to time at such times and in compliance with such requirements as the Administrator shall determine; provided, however, that incentive stock options (granted under the Plan and all plans of the Company and its Affiliates) may not be first exercisable in a calendar year for stock having a Fair Market (determined as of the date an Option is granted) exceeding $100,000. An Option granted under the Plan

6.04. Nontransferability. Except as provided in Section 6.05, each Option granted under the Plan shall be nontransferable except by will or by the laws of descent and distribution. In the event of any such transfer, the Option and any Corresponding SAR that relates to such Option must be transferred to the same person or persons or entity or entities. Except as set forth in Section 6.05, during the lifetime of the Participant to whom the Option is granted, the Option may be exercised only by the Participant. No right or interest of a Participant in any Option shall be liable for, or subject to, any lien, obligation, or liability of such Participant. 6.05. Transferable Options. Section 6.04 to the contrary notwithstanding, if the Agreement provides, an Option that is not an incentive stock option may be transferred by a Participant to the Participant's children, grandchildren, spouse, one or more trusts for the benefit of such family members or a partnership in which such family members are the only partners; provided, however, that Participant may not receive any consideration for the transfer. In addition to transfers described in the preceding sentence the Administrator may grant Options that are not incentive stock options that are transferable on other terms and conditions as may be permitted under Securities Exchange Commission Rule 16b-3 as in effect from time to time. The holder of an Option transferred pursuant to this section shall be bound by the same terms and conditions that governed the Option during the period that it was held by the Participant. In the event of any such transfer, the Option and any Corresponding SAR that relates to such Option must be transferred to the same person or persons or entity or entities. -8-

6.06. Employee Status. For purposes of determining the applicability of Section 422 of the Code (relating to incentive stock options), or in the event that the terms of any Option provide that it may be exercised only during employment or within a specified period of time after termination of employment, the Administrator may decide to what extent leaves of absence for governmental or military service, illness, temporary disability, or other reasons shall not be deemed interruptions of continuous employment. 6.07. Exercise. Subject to the provisions of the Plan and the applicable Agreement, an Option may be exercised in whole at any time or in part from time to time at such times and in compliance with such requirements as the Administrator shall determine; provided, however, that incentive stock options (granted under the Plan and all plans of the Company and its Affiliates) may not be first exercisable in a calendar year for stock having a Fair Market (determined as of the date an Option is granted) exceeding $100,000. An Option granted under the Plan may be exercised with respect to any number of whole shares less than the full number for which the Option could be exercised. A partial exercise of an Option shall not affect the right to exercise the Option from time to time in accordance with the Plan and the applicable Agreement with respect to the remaining shares subject to the Option. The exercise of an Option shall result in the termination of any Corresponding SAR to the extent of the number of shares with respect to which the Option is exercised. 6.08. Payment. Unless otherwise provided by the Agreement, payment of the Option price shall be made in cash or a cash equivalent acceptable to the Adminis-9-

trator. If the Agreement provides, payment of all or part of the Option price may be made by surrendering shares of Common Stock to the Company. If Common Stock is used to pay all or part of the Option price, the sum of the cash and cash equivalent and the Fair Market Value (determined as of the day preceding the date of exercise) of the shares surrendered must not be less than the Option price of the shares for which the Option is being exercised. 6.09. Installment Payment. If the Agreement provides, and if the Participant is employed by the Company on the date the Option is exercised, payment of all or part of the Option price may be made in installments. In that event the Company shall lend the Participant an amount equal to not more than ninety percent (90%) of the Option price of the shares acquired by the exercise of the Option. This amount shall be evidenced by the Participant's promissory note and shall be payable in not more than five equal annual installments, unless the amount of the loan exceeds the maximum loan value for the shares purchased, which value shall be established from time to time by regulations of the Board of Governors of the Federal Reserve System. In that event, the note shall be payable in equal quarterly installments over a period of time not to exceed five years. The Administrator, however, may vary

6.06. Employee Status. For purposes of determining the applicability of Section 422 of the Code (relating to incentive stock options), or in the event that the terms of any Option provide that it may be exercised only during employment or within a specified period of time after termination of employment, the Administrator may decide to what extent leaves of absence for governmental or military service, illness, temporary disability, or other reasons shall not be deemed interruptions of continuous employment. 6.07. Exercise. Subject to the provisions of the Plan and the applicable Agreement, an Option may be exercised in whole at any time or in part from time to time at such times and in compliance with such requirements as the Administrator shall determine; provided, however, that incentive stock options (granted under the Plan and all plans of the Company and its Affiliates) may not be first exercisable in a calendar year for stock having a Fair Market (determined as of the date an Option is granted) exceeding $100,000. An Option granted under the Plan may be exercised with respect to any number of whole shares less than the full number for which the Option could be exercised. A partial exercise of an Option shall not affect the right to exercise the Option from time to time in accordance with the Plan and the applicable Agreement with respect to the remaining shares subject to the Option. The exercise of an Option shall result in the termination of any Corresponding SAR to the extent of the number of shares with respect to which the Option is exercised. 6.08. Payment. Unless otherwise provided by the Agreement, payment of the Option price shall be made in cash or a cash equivalent acceptable to the Adminis-9-

trator. If the Agreement provides, payment of all or part of the Option price may be made by surrendering shares of Common Stock to the Company. If Common Stock is used to pay all or part of the Option price, the sum of the cash and cash equivalent and the Fair Market Value (determined as of the day preceding the date of exercise) of the shares surrendered must not be less than the Option price of the shares for which the Option is being exercised. 6.09. Installment Payment. If the Agreement provides, and if the Participant is employed by the Company on the date the Option is exercised, payment of all or part of the Option price may be made in installments. In that event the Company shall lend the Participant an amount equal to not more than ninety percent (90%) of the Option price of the shares acquired by the exercise of the Option. This amount shall be evidenced by the Participant's promissory note and shall be payable in not more than five equal annual installments, unless the amount of the loan exceeds the maximum loan value for the shares purchased, which value shall be established from time to time by regulations of the Board of Governors of the Federal Reserve System. In that event, the note shall be payable in equal quarterly installments over a period of time not to exceed five years. The Administrator, however, may vary such terms and make such other provisions concerning the unpaid balance of such purchase price in the case of hardship, subsequent termination of employment, absence on military or government service, or subsequent death of the Participant as in its discretion are necessary or advisable in order to protect the Company, -10-

promote the purposes of the Plan and comply with regulations of the Board of Governors of the Federal Reserve System relating to securities credit transactions. The Participant shall pay interest on the unpaid balance at the minimum rate necessary to avoid imputed interest or original issue discount under the Code. All shares acquired with cash borrowed from the Company shall be pledged to the Company as security for the repayment thereof. In the discretion of the Administrator, shares of stock may be released from such pledge proportionately as payments on the note (together with interest) are made, provided the release of such shares complies with the regulations of the Federal Reserve System relating to securities credit transactions then applicable. While shares are so pledged, and so long as there has been no default in the installment payments, such shares shall remain registered in the name of the Participant, and he shall have the right to vote such shares and to receive all dividends thereon. 6.10. Shareholder Rights. No Participant shall have any rights as a shareholder with respect to shares subject to his Option until the date of exercise of such Option.

trator. If the Agreement provides, payment of all or part of the Option price may be made by surrendering shares of Common Stock to the Company. If Common Stock is used to pay all or part of the Option price, the sum of the cash and cash equivalent and the Fair Market Value (determined as of the day preceding the date of exercise) of the shares surrendered must not be less than the Option price of the shares for which the Option is being exercised. 6.09. Installment Payment. If the Agreement provides, and if the Participant is employed by the Company on the date the Option is exercised, payment of all or part of the Option price may be made in installments. In that event the Company shall lend the Participant an amount equal to not more than ninety percent (90%) of the Option price of the shares acquired by the exercise of the Option. This amount shall be evidenced by the Participant's promissory note and shall be payable in not more than five equal annual installments, unless the amount of the loan exceeds the maximum loan value for the shares purchased, which value shall be established from time to time by regulations of the Board of Governors of the Federal Reserve System. In that event, the note shall be payable in equal quarterly installments over a period of time not to exceed five years. The Administrator, however, may vary such terms and make such other provisions concerning the unpaid balance of such purchase price in the case of hardship, subsequent termination of employment, absence on military or government service, or subsequent death of the Participant as in its discretion are necessary or advisable in order to protect the Company, -10-

promote the purposes of the Plan and comply with regulations of the Board of Governors of the Federal Reserve System relating to securities credit transactions. The Participant shall pay interest on the unpaid balance at the minimum rate necessary to avoid imputed interest or original issue discount under the Code. All shares acquired with cash borrowed from the Company shall be pledged to the Company as security for the repayment thereof. In the discretion of the Administrator, shares of stock may be released from such pledge proportionately as payments on the note (together with interest) are made, provided the release of such shares complies with the regulations of the Federal Reserve System relating to securities credit transactions then applicable. While shares are so pledged, and so long as there has been no default in the installment payments, such shares shall remain registered in the name of the Participant, and he shall have the right to vote such shares and to receive all dividends thereon. 6.10. Shareholder Rights. No Participant shall have any rights as a shareholder with respect to shares subject to his Option until the date of exercise of such Option. 6.11. Disposition of Stock. A Participant shall notify the Company of any sale or other disposition of Common Stock acquired pursuant to an Option that was an incentive stock option if such sale or disposition occurs (i) within two years of the grant of an Option or (ii) within one year of the issuance of the Common Stock to the Participant. Such notice shall be in writing and directed to the Secretary of the Company. -11-

ARTICLE VII SARS 7.01. Award. In accordance with the provisions of Article IV, the Administrator will designate each individual to whom SARs are to be granted and will specify the number of shares covered by such awards. For purposes of the preceding sentence, an Option and Corresponding SAR shall be treated as a single award. In addition no Participant may be granted Corresponding SARs (under all incentive stock option plans of the Company and its Affiliates) that are related to incentive stock options which are first exercisable in any calendar year for stock having an aggregate Fair Market Value (determined as of the date the related Option is granted) that exceeds $100,000. 7.02. Maximum SAR Period. The maximum period in which an SAR may be exercised shall be determined by the Administrator on the date of grant, except that no Corresponding SAR that is related to an incentive stock

promote the purposes of the Plan and comply with regulations of the Board of Governors of the Federal Reserve System relating to securities credit transactions. The Participant shall pay interest on the unpaid balance at the minimum rate necessary to avoid imputed interest or original issue discount under the Code. All shares acquired with cash borrowed from the Company shall be pledged to the Company as security for the repayment thereof. In the discretion of the Administrator, shares of stock may be released from such pledge proportionately as payments on the note (together with interest) are made, provided the release of such shares complies with the regulations of the Federal Reserve System relating to securities credit transactions then applicable. While shares are so pledged, and so long as there has been no default in the installment payments, such shares shall remain registered in the name of the Participant, and he shall have the right to vote such shares and to receive all dividends thereon. 6.10. Shareholder Rights. No Participant shall have any rights as a shareholder with respect to shares subject to his Option until the date of exercise of such Option. 6.11. Disposition of Stock. A Participant shall notify the Company of any sale or other disposition of Common Stock acquired pursuant to an Option that was an incentive stock option if such sale or disposition occurs (i) within two years of the grant of an Option or (ii) within one year of the issuance of the Common Stock to the Participant. Such notice shall be in writing and directed to the Secretary of the Company. -11-

ARTICLE VII SARS 7.01. Award. In accordance with the provisions of Article IV, the Administrator will designate each individual to whom SARs are to be granted and will specify the number of shares covered by such awards. For purposes of the preceding sentence, an Option and Corresponding SAR shall be treated as a single award. In addition no Participant may be granted Corresponding SARs (under all incentive stock option plans of the Company and its Affiliates) that are related to incentive stock options which are first exercisable in any calendar year for stock having an aggregate Fair Market Value (determined as of the date the related Option is granted) that exceeds $100,000. 7.02. Maximum SAR Period. The maximum period in which an SAR may be exercised shall be determined by the Administrator on the date of grant, except that no Corresponding SAR that is related to an incentive stock option shall be exercisable after the expiration of ten years from the date such related Option was granted. The terms of any Corresponding SAR that is related to an incentive stock option may provide that it is exercisable for a period less than such maximum period. 7.03. Nontransferability. Except as provided in Section 7.04, each SAR granted under the Plan shall be nontransferable except by will or by the laws of descent and distribution. In the event of any such transfer, a Corresponding SAR and the related Option must be transferred to the same person or persons or entity or entities. -12-

Except as set forth in Section 7.04, during the lifetime of the Participant to whom the SAR is granted, the SAR may be exercised only by the Participant. No right or interest of a Participant in any SAR shall be liable for, or subject to, any lien, obligation, or liability of such Participant. 7.04. Transferable SARs. Section 7.03 to the contrary notwithstanding, the Administrator may grant transferable SARs to the extent that, and on such terms as may be permitted by, Securities Exchange Commission Rule 16b3 as in effect from time to time. In the event of any such transfer, Corresponding SAR and the related Option must be transferred to the same person or person or entity or entities. The holder of an SAR transferred pursuant to this section shall be bound by the same terms and conditions that governed the SAR during the period that it

ARTICLE VII SARS 7.01. Award. In accordance with the provisions of Article IV, the Administrator will designate each individual to whom SARs are to be granted and will specify the number of shares covered by such awards. For purposes of the preceding sentence, an Option and Corresponding SAR shall be treated as a single award. In addition no Participant may be granted Corresponding SARs (under all incentive stock option plans of the Company and its Affiliates) that are related to incentive stock options which are first exercisable in any calendar year for stock having an aggregate Fair Market Value (determined as of the date the related Option is granted) that exceeds $100,000. 7.02. Maximum SAR Period. The maximum period in which an SAR may be exercised shall be determined by the Administrator on the date of grant, except that no Corresponding SAR that is related to an incentive stock option shall be exercisable after the expiration of ten years from the date such related Option was granted. The terms of any Corresponding SAR that is related to an incentive stock option may provide that it is exercisable for a period less than such maximum period. 7.03. Nontransferability. Except as provided in Section 7.04, each SAR granted under the Plan shall be nontransferable except by will or by the laws of descent and distribution. In the event of any such transfer, a Corresponding SAR and the related Option must be transferred to the same person or persons or entity or entities. -12-

Except as set forth in Section 7.04, during the lifetime of the Participant to whom the SAR is granted, the SAR may be exercised only by the Participant. No right or interest of a Participant in any SAR shall be liable for, or subject to, any lien, obligation, or liability of such Participant. 7.04. Transferable SARs. Section 7.03 to the contrary notwithstanding, the Administrator may grant transferable SARs to the extent that, and on such terms as may be permitted by, Securities Exchange Commission Rule 16b3 as in effect from time to time. In the event of any such transfer, Corresponding SAR and the related Option must be transferred to the same person or person or entity or entities. The holder of an SAR transferred pursuant to this section shall be bound by the same terms and conditions that governed the SAR during the period that it was held by the Participant. 7.05. Employee Status. If the terms of any SAR provide that it may be exercised only during employment or within a specified period of time after termination of employment, the Administrator may decide to what extent leaves of absence for governmental or military service, illness, temporary disability or other reasons shall not be deemed interruptions of continuous employment. 7.06. Exercise. Subject to the provisions of the Plan and the applicable Agreement, an SAR may be exercised in whole at any time or in part from time to time at such times and in compliance with such requirements as the Administrator shall determine; provided, however, that a Corresponding SAR that is related to an incentive stock option may be exercised only to the extent that the related Option is -13-

exercisable and only when the Fair Market Value exceeds the option price of the related Option. An SAR granted under the Plan may be exercised with respect to any number of whole shares less than the full number for which the SAR could be exercised. A partial exercise of an SAR shall not affect the right to exercise the SAR from time to time in accordance with the Plan and the applicable Agreement with respect to the remaining shares subject to the SAR. The exercise of a Corresponding SAR shall result in the termination of the related Option to the extent of the number of shares with respect to which the SAR is exercised. 7.07. Settlement. At the Administrator's discretion, the amount payable as a result of the exercise of an SAR may be settled in cash, Common Stock, or a combination of cash and Common Stock. No fractional share will be deliverable upon the

Except as set forth in Section 7.04, during the lifetime of the Participant to whom the SAR is granted, the SAR may be exercised only by the Participant. No right or interest of a Participant in any SAR shall be liable for, or subject to, any lien, obligation, or liability of such Participant. 7.04. Transferable SARs. Section 7.03 to the contrary notwithstanding, the Administrator may grant transferable SARs to the extent that, and on such terms as may be permitted by, Securities Exchange Commission Rule 16b3 as in effect from time to time. In the event of any such transfer, Corresponding SAR and the related Option must be transferred to the same person or person or entity or entities. The holder of an SAR transferred pursuant to this section shall be bound by the same terms and conditions that governed the SAR during the period that it was held by the Participant. 7.05. Employee Status. If the terms of any SAR provide that it may be exercised only during employment or within a specified period of time after termination of employment, the Administrator may decide to what extent leaves of absence for governmental or military service, illness, temporary disability or other reasons shall not be deemed interruptions of continuous employment. 7.06. Exercise. Subject to the provisions of the Plan and the applicable Agreement, an SAR may be exercised in whole at any time or in part from time to time at such times and in compliance with such requirements as the Administrator shall determine; provided, however, that a Corresponding SAR that is related to an incentive stock option may be exercised only to the extent that the related Option is -13-

exercisable and only when the Fair Market Value exceeds the option price of the related Option. An SAR granted under the Plan may be exercised with respect to any number of whole shares less than the full number for which the SAR could be exercised. A partial exercise of an SAR shall not affect the right to exercise the SAR from time to time in accordance with the Plan and the applicable Agreement with respect to the remaining shares subject to the SAR. The exercise of a Corresponding SAR shall result in the termination of the related Option to the extent of the number of shares with respect to which the SAR is exercised. 7.07. Settlement. At the Administrator's discretion, the amount payable as a result of the exercise of an SAR may be settled in cash, Common Stock, or a combination of cash and Common Stock. No fractional share will be deliverable upon the exercise of an SAR but a cash payment will be made in lieu thereof. 7.08. Shareholder Rights. No Participant shall, as a result of receiving an SAR award, have any rights as a shareholder of the Company or any Affiliate until the date that the SAR is exercised and then only to the extent that the SAR is settled by the issuance of Common Stock. ARTICLE VIII STOCK AWARDS 8.01. Award. In accordance with the provisions of Article IV, the Administrator will designate each individual to whom a Stock Award is to be made and will specify the number of shares of Common Stock covered by such awards. -14-

8.02. Vesting. The Administrator, on the date of the award, may prescribe that a Participant's rights in the Stock Award shall be forfeitable or otherwise restricted for a period of time or subject to such conditions as may be set forth in the Agreement. If a Stock Award is forfeitable and non-transferable upon its grant, the period of restriction shall be at least three years; provided, however, that the minimum period of restriction shall be at least one year in the case of a Stock Award that will become transferable and nonforfeitable on account of the satisfaction of performance objectives prescribed by the Administrator. 8.03. Performance Objectives. In accordance with Section 8.02, the Administrator may prescribe that Stock Awards will become vested or transferable or both based on objectives stated with respect to the Company's

exercisable and only when the Fair Market Value exceeds the option price of the related Option. An SAR granted under the Plan may be exercised with respect to any number of whole shares less than the full number for which the SAR could be exercised. A partial exercise of an SAR shall not affect the right to exercise the SAR from time to time in accordance with the Plan and the applicable Agreement with respect to the remaining shares subject to the SAR. The exercise of a Corresponding SAR shall result in the termination of the related Option to the extent of the number of shares with respect to which the SAR is exercised. 7.07. Settlement. At the Administrator's discretion, the amount payable as a result of the exercise of an SAR may be settled in cash, Common Stock, or a combination of cash and Common Stock. No fractional share will be deliverable upon the exercise of an SAR but a cash payment will be made in lieu thereof. 7.08. Shareholder Rights. No Participant shall, as a result of receiving an SAR award, have any rights as a shareholder of the Company or any Affiliate until the date that the SAR is exercised and then only to the extent that the SAR is settled by the issuance of Common Stock. ARTICLE VIII STOCK AWARDS 8.01. Award. In accordance with the provisions of Article IV, the Administrator will designate each individual to whom a Stock Award is to be made and will specify the number of shares of Common Stock covered by such awards. -14-

8.02. Vesting. The Administrator, on the date of the award, may prescribe that a Participant's rights in the Stock Award shall be forfeitable or otherwise restricted for a period of time or subject to such conditions as may be set forth in the Agreement. If a Stock Award is forfeitable and non-transferable upon its grant, the period of restriction shall be at least three years; provided, however, that the minimum period of restriction shall be at least one year in the case of a Stock Award that will become transferable and nonforfeitable on account of the satisfaction of performance objectives prescribed by the Administrator. 8.03. Performance Objectives. In accordance with Section 8.02, the Administrator may prescribe that Stock Awards will become vested or transferable or both based on objectives stated with respect to the Company's return on equity, earnings per share, total earnings, earnings growth, return on capital, return on assets, Fair Market Value or other criteria. If the Administrator, on the date of award, prescribes that a Stock Award shall become nonforfeitable and transferable only upon the attainment of performance objectives stated with respect to one or more of the foregoing criteria, the shares subject to such Stock Award shall become nonforfeitable and transferable only to the extent that the Administrator certifies that such objectives have been achieved. 8.04. Employee Status. In the event that the terms of any Stock Award provide that shares may become transferable and nonforfeitable thereunder only after completion of a specified period of employment, the Administrator may decide in each case to what extent leaves of absence for governmental or military service, illness, -15-

temporary disability, or other reasons shall not be deemed interruptions of continuous employment. 8.05. Shareholder Rights. During the time a Stock Award is forfeitable, (in accordance with the applicable Agreement and while the shares of Common Stock granted pursuant to the Stock Award may be forfeited or are nontransferable), a Participant will have all rights of a shareholder with respect to a Stock Award, including the right to receive dividends and vote the shares; provided, however, that during such period (i) a Participant may not sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of shares of Common Stock granted pursuant to a Stock Award, (ii) the Company shall retain custody of the certificates evidencing shares of Common Stock granted pursuant to a Stock Award, and (iii) the Participant will deliver to the Company a stock power, endorsed in blank, with respect to each Stock Award. The limitations set forth in the preceding sentence

8.02. Vesting. The Administrator, on the date of the award, may prescribe that a Participant's rights in the Stock Award shall be forfeitable or otherwise restricted for a period of time or subject to such conditions as may be set forth in the Agreement. If a Stock Award is forfeitable and non-transferable upon its grant, the period of restriction shall be at least three years; provided, however, that the minimum period of restriction shall be at least one year in the case of a Stock Award that will become transferable and nonforfeitable on account of the satisfaction of performance objectives prescribed by the Administrator. 8.03. Performance Objectives. In accordance with Section 8.02, the Administrator may prescribe that Stock Awards will become vested or transferable or both based on objectives stated with respect to the Company's return on equity, earnings per share, total earnings, earnings growth, return on capital, return on assets, Fair Market Value or other criteria. If the Administrator, on the date of award, prescribes that a Stock Award shall become nonforfeitable and transferable only upon the attainment of performance objectives stated with respect to one or more of the foregoing criteria, the shares subject to such Stock Award shall become nonforfeitable and transferable only to the extent that the Administrator certifies that such objectives have been achieved. 8.04. Employee Status. In the event that the terms of any Stock Award provide that shares may become transferable and nonforfeitable thereunder only after completion of a specified period of employment, the Administrator may decide in each case to what extent leaves of absence for governmental or military service, illness, -15-

temporary disability, or other reasons shall not be deemed interruptions of continuous employment. 8.05. Shareholder Rights. During the time a Stock Award is forfeitable, (in accordance with the applicable Agreement and while the shares of Common Stock granted pursuant to the Stock Award may be forfeited or are nontransferable), a Participant will have all rights of a shareholder with respect to a Stock Award, including the right to receive dividends and vote the shares; provided, however, that during such period (i) a Participant may not sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of shares of Common Stock granted pursuant to a Stock Award, (ii) the Company shall retain custody of the certificates evidencing shares of Common Stock granted pursuant to a Stock Award, and (iii) the Participant will deliver to the Company a stock power, endorsed in blank, with respect to each Stock Award. The limitations set forth in the preceding sentence shall not apply after the shares of Common Stock granted under the Stock Award are transferable and are no longer forfeitable. ARTICLE IX ADJUSTMENT UPON CHANGE IN COMMON STOCK The maximum number of shares as to which Options, SARs and Stock Awards may be granted under the Plan, the terms of outstanding Stock Awards, Options, and SARs, and the per individual limitations on the number of shares or Units for which Options, SARs, and Stock Awards may be granted, shall be adjusted -16-

as the Committee shall determine to be equitably required in the event that (a) the Company (i) effects one or more stock dividends, stock split-ups, subdivisions or consolidations of shares or (ii) engages in a transaction to which Section 424 of the Code applies or (b) there occurs any other event which, in the judgment of the Committee necessitates such action. Any determination made under this Article IX by the Committee shall be final and conclusive. The issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the maximum number of shares as to which Options, SARs and Stock Awards may be granted, the per individual

temporary disability, or other reasons shall not be deemed interruptions of continuous employment. 8.05. Shareholder Rights. During the time a Stock Award is forfeitable, (in accordance with the applicable Agreement and while the shares of Common Stock granted pursuant to the Stock Award may be forfeited or are nontransferable), a Participant will have all rights of a shareholder with respect to a Stock Award, including the right to receive dividends and vote the shares; provided, however, that during such period (i) a Participant may not sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of shares of Common Stock granted pursuant to a Stock Award, (ii) the Company shall retain custody of the certificates evidencing shares of Common Stock granted pursuant to a Stock Award, and (iii) the Participant will deliver to the Company a stock power, endorsed in blank, with respect to each Stock Award. The limitations set forth in the preceding sentence shall not apply after the shares of Common Stock granted under the Stock Award are transferable and are no longer forfeitable. ARTICLE IX ADJUSTMENT UPON CHANGE IN COMMON STOCK The maximum number of shares as to which Options, SARs and Stock Awards may be granted under the Plan, the terms of outstanding Stock Awards, Options, and SARs, and the per individual limitations on the number of shares or Units for which Options, SARs, and Stock Awards may be granted, shall be adjusted -16-

as the Committee shall determine to be equitably required in the event that (a) the Company (i) effects one or more stock dividends, stock split-ups, subdivisions or consolidations of shares or (ii) engages in a transaction to which Section 424 of the Code applies or (b) there occurs any other event which, in the judgment of the Committee necessitates such action. Any determination made under this Article IX by the Committee shall be final and conclusive. The issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the maximum number of shares as to which Options, SARs and Stock Awards may be granted, the per individual limitations on the number of shares for which Options, SARs and Stock Awards may be granted or the terms of outstanding Stock Awards, Options or SARs. The Committee may make Stock Awards and may grant Options and SARs in substitution for performance shares, phantom shares, stock awards, stock options, stock appreciation rights, or similar awards held by an individual who becomes an employee of the Company or an Affiliate in connection with a transaction described in the first paragraph of this Article IX. Notwithstanding any provision of the Plan (other than the limitation of Section 5.02), the terms of such substituted Stock -17-

Awards or Option or SAR grants shall be as the Committee, in its discretion, determines is appropriate. ARTICLE X COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES No Option or SAR shall be exercisable, no Common Stock shall be issued, no certificates for shares of Common Stock shall be delivered, and no payment shall be made under the Plan except in compliance with all applicable federal and state laws and regulations (including, without limitation, withholding tax requirements), any listing agreement to which the Company is a party, and the rules of all domestic stock exchanges on which the

as the Committee shall determine to be equitably required in the event that (a) the Company (i) effects one or more stock dividends, stock split-ups, subdivisions or consolidations of shares or (ii) engages in a transaction to which Section 424 of the Code applies or (b) there occurs any other event which, in the judgment of the Committee necessitates such action. Any determination made under this Article IX by the Committee shall be final and conclusive. The issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the maximum number of shares as to which Options, SARs and Stock Awards may be granted, the per individual limitations on the number of shares for which Options, SARs and Stock Awards may be granted or the terms of outstanding Stock Awards, Options or SARs. The Committee may make Stock Awards and may grant Options and SARs in substitution for performance shares, phantom shares, stock awards, stock options, stock appreciation rights, or similar awards held by an individual who becomes an employee of the Company or an Affiliate in connection with a transaction described in the first paragraph of this Article IX. Notwithstanding any provision of the Plan (other than the limitation of Section 5.02), the terms of such substituted Stock -17-

Awards or Option or SAR grants shall be as the Committee, in its discretion, determines is appropriate. ARTICLE X COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES No Option or SAR shall be exercisable, no Common Stock shall be issued, no certificates for shares of Common Stock shall be delivered, and no payment shall be made under the Plan except in compliance with all applicable federal and state laws and regulations (including, without limitation, withholding tax requirements), any listing agreement to which the Company is a party, and the rules of all domestic stock exchanges on which the Company's shares may be listed. The Company shall have the right to rely on an opinion of its counsel as to such compliance. Any share certificate issued to evidence Common Stock when a Stock Award is granted or for which an Option or SAR is exercised may bear such legends and statements as the Administrator may deem advisable to assure compliance with federal and state laws and regulations. No Option or SAR shall be exercisable, no Stock Award shall be granted, no Common Stock shall be issued, no certificate for shares shall be delivered, and no payment shall be made under the Plan until the Company has obtained such consent or approval as the Administrator may deem advisable from regulatory bodies having jurisdiction over such matters. -18-

ARTICLE XI GENERAL PROVISIONS 11.01. Effect on Employment and Service. Neither the adoption of the Plan, its operation, nor any documents describing or referring to the Plan (or any part thereof) shall confer upon any individual any right to continue in the employ or service of the Company or an Affiliate or in any way affect any right and power of the Company or an Affiliate to terminate the employment or service of any individual at any time with or without assigning a reason therefor. 11.02. Unfunded Plan. The Plan, insofar as it provides for grants, shall be unfunded, and the Company shall not be required to segregate any assets that may at any time be represented by grants under the Plan. Any liability of the Company to any person with respect to any grant under the Plan shall be based solely upon any contractual

Awards or Option or SAR grants shall be as the Committee, in its discretion, determines is appropriate. ARTICLE X COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES No Option or SAR shall be exercisable, no Common Stock shall be issued, no certificates for shares of Common Stock shall be delivered, and no payment shall be made under the Plan except in compliance with all applicable federal and state laws and regulations (including, without limitation, withholding tax requirements), any listing agreement to which the Company is a party, and the rules of all domestic stock exchanges on which the Company's shares may be listed. The Company shall have the right to rely on an opinion of its counsel as to such compliance. Any share certificate issued to evidence Common Stock when a Stock Award is granted or for which an Option or SAR is exercised may bear such legends and statements as the Administrator may deem advisable to assure compliance with federal and state laws and regulations. No Option or SAR shall be exercisable, no Stock Award shall be granted, no Common Stock shall be issued, no certificate for shares shall be delivered, and no payment shall be made under the Plan until the Company has obtained such consent or approval as the Administrator may deem advisable from regulatory bodies having jurisdiction over such matters. -18-

ARTICLE XI GENERAL PROVISIONS 11.01. Effect on Employment and Service. Neither the adoption of the Plan, its operation, nor any documents describing or referring to the Plan (or any part thereof) shall confer upon any individual any right to continue in the employ or service of the Company or an Affiliate or in any way affect any right and power of the Company or an Affiliate to terminate the employment or service of any individual at any time with or without assigning a reason therefor. 11.02. Unfunded Plan. The Plan, insofar as it provides for grants, shall be unfunded, and the Company shall not be required to segregate any assets that may at any time be represented by grants under the Plan. Any liability of the Company to any person with respect to any grant under the Plan shall be based solely upon any contractual obligations that may be created pursuant to the Plan. No such obligation of the Company shall be deemed to be secured by any pledge of, or other encumbrance on, any property of the Company. 11.03. Rules of Construction. Headings are given to the articles and sections of the Plan solely as a convenience to facilitate reference. The reference to any statute, regulation, or other provision of law shall be construed to refer to any amendment to or successor of such provision of law. -19-

ARTICLE XII AMENDMENT The Board may amend or terminate the Plan from time to time; provided, however, that no amendment may become effective until shareholder approval is obtained if (i) the amendment increases the aggregate number of shares of Common Stock that may be issued under the Plan, (ii) the amendment changes the class of individuals eligible to become Participants or (iii) the amendment materially increases the benefits that may be provided under the Plan. No amendment shall, without a Participant's consent, adversely affect any rights of such Participant under any outstanding Stock Award, Option, or SAR outstanding at the time such amendment is made. ARTICLE XIII

ARTICLE XI GENERAL PROVISIONS 11.01. Effect on Employment and Service. Neither the adoption of the Plan, its operation, nor any documents describing or referring to the Plan (or any part thereof) shall confer upon any individual any right to continue in the employ or service of the Company or an Affiliate or in any way affect any right and power of the Company or an Affiliate to terminate the employment or service of any individual at any time with or without assigning a reason therefor. 11.02. Unfunded Plan. The Plan, insofar as it provides for grants, shall be unfunded, and the Company shall not be required to segregate any assets that may at any time be represented by grants under the Plan. Any liability of the Company to any person with respect to any grant under the Plan shall be based solely upon any contractual obligations that may be created pursuant to the Plan. No such obligation of the Company shall be deemed to be secured by any pledge of, or other encumbrance on, any property of the Company. 11.03. Rules of Construction. Headings are given to the articles and sections of the Plan solely as a convenience to facilitate reference. The reference to any statute, regulation, or other provision of law shall be construed to refer to any amendment to or successor of such provision of law. -19-

ARTICLE XII AMENDMENT The Board may amend or terminate the Plan from time to time; provided, however, that no amendment may become effective until shareholder approval is obtained if (i) the amendment increases the aggregate number of shares of Common Stock that may be issued under the Plan, (ii) the amendment changes the class of individuals eligible to become Participants or (iii) the amendment materially increases the benefits that may be provided under the Plan. No amendment shall, without a Participant's consent, adversely affect any rights of such Participant under any outstanding Stock Award, Option, or SAR outstanding at the time such amendment is made. ARTICLE XIII DURATION OF PLAN No Stock Award, Option or SAR may be granted under the Plan after January 8, 2006. Stock Awards, Options, and SARs granted before that date shall remain valid in accordance with their terms. -20-

ARTICLE XIV EFFECTIVE DATE OF PLAN Options and SARs may be granted under the Plan upon its adoption by the Board, provided that no Option or SAR shall be effective or exercisable unless the Plan is approved by a majority of the votes of the Company's shareholders, voting either in person or by proxy, present, or represented, and entitled to vote, at a duly held shareholders' meeting within twelve months of such adoption. Stock Awards may be granted under the Plan upon the later of its adoption by the Board or its approval by shareholders in accordance with the preceding sentence. -21-

EXHIBIT 10.3

ARTICLE XII AMENDMENT The Board may amend or terminate the Plan from time to time; provided, however, that no amendment may become effective until shareholder approval is obtained if (i) the amendment increases the aggregate number of shares of Common Stock that may be issued under the Plan, (ii) the amendment changes the class of individuals eligible to become Participants or (iii) the amendment materially increases the benefits that may be provided under the Plan. No amendment shall, without a Participant's consent, adversely affect any rights of such Participant under any outstanding Stock Award, Option, or SAR outstanding at the time such amendment is made. ARTICLE XIII DURATION OF PLAN No Stock Award, Option or SAR may be granted under the Plan after January 8, 2006. Stock Awards, Options, and SARs granted before that date shall remain valid in accordance with their terms. -20-

ARTICLE XIV EFFECTIVE DATE OF PLAN Options and SARs may be granted under the Plan upon its adoption by the Board, provided that no Option or SAR shall be effective or exercisable unless the Plan is approved by a majority of the votes of the Company's shareholders, voting either in person or by proxy, present, or represented, and entitled to vote, at a duly held shareholders' meeting within twelve months of such adoption. Stock Awards may be granted under the Plan upon the later of its adoption by the Board or its approval by shareholders in accordance with the preceding sentence. -21-

EXHIBIT 10.3 LSB BANCSHARES, INC. MANAGEMENT INCENTIVE PLAN EFFECTIVE JANUARY 1, 1996 Article I Purpose The LSB Bancshares, Inc. Management Incentive Plan (the "Plan") provides an opportunity for selected key employees of LSB Bancshares, Inc. ("LSB") and its subsidiaries to earn awards for the achievement of specific corporate and individual performance goals. The specific purposes of the Plan are: (a) to attract and retain key employees; (b) to increase key employees' attention and achievement of specific goals related to the rate of return on the assets of LSB thereby enhancing the profitability of LSB; and (c) to reward key employees for their individual and combined contributions to the achievement of specific performance objectives and strategic goals. Article II Definitions The following words or terms used in the Plan and its Exhibits have the indicated meanings:

ARTICLE XIV EFFECTIVE DATE OF PLAN Options and SARs may be granted under the Plan upon its adoption by the Board, provided that no Option or SAR shall be effective or exercisable unless the Plan is approved by a majority of the votes of the Company's shareholders, voting either in person or by proxy, present, or represented, and entitled to vote, at a duly held shareholders' meeting within twelve months of such adoption. Stock Awards may be granted under the Plan upon the later of its adoption by the Board or its approval by shareholders in accordance with the preceding sentence. -21-

EXHIBIT 10.3 LSB BANCSHARES, INC. MANAGEMENT INCENTIVE PLAN EFFECTIVE JANUARY 1, 1996 Article I Purpose The LSB Bancshares, Inc. Management Incentive Plan (the "Plan") provides an opportunity for selected key employees of LSB Bancshares, Inc. ("LSB") and its subsidiaries to earn awards for the achievement of specific corporate and individual performance goals. The specific purposes of the Plan are: (a) to attract and retain key employees; (b) to increase key employees' attention and achievement of specific goals related to the rate of return on the assets of LSB thereby enhancing the profitability of LSB; and (c) to reward key employees for their individual and combined contributions to the achievement of specific performance objectives and strategic goals. Article II Definitions The following words or terms used in the Plan and its Exhibits have the indicated meanings: 2.1 Beneficiary or Beneficiaries means a person or persons or other entity designated by a Participant to receive the payment of a Participant's entitlements under the Plan. If there is no valid designation by the Participant, or if the designated Beneficiary is not living or in existence at the time of the Participant's death, the Participant's Beneficiary is the Participant's estate. 2.2 Board means the Board of Directors of LSB. 2.3 Committee means the Stock Option and Compensation Committee of the Board. 2.4 Earned Incentive Award means the actual award a Participant is entitled to receive determined in accordance with Section 4.3. 2.5 Effective Date means January 1, 1996.

2.6 Eligible Employee means an individual employed by LSB or a Subsidiary in a legal and bonafide relationship of employer and employee and who is a key employee of LSB or a Subsidiary. An individual is a key employee of LSB or a Subsidiary if such individual is in a position to affect materially the profitability of LSB or a Subsidiary by reason of the nature and extent of such employee's duties and responsibilities.

EXHIBIT 10.3 LSB BANCSHARES, INC. MANAGEMENT INCENTIVE PLAN EFFECTIVE JANUARY 1, 1996 Article I Purpose The LSB Bancshares, Inc. Management Incentive Plan (the "Plan") provides an opportunity for selected key employees of LSB Bancshares, Inc. ("LSB") and its subsidiaries to earn awards for the achievement of specific corporate and individual performance goals. The specific purposes of the Plan are: (a) to attract and retain key employees; (b) to increase key employees' attention and achievement of specific goals related to the rate of return on the assets of LSB thereby enhancing the profitability of LSB; and (c) to reward key employees for their individual and combined contributions to the achievement of specific performance objectives and strategic goals. Article II Definitions The following words or terms used in the Plan and its Exhibits have the indicated meanings: 2.1 Beneficiary or Beneficiaries means a person or persons or other entity designated by a Participant to receive the payment of a Participant's entitlements under the Plan. If there is no valid designation by the Participant, or if the designated Beneficiary is not living or in existence at the time of the Participant's death, the Participant's Beneficiary is the Participant's estate. 2.2 Board means the Board of Directors of LSB. 2.3 Committee means the Stock Option and Compensation Committee of the Board. 2.4 Earned Incentive Award means the actual award a Participant is entitled to receive determined in accordance with Section 4.3. 2.5 Effective Date means January 1, 1996.

2.6 Eligible Employee means an individual employed by LSB or a Subsidiary in a legal and bonafide relationship of employer and employee and who is a key employee of LSB or a Subsidiary. An individual is a key employee of LSB or a Subsidiary if such individual is in a position to affect materially the profitability of LSB or a Subsidiary by reason of the nature and extent of such employee's duties and responsibilities. 2.7 Individual Performance Objectives means objectives determined by the Committee for individual performance by a Participant. 2.8 LSB means LSB Bancshares, Inc. 2.9 Maximum Incentive Award means the award a Participant is entitled to receive determined in accordance with Section 4.1, without giving effect to the achievement of Individual Performance Objectives. 2.10 Participant means an Eligible Employee designated by the Committee to participate in the Plan. 2.11 Plan means the LSB Management Incentive Plan.

2.6 Eligible Employee means an individual employed by LSB or a Subsidiary in a legal and bonafide relationship of employer and employee and who is a key employee of LSB or a Subsidiary. An individual is a key employee of LSB or a Subsidiary if such individual is in a position to affect materially the profitability of LSB or a Subsidiary by reason of the nature and extent of such employee's duties and responsibilities. 2.7 Individual Performance Objectives means objectives determined by the Committee for individual performance by a Participant. 2.8 LSB means LSB Bancshares, Inc. 2.9 Maximum Incentive Award means the award a Participant is entitled to receive determined in accordance with Section 4.1, without giving effect to the achievement of Individual Performance Objectives. 2.10 Participant means an Eligible Employee designated by the Committee to participate in the Plan. 2.11 Plan means the LSB Management Incentive Plan. 2.12 Plan Year means the calendar year. 2.13 Subsidiary means any corporation (other than LSB) in an unbroken chain of corporations beginning with LSB if each of the corporations in the chain (other than the last corporation) owns stock processing at least 50% of the total combined voting power of all classes of stock in one of the other corporations in the chain. 2.14 Termination Event means: (a) Death of the Participant while employed by LSB or a Subsidiary. (b) Retirement of the Participant from LSB or a Subsidiary with the approval of the Board. (c) Disability of the Participant while employed by LSB or a Subsidiary. For this purpose, the term "disability" shall mean the inability of a Participant, by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long continued or of indefinite duration, to perform his duties for LSB or a Subsidiary. The determination of disability shall be made by the Board based on medical evidence from an independent physician selected by the Participant with the approval of the Board. 2

Article III Participation 3.1 Designation. (a) Prior to the beginning of each Plan Year, the Committee shall select the Eligible Employees who shall become Participants with respect to such Plan Year. The Board, in its discretion, may determine that an Eligible Employee selected by the Committee shall not be a Participant with respect to a Plan Year. (b) Within sixty days after the Effective Date or in the event of the promotion of an employee or the hiring of a new employee during the Plan Year, the Committee may approve the entry of a Participant into the Plan during the Plan Year. In such case, the Earned Incentive Award determined under Article IV with respect to such Participant shall be multiplied by a fraction, the numerator of which is the number of full calendar months during the Plan Year in which he is a Participant and the denominator of which is twelve. 3.2 Terms and Conditions of Participation. Participation in the Plan shall be subject to the provisions of the Plan and such other terms and conditions as the Board shall provide. Participation with respect to a Plan Year shall be evidenced by the delivery to the Participant of an Incentive Participation Certificate, a specimen of which is attached to the Plan as Exhibit A. Each Incentive Participation Certificate shall set forth the applicable Plan Year, the Individual Performance Objectives for the Participant, if any, and any other conditions (other than as contained in the Plan) relating to the Maximum Incentive Award and the payment thereof to the Participant.

Article III Participation 3.1 Designation. (a) Prior to the beginning of each Plan Year, the Committee shall select the Eligible Employees who shall become Participants with respect to such Plan Year. The Board, in its discretion, may determine that an Eligible Employee selected by the Committee shall not be a Participant with respect to a Plan Year. (b) Within sixty days after the Effective Date or in the event of the promotion of an employee or the hiring of a new employee during the Plan Year, the Committee may approve the entry of a Participant into the Plan during the Plan Year. In such case, the Earned Incentive Award determined under Article IV with respect to such Participant shall be multiplied by a fraction, the numerator of which is the number of full calendar months during the Plan Year in which he is a Participant and the denominator of which is twelve. 3.2 Terms and Conditions of Participation. Participation in the Plan shall be subject to the provisions of the Plan and such other terms and conditions as the Board shall provide. Participation with respect to a Plan Year shall be evidenced by the delivery to the Participant of an Incentive Participation Certificate, a specimen of which is attached to the Plan as Exhibit A. Each Incentive Participation Certificate shall set forth the applicable Plan Year, the Individual Performance Objectives for the Participant, if any, and any other conditions (other than as contained in the Plan) relating to the Maximum Incentive Award and the payment thereof to the Participant. Article IV Incentive Awards 4.1 Determination of Maximum Incentive Awards. Each Participant for a Plan Year shall be eligible to receive a Maximum Incentive Award determined by multiplying his Potential Award for the Plan Year by a fraction, the numerator of which is equal to the Actual ROAA minus the Minimum ROAA for the Plan Year, and denominator of which is equal to the Maximum ROAA minus the Minimum ROAA for the Plan Year. 4.2 Definitions. For purposes of this Article IV, the following definitions shall apply: (a) "Actual ROAA" means the ROAA actually achieved by LSB for the Plan Year. (b) "Maximum ROAA" means the ROAA determined for each Plan Year by the Committee above which no additional Maximum Incentive Award shall be paid. The Maximum ROAA with respect to a Plan Year shall be determined by the Committee prior 3

to the first day of such Plan Year or within sixty days after the Effective Date for the 1996 Plan Year. (c) "Minimum ROAA" means the ROAA determined for each Plan Year by the Committee below which no Maximum Incentive Award shall be paid. The Minimum ROAA with respect to a Plan Year shall be determined by the Committee prior to the first day of such Plan Year or within sixty days after the Effective Date for the 1996 Plan Year. (d) "Potential Award" means with respect to each Participant for the Plan Year a dollar amount determined by multiplying the mid-point level for his salary grade as of the first day of the Plan Year by a percentage designated by the Committee prior to the first day of the Plan Year or within sixty days after the Effective Date for the 1996 Plan Year. The Potential Award represents the Maximum Incentive Award payable to the Participant in the event the Maximum ROAA is achieved for the Plan Year and shall be reflected on his Incentive Participation Certificate for the Plan Year. (e) "ROAA" means a percentage determined by dividing the net income of LSB for the Plan Year before accruals of Earned Incentive Awards under the Plan by the average daily total assets of LSB during the Plan Year. The ROAA for a Plan Year shall be determined by the independent certified public accountants of LSB in accordance with generally accepted accounting principles.

to the first day of such Plan Year or within sixty days after the Effective Date for the 1996 Plan Year. (c) "Minimum ROAA" means the ROAA determined for each Plan Year by the Committee below which no Maximum Incentive Award shall be paid. The Minimum ROAA with respect to a Plan Year shall be determined by the Committee prior to the first day of such Plan Year or within sixty days after the Effective Date for the 1996 Plan Year. (d) "Potential Award" means with respect to each Participant for the Plan Year a dollar amount determined by multiplying the mid-point level for his salary grade as of the first day of the Plan Year by a percentage designated by the Committee prior to the first day of the Plan Year or within sixty days after the Effective Date for the 1996 Plan Year. The Potential Award represents the Maximum Incentive Award payable to the Participant in the event the Maximum ROAA is achieved for the Plan Year and shall be reflected on his Incentive Participation Certificate for the Plan Year. (e) "ROAA" means a percentage determined by dividing the net income of LSB for the Plan Year before accruals of Earned Incentive Awards under the Plan by the average daily total assets of LSB during the Plan Year. The ROAA for a Plan Year shall be determined by the independent certified public accountants of LSB in accordance with generally accepted accounting principles. An example illustrating the calculation of the Maximum Incentive Award is attached as Exhibit B. 4.3 Determination of Earned Incentive Awards. Subject to Section 4.4, in the event the Committee does not establish Individual Performance Objectives or in the event the Committee, in its sole discretion, determines that the Individual Performance Objectives have been achieved, the Earned Incentive Award shall be equal to the Maximum Incentive Award. Subject to Section 4.4, in the event that the Committee, in its sole discretion, determines that the Individual Performance Objectives are partially achieved, the Earned Incentive Award shall be equal to a percentage of the Maximum Incentive Award determined by the Committee, in its sole discretion. 4.4 Notwithstanding any other provision of the Plan, the Board may review and approve the determination and payment of the Earned Incentive Award as determined under Article IV and in its discretion may adjust the amount of the payment as it deems necessary to meet the purpose of the Plan and the best interests of LSB. In no event shall an Earned Incentive Award be paid to a Participant who in the sole determination of the Board has violated established policies and practices of LSB as reflected in the minutes of the Board or the Committee. 4

Article V Termination of Employment During Plan Year 5.1 Termination for Reasons Other Than a Termination Event. The Participant shall not receive an Earned Incentive Award with respect to a Plan Year if, for reasons other than a Termination Event, the employment of the Participant by LSB or a Subsidiary is terminated during the Plan Year or the duties or position of the Participant is changed during the Plan Year so that he is no longer an Eligible Employee. 5.2 Termination on Account of Termination Event. In the event of a Termination Event, the Participant or his Beneficiary shall receive an Earned Incentive Award with respect to such Plan Year equal to the amount determined under Section 4.3 multiplied by a fraction, the numerator of which is the number of full calendar months during the Plan Year in which he was a Participant prior to the Termination Event and the denominator of which is twelve. Article VI Payment of Earned Incentive Awards Unless otherwise determined by the Committee or the Board, the Earned Incentive Award for a Plan Year shall be paid by LSB in cash to the Participant or his Beneficiary by the later of (a) March 15 following the end of the Plan Year, or (b) thirty days following the determination of the Actual ROAA for the Plan Year. Article VII Death Benefits

Article V Termination of Employment During Plan Year 5.1 Termination for Reasons Other Than a Termination Event. The Participant shall not receive an Earned Incentive Award with respect to a Plan Year if, for reasons other than a Termination Event, the employment of the Participant by LSB or a Subsidiary is terminated during the Plan Year or the duties or position of the Participant is changed during the Plan Year so that he is no longer an Eligible Employee. 5.2 Termination on Account of Termination Event. In the event of a Termination Event, the Participant or his Beneficiary shall receive an Earned Incentive Award with respect to such Plan Year equal to the amount determined under Section 4.3 multiplied by a fraction, the numerator of which is the number of full calendar months during the Plan Year in which he was a Participant prior to the Termination Event and the denominator of which is twelve. Article VI Payment of Earned Incentive Awards Unless otherwise determined by the Committee or the Board, the Earned Incentive Award for a Plan Year shall be paid by LSB in cash to the Participant or his Beneficiary by the later of (a) March 15 following the end of the Plan Year, or (b) thirty days following the determination of the Actual ROAA for the Plan Year. Article VII Death Benefits 7.1 Designation of Beneficiary. (a) Each Participant may designate a Beneficiary to receive any benefits due under the Plan upon the Participant's death. The Beneficiary designation must be made by executing a Beneficiary Designation Form. A specimen Beneficiary Designation Form is attached as Exhibit C. (b) A Participant may change an earlier Beneficiary designation by a later execution of a Beneficiary Designation Form. The execution of a Beneficiary Designation Form revokes and rescinds any prior Beneficiary Designation Form. A Beneficiary designation is not binding on the Company until LSB receives the Beneficiary Designation Form. 7.2 Death Benefits. If a Participant dies before receiving all payments to which he is entitled under the Plan, payment of the amounts to which the Participant is entitled shall be made to the Participant's Beneficiary. Payments to the Beneficiary shall be made in the manner as they would have been made had the Participant continued to live. 5

Article VIII Guarantees LSB has only a contractual obligation to pay the benefits described in Article IV. A Participant shall have no interest in any fund or specified asset of LSB. No trust fund shall be created in connection with the Plan or any Earned Incentive Award, and there shall be no required funding of amounts which may become payable under the Plan. Any amounts which are or may be set aside under the provisions of the Plan shall continue for all purposes to be a part of the general assets of LSB, and no person other than LSB shall, by virtue of the provisions of the Plan, have any interest in such assets. No right to receive payments from LSB pursuant to the Plan shall be greater than the right of any unsecured creditor of LSB. Article IX Administration of the Plan The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall have plenary authority in its discretion, among other things, to designate the Participants to receive Earned Incentive Awards, to determine (a) the Individual Performance Objectives of each Participant, (b) the Minimum and Maximum ROAA, (c) the Potential Award of each Participant, (d) whether the Individual Performance Objectives have been achieved by a Participant and (e) the amount of the Earned Incentive Awards of each Participant, to interpret the Plan and to prescribe, amend and rescind rules and regulations relating to the Plan.

Article VIII Guarantees LSB has only a contractual obligation to pay the benefits described in Article IV. A Participant shall have no interest in any fund or specified asset of LSB. No trust fund shall be created in connection with the Plan or any Earned Incentive Award, and there shall be no required funding of amounts which may become payable under the Plan. Any amounts which are or may be set aside under the provisions of the Plan shall continue for all purposes to be a part of the general assets of LSB, and no person other than LSB shall, by virtue of the provisions of the Plan, have any interest in such assets. No right to receive payments from LSB pursuant to the Plan shall be greater than the right of any unsecured creditor of LSB. Article IX Administration of the Plan The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall have plenary authority in its discretion, among other things, to designate the Participants to receive Earned Incentive Awards, to determine (a) the Individual Performance Objectives of each Participant, (b) the Minimum and Maximum ROAA, (c) the Potential Award of each Participant, (d) whether the Individual Performance Objectives have been achieved by a Participant and (e) the amount of the Earned Incentive Awards of each Participant, to interpret the Plan and to prescribe, amend and rescind rules and regulations relating to the Plan. Article X Amendment and Termination of the Plan The Plan may be amended or terminated at any time by the Board, provided that such termination or amendment shall not, without the consent of the Participant, affect such Participant's rights with respect to Maximum Incentive Awards previously awarded to him. With the consent of the Participant affected, the Board may amend outstanding Maximum Incentive Awards in a manner not inconsistent with the Plan. Article XI Restrictions on Transfer of Benefits No right or benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance or charge, and any attempt to do so shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities, or torts of the person entitled to such benefit. If any Participant or Beneficiary under the Plan should become bankrupt or attempt to anticipate, alienate, sell, assign, pledge, encumber or charge any right to a benefit hereunder, then such right or benefit, in the discretion of the Committee, shall cease and terminate, and, in such event, the Committee may hold or apply the same or any part thereof for the benefit of such Participant or Beneficiary, his or her 6

spouse, children, or other dependents, or any of them, in such manner and in such portion as the Committee may deem proper. Article XII General Provisions 12.1 No Right or Obligation of Continued Employment. Nothing contained in the Plan shall require LSB or a Subsidiary to continue to employ the Participant, nor shall the Participant be required to remain in the employment of LSB or a Subsidiary. 12.2 Withholding. There shall be deducted from the payment of the Earned Incentive Award the amount of any tax or other amount required by any governmental authority to be withheld and paid over by LSB to such authority for the account of the person entitled to such payment. 12.3 Retirement Plans. In no event shall any amounts accrued or payable under the Plan be treated as compensation for the purpose of determining the amount of contributions or benefits to which a Participant shall be entitled under any retirement plan to which LSB or a Subsidiary may be a party. 12.4 Surrender of Certificate. Upon the receipt of an Earned Incentive Award or forfeiture of a Maximum Incentive Award, the Participant or other holder of the Incentive Participation Certificate representing the right to

spouse, children, or other dependents, or any of them, in such manner and in such portion as the Committee may deem proper. Article XII General Provisions 12.1 No Right or Obligation of Continued Employment. Nothing contained in the Plan shall require LSB or a Subsidiary to continue to employ the Participant, nor shall the Participant be required to remain in the employment of LSB or a Subsidiary. 12.2 Withholding. There shall be deducted from the payment of the Earned Incentive Award the amount of any tax or other amount required by any governmental authority to be withheld and paid over by LSB to such authority for the account of the person entitled to such payment. 12.3 Retirement Plans. In no event shall any amounts accrued or payable under the Plan be treated as compensation for the purpose of determining the amount of contributions or benefits to which a Participant shall be entitled under any retirement plan to which LSB or a Subsidiary may be a party. 12.4 Surrender of Certificate. Upon the receipt of an Earned Incentive Award or forfeiture of a Maximum Incentive Award, the Participant or other holder of the Incentive Participation Certificate representing the right to receive such Award shall surrender the Certificate to LSB. 12.5 Dilution or Other Adjustments. If there is any change in LSB because of a merger, consolidation or reorganization involving LSB, the Board shall make such adjustments to any provisions of the Plan as the Board deems desirable to prevent the dilution or enlargement of rights granted hereunder. 12.6 Binding on Successors. The obligations of LSB under the Plan shall be binding upon any organization which shall succeed to all or substantially all of the assets of LSB, and the term "LSB," whenever used in the Plan, shall mean and include any such organization after the succession. 12.7 Applicable Law. The Plan shall be governed by and construed in accordance with the laws of the State of North Carolina. 7

EXHIBIT A LSB BANCSHARES, INC. MANAGEMENT INCENTIVE PLAN Pursuant to the LSB Bancshares, Inc. Management Incentive Plan (the "Plan"), LSB Bancshares, Inc. ("LSB") hereby certifies to ______________________ (the "Participant") that LSB has on ________________, ______, approved the entry of the Participant into the Plan with respect to the Plan Year commencing on January 1, _____. Through participation in the Plan, the Participant is eligible to receive a Potential Award in the amount of $________________ in the event LSB achieves a _____% ROAA for the Plan Year and the Individual Performance Objectives, if any, specified below are achieved. No award shall be paid under the Plan in the event the ROAA for the Plan Year is ______% or less. The Individual Performance Objectives, if any, for the Participant for the Plan Year are attached hereto as Annex 1. In the event that ROAA for the Plan Year is greater than ______% and the Individual Performance Objectives are achieved, as determined by LSB, the Participant shall be entitled to receive an incentive award determined in accordance with the terms of the Plan. In the event that ROAA for the Plan Year is greater than ______% and the Individual Performance Objectives are partially achieved, as determined by LSB, the Participant shall be entitled to receive a portion of the incentive award determined in accordance with the terms of the Plan. The determination and payment of awards shall be subject to and governed by the terms and conditions of the Plan. This the ____ day of ________________, _____.

EXHIBIT A LSB BANCSHARES, INC. MANAGEMENT INCENTIVE PLAN Pursuant to the LSB Bancshares, Inc. Management Incentive Plan (the "Plan"), LSB Bancshares, Inc. ("LSB") hereby certifies to ______________________ (the "Participant") that LSB has on ________________, ______, approved the entry of the Participant into the Plan with respect to the Plan Year commencing on January 1, _____. Through participation in the Plan, the Participant is eligible to receive a Potential Award in the amount of $________________ in the event LSB achieves a _____% ROAA for the Plan Year and the Individual Performance Objectives, if any, specified below are achieved. No award shall be paid under the Plan in the event the ROAA for the Plan Year is ______% or less. The Individual Performance Objectives, if any, for the Participant for the Plan Year are attached hereto as Annex 1. In the event that ROAA for the Plan Year is greater than ______% and the Individual Performance Objectives are achieved, as determined by LSB, the Participant shall be entitled to receive an incentive award determined in accordance with the terms of the Plan. In the event that ROAA for the Plan Year is greater than ______% and the Individual Performance Objectives are partially achieved, as determined by LSB, the Participant shall be entitled to receive a portion of the incentive award determined in accordance with the terms of the Plan. The determination and payment of awards shall be subject to and governed by the terms and conditions of the Plan. This the ____ day of ________________, _____. LSB BANCSHARES, INC. By: President Attest: Secretary [Corporate Seal]

Annex I INDIVIDUAL PERFORMANCE OBJECTIVES

EXHIBIT B EXAMPLE OF MAXIMUM INCENTIVE AWARD CALCULATION
Factors - ------Salary Mid-Point Incentive % Actual ROAA Minimum ROAA Maximum ROAA Calculation - ----------Potential Award = = = = = $50,000 10% 1.2% 0.8% 1.6%

= = =

Salary Mid-Point x Incentive % $50,000 x 10% $5,000

Annex I INDIVIDUAL PERFORMANCE OBJECTIVES

EXHIBIT B EXAMPLE OF MAXIMUM INCENTIVE AWARD CALCULATION
Factors - ------Salary Mid-Point Incentive % Actual ROAA Minimum ROAA Maximum ROAA Calculation - ----------Potential Award = = = = = $50,000 10% 1.2% 0.8% 1.6%

= = =

Salary Mid-Point x Incentive % $50,000 x 10% $5,000

Maximum Incentive Award

=

Potential Award x (Actual ROAA - Minimum ROAA) -------------------------(Maximum ROAA - Minimum ROAA) $5,000 x (1.2% - 0.8%) ----------(1.6% - 0.8%) 0.4% ---0.8% 50%

=

=

$5,000

x

= =

$5,000 $2,500

x

EXHIBIT C

EXHIBIT B EXAMPLE OF MAXIMUM INCENTIVE AWARD CALCULATION
Factors - ------Salary Mid-Point Incentive % Actual ROAA Minimum ROAA Maximum ROAA Calculation - ----------Potential Award = = = = = $50,000 10% 1.2% 0.8% 1.6%

= = =

Salary Mid-Point x Incentive % $50,000 x 10% $5,000

Maximum Incentive Award

=

Potential Award x (Actual ROAA - Minimum ROAA) -------------------------(Maximum ROAA - Minimum ROAA) $5,000 x (1.2% - 0.8%) ----------(1.6% - 0.8%) 0.4% ---0.8% 50%

=

=

$5,000

x

= =

$5,000 $2,500

x

EXHIBIT C

EXHIBIT C BENEFICIARY DESIGNATION The undersigned Participant, having potential rights to payments following his death under the LSB Bancshares, Inc. Management Incentive Plan (the "Plan"), hereby designates the following beneficiary entitled to any such payments under the plan following his death: Name Address In default of said beneficiary, the death benefit shall be payable to the participant's estate. This designation supersedes all designations, if any, previously made under the Plan. It is subject to change by the participant upon delivery of a new designation to LSB Bancshares, Inc.. This designation is made in duplicate, one executed copy of which shall be retained by LSB Bancshares, Inc. and one by the participant.
Dated: --------------------Participant:

---------------------------------Signature

---------------------------------Print Name

Dated: ---------------------

LSB Bancshares, Inc. By: ------------------------------

EXHIBIT 13 SUMMARY OF SELECTED FINANCIAL DATA LSB Bancshares, Inc.
Years Ended Decembe (In Thousands, expect per share data and ratios) 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------SUMMARY OF OPERATIONS Interest income.................................. $28,051 $24,393 $22,916 $24,4 Interest expense................................. 11,448 8,695 8,048 9,9 ----------------------Net interest income.............................. 16,603 15,698 14,868 14,5 Provision for loan losses........................ 252 219 941 8 ----------------------Net interest income after provision for loan losses................ 16,351 15,479 13,927 13,6 Noninterest income............................... 3,244 2,603 3,214 2,6 Noninterest expense.............................. 13,112 12,198 11,436 10,1 ----------------------Income from continuing operations before income taxes................................... 6,483 5,884 5,705 6,1 Income taxes..................................... 1,701 1,422 1,349 1,7 ----------------------Net income....................................... $ 4,782 $ 4,462 $ 4,356 $ 4,4 ======= ======= ======= ===== Cash dividends declared.......................... $ 2,061 $ 1,876 $ 1,766 $ 1,6

EXHIBIT 13 SUMMARY OF SELECTED FINANCIAL DATA LSB Bancshares, Inc.
Years Ended Decembe (In Thousands, expect per share data and ratios) 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------SUMMARY OF OPERATIONS Interest income.................................. $28,051 $24,393 $22,916 $24,4 Interest expense................................. 11,448 8,695 8,048 9,9 ----------------------Net interest income.............................. 16,603 15,698 14,868 14,5 Provision for loan losses........................ 252 219 941 8 ----------------------Net interest income after provision for loan losses................ 16,351 15,479 13,927 13,6 Noninterest income............................... 3,244 2,603 3,214 2,6 Noninterest expense.............................. 13,112 12,198 11,436 10,1 ----------------------Income from continuing operations before income taxes................................... 6,483 5,884 5,705 6,1 Income taxes..................................... 1,701 1,422 1,349 1,7 ----------------------Net income....................................... $ 4,782 $ 4,462 $ 4,356 $ 4,4 ======= ======= ======= ===== Cash dividends declared.......................... $ 2,061 $ 1,876 $ 1,766 $ 1,6 ======= ======= ======= ===== SELECTED YEAR-END ASSETS AND LIABILITIES Investment securities............................ $108,968 $109,912 $90,614 $94,4 Loans, net of unearned income.................... 226,667 205,252 196,172 183,8 Assets........................................... 375,026 357,092 342,980 323,4 Deposits......................................... 323,289 309,906 296,903 281,2 Shareholders' equity............................. 48,110 44,475 42,036 39,2 RATIOS (AVERAGES) Net income to total assets....................... Net income to shareholders' equity............... Dividend payout ratio............................ Shareholders' equity to total assets ratio....... PER SHARE DATA* Net income....................................... Cash dividends declared.......................... Book value at year end...........................

1.30% 10.34 43.09 12.61

1.27% 10.29 42.05 12.34

1.32% 10.69 40.52 12.32

1. 11. 36. 11.

$

1.11 .48 11.19

$

1.05 .44 10.42

$

1.03 .42 9.9

$

1. . 9.

(*) Per share data have been restated in this table to give effect to the five-for-four stock splits paid March 31, 1994, March 31, 1992 and April 16, 1990. 11

AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS Table 1 Fully taxable equivalent basis (1) (In Thousands)
1995 1994 Interest Interest Average Income Average Average Income Average Average Balance Expense Yield/Rate Balance Expense Yield/Rate Balance ---------------------------------- ---------------------------------- --Earning assets: Loans and leases receivable, net (2)..... Investment securities: Taxable.................

$214,380

$20,290

9.46%

$202,589

$17,245

8.51%

$1

76,433

4,767

6.24

69,858

4,263

6.10

AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS Table 1 Fully taxable equivalent basis (1) (In Thousands)
1995 1994 Interest Interest Average Income Average Average Income Average Average Balance Expense Yield/Rate Balance Expense Yield/Rate Balance ---------------------------------- ---------------------------------- --Earning assets: Loans and leases receivable, net (2)..... Investment securities: Taxable................. Tax exempt.............. Federal funds sold...... Total earning assets.... Non-earning assets: Cash and due from banks... Premises and equipment.... Other assets.............. Reserve for loan losses... Total assets............

$214,380

$20,290

9.46%

$202,589

$17,245

8.51%

$1

76,433 30,295 18,256 ------339,364

4,767 2,725 1,066 ------28,848

6.24 8.99 5.84 8.50

69,858 29,617 22,579 ------324,643

4,263 2,788 943 -----25,239

6.10 9.41 4.18 7.77 3

15,618 8,883 5,660 (2,686) ------$366,839 ========

------$28,848 =======

15,576 9,316 4,673 (2,789) ------$351,419 ========

-----$25,239 =======

$3 ==

Interest-bearing liabilities: Savings and time deposits................ $278,525 Federal funds purchased and securities sold under agreements to repurchase.............. Total interestbearing liabilities... Other liabilities and shareholders' equity: Demand deposits........... Other liabilities......... Shareholders' equity...... Total liabilities and shareholders' equity................ Net interest income and net interest margin (3)...

$11,402

4.09%

$265,716

$ 8,622

3.24%

$2

1,262 ------279,787

46 ------11,448

3.65

2,317 ------268,033

73 -----8,695

3.15 3.24 2

4.09

38,925 1,882 46,245 -------

-------

38,203 1,830 43,353 -------

------

-

$366,839 ========

$11,448 ======= $17,400 ======= 5.13% ====== 4.41% =====

$351,419 ========

$ 8,695 ====== $16,544 ======= 5.10% ====== 4.53% =====

$3 ==

Interest rate spread (4)..

(1)Income related to securities and loans exempt from federal income taxes is stated on a fully taxable-equivalent basis, assuming a federal income tax rate of 34%, and is then reduced by the non-deductible portion of interest expense. (2)The average loans and leases receivable balances include non-accruing loans. Loan fees of $495, $574 and $663 for 1995, 1994 and 1993, respectively, are included in interest income. (3)Net interest margin is computed by dividing net interest income by average earning assets. (4)Earning assets yield minus interest-bearing liability rate. 12

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION Management's discussion as presented herein provides an overview of the changes in financial condition and results of operation for LSB Bancshares, Inc. ("Bancshares") and its wholly-owned subsidiary, Lexington State Bank ("LSB") for the years 1995, 1994 and 1993. The consolidated financial statements also include the accounts and results of operations of LSB's wholly-owned subsidiaries, Peoples Finance Company of Lexington, Inc. ("Peoples Finance") and LSB Financial Services, Inc. ("LSB Financial Services"). This discussion and analysis is intended to provide pertinent information in the areas of liquidity, capital resources, results of operation, financial position, asset quality and interest sensitivity. It should be read in conjunction with the audited financial statements, footnotes and supplemental tables provided herein. SUMMARY Bancshares had net income for the year ended December 31, 1995 of $4,782,000 compared to $4,462,000 in 1994 and $4,356,000 in 1993. Net income for 1995 increased $320,000 or 7.2% compared to 1994, following an increase of $106,000 or 2.4% in 1994 compared to 1993. Return on average assets for 1995 was 1.30% compared to 1.27% in 1994 and 1.32% in 1993. Bancshares' return on average shareholders' equity for 1995 was 10.34% compared to 10.29% for 1994 and 10.69% for 1993. Earnings per share of $1.11 for 1995 was up 5.7% compared to $1.05 per share for 1994. Earnings per share increased 1.9% in 1994 from the $1.03 earned in 1993. Growth in net interest income improved slightly in 1995 compared to 1994, following a modest gain over 1993. The interest rate environment which caused interest margins to decline in 1994 continued to apply pressure on interest margins for much of 1995. Interest rates continued to climb the first half of 1995 and declined only slightly during the last half of the year. The increase in net interest income in 1995 was $905,000 or 5.8% compared to $830,000 or 5.6% in 1994. The loan loss provision necessary to maintain an adequate reserve was increased only marginally in 1995 compared to 1994. Noninterest income rebounded in 1995 with an increase of $641,000 or 24.6% over 1994, which was down $611,000 or 19.0% over 1993 as the result of losses experienced in the mortgage loan portfolio LSB carried for sale to the Federal Home Loan Mortgage Corporation ("Freddie Mac"). On the other hand, the increase in noninterest expense in 1995 of $914,000 or 7.5% was somewhat larger than the $762,000 or 6.7% increase experienced in 1994. Asset growth remained modest in 1995, with a gain of $17,934,000 or 5.0% compared to an increase of $14,112,000 or 4.1% in 1994. Deposit growth was also modest in 1995, with an increase of $13,383,000 or 4.3% compared to a gain of $13,003,000 or 4.4% in 1994 over 1993. Loan growth increased at a good pace in 1995 with gains of $21,415,000 or 10.4% compared to 1994, which was up $9,080,000 or 4.6% from 1993. ASSET/LIABILITY MANAGEMENT The objectives of asset/liability management are to ensure long-range profitability performance and minimize risk, adhere to proper liquidity and maintain sound capital. To meet these goals, the process of asset/liability management monitors the exposure to interest rate risk, balance sheet trends, pricing policies and liquidity position. VOLUME AND RATE VARIANCE ANALYSIS
1995 TABLE 2 Fully Taxable Equivalent Basis(1) (In Thousands) Volume Rate Total Variance(2) Variance(2) Variance ------------------------------------Volume Variance(2) -------------

Interest income: Loans receivable.................................... Taxable............................................. Tax exempt.......................................... Federal funds sold.................................. Total interest income........................... Interest expense: Savings and time deposits........................... Federal funds purchased and securities sold under agreements to repurchase.......................... Total interest expense......................... Increase (decrease) in net interest income..........

$1,043 405 63 (204) -----1,307 -----431 37 -----394 -----$ 913 ======

$

2,002 99 (126) 327 ------2,320 ------2,349 10 ------2,359 ------$ (57) =======

$ 3,045 504 (63) 123 ------3,609 ------2,780 (27) ------2,753 ------$ 856 =======

994 381 196 58 -----1,629 -----476 10 -----486 -----$1,143 ======

$

(1) Income related to securties and loans exempt from federal income taxes is stated on a fully taxable-equivalent basis, assuming a federal income tax rate of 34%, and is then reduced by the non-deductible portion of interest expense. (2) The volume/rate variance for each category has been allocated on a consistent basis between rate and volume variances, based on the percentage of rate, or volume, variance to the sum of the two absolute variances. 13

INTEREST SENSITIVITY ANALYSIS(1)
December 31, 1995 TABLE 3 (In Thousands) Total 1-90 91-180 181-365 Sensitive Day Day Day Within Y Sensitive Sensitive Sensitive One Year Sensit -------------------------------------------------------

Interest-earning assets: Loans, net of unearned income.................... $ 103,603 U.S. Treasury securities......................... 2,725 U.S. government agencies obligations............. 248 Obligations of states and political subdivisions. 505 Federal Home Loan Bank........................... 1,071 Federal funds sold............................... 10,025 --------Total interest-earning assets............... $ 118,177 ========= Interest-bearing liabilities: N.O.W. account deposits.......................... $ 67,847 Money market deposits............................ 58,799 Regular savings deposits......................... 33,248 Time deposits.................................... 45,321 Securities sold under agreements to repurchase and other borrowed-money....................... 1,494 --------Total interest-bearing liabilities Interest sensitivity gap......................... $ (88,532) Ratio of interest-sensitive assets/ interest-sensitive liabilities ............... .57 $ (2,122) .92 $ 32,008 2.93 $ (58,646) .77 $ 206,709 ========= $ 19,594 2,000 3,214 $ 39,080 5,023 4,008 503 $ 162,277 9,748 4,256 4,222 1,071 10,025 --------$ 191,599 ========= $ 56, 24, 37, 7,

-------$ 24,808 ========

-------$ 48,614 ========

-----$ 125, ======

$

$ 26,930

$ 16,606

67,847 58,799 33,248 88,857

$

31,

-------$ 26,930 ========

-------$ 16,606 ========

1,494 --------$ 250,245 =========

-----$ 31, ======

(1) Interest sensitivity is computed using assets and liabilities having interest rates that can be adjusted during the period indiciated. Balance sheet composition and interest rate movements produce the biggest effect on profitability and

INTEREST SENSITIVITY ANALYSIS(1)
December 31, 1995 TABLE 3 (In Thousands) Total 1-90 91-180 181-365 Sensitive Day Day Day Within Y Sensitive Sensitive Sensitive One Year Sensit -------------------------------------------------------

Interest-earning assets: Loans, net of unearned income.................... $ 103,603 U.S. Treasury securities......................... 2,725 U.S. government agencies obligations............. 248 Obligations of states and political subdivisions. 505 Federal Home Loan Bank........................... 1,071 Federal funds sold............................... 10,025 --------Total interest-earning assets............... $ 118,177 ========= Interest-bearing liabilities: N.O.W. account deposits.......................... $ 67,847 Money market deposits............................ 58,799 Regular savings deposits......................... 33,248 Time deposits.................................... 45,321 Securities sold under agreements to repurchase and other borrowed-money....................... 1,494 --------Total interest-bearing liabilities Interest sensitivity gap......................... $ (88,532) Ratio of interest-sensitive assets/ interest-sensitive liabilities ............... .57 $ (2,122) .92 $ 32,008 2.93 $ (58,646) .77 $ 206,709 ========= $ 19,594 2,000 3,214 $ 39,080 5,023 4,008 503 $ 162,277 9,748 4,256 4,222 1,071 10,025 --------$ 191,599 ========= $ 56, 24, 37, 7,

-------$ 24,808 ========

-------$ 48,614 ========

-----$ 125, ======

$

$ 26,930

$ 16,606

67,847 58,799 33,248 88,857

$

31,

-------$ 26,930 ========

-------$ 16,606 ========

1,494 --------$ 250,245 =========

-----$ 31, ======

(1) Interest sensitivity is computed using assets and liabilities having interest rates that can be adjusted during the period indiciated. Balance sheet composition and interest rate movements produce the biggest effect on profitability and performance. Asset/liability management evaluates the impact on corporate goals of interest rate trends, market conditions and the general economic environment. To meet the objectives of profitability and performance while minimizing risk, proportionate balances are sought within earning assets and interest-bearing liabilities. Full discussion of the effects of these respective portfolios on 1995's performance can be found under the headings of earning assets and interest-bearing liabilities. Asset/liability management seeks to minimize the risk of interest rate movements by matching the maturities and repricing opportunities of interest-sensitive assets and liabilities. The interest sensitivity schedule analyzing the interest rate risk as of December 31, 1995 is presented in Table 3. As interest sensitivity is continually changing, the table reflects LSB's balance sheet position at one point in time and is not necessarily indicative of its position on other dates. On December 31, 1995, the one-year cumulative interest sensitivity gap was a negative $58,646,000, for a ratio of interest-sensitive assets to interest-sensitive liabilities of .77. Asset/liability management also addresses liquidity positioning. Liquidity management is required in order to fund current and future extensions of credit, meet deposit withdrawals, maintain reserve requirements and otherwise sustain operations. As such, it is related to interest rate sensitivity management, in that each is affected by maturing assets and liabilities. While interest sensitivity management is concerned with repricing intervals of assets and liabilities, liquidity management is concerned with the maturities of those respective balances. An appropriate liquidity position is further accomplished through deposit growth and access to sources of funds other than deposits, such as the federal funds market. Traditionally, LSB has been a seller of excess investable funds in the federal funds market and uses these funds as a part of its liquidity management. Net cash provided by operating activities, a primary source of liquidity, was $4,579,000 in 1995 compared to $4,305,000 in 1994 and $8,492,000 in 1993. Details of cash flows for the years 1995, 1994 and 1993 are provided in the Consolidated

Statements of Cash Flows. NET INTEREST INCOME Interest rates, which began to increase in 1994, made one more upward adjustment in February of 1995 before beginning to decline. The decline in interest rates in 1995 was gradual, with the prime interest rate adjusting 25 basis points in both July and December. The prime interest rate, which is used as an interest rate indicator by banks, made three adjustments in 1995, following five increases in 1994 and remaining unchanged in 1993. The changing interest rate environment of 1995 resulted in a 12 basis point decline in LSB's interest rate spread compared to a 16 basis point decline in 1994 and a four basis point gain in 1993. This placed the interest spread at 4.41% for 1995 compared to 4.53% for 1994 and 4.69% for 1993. Table 1 provides an average 14

SUMMARY OF INVESTMENT SECURITIES PORTFOLIO
TABLE 4 (In Thousands) December 31, 1995 Carrying Market Value Value ---------------------$ 34,265 41,749 31,883 1,071 -------$108,968 ======== $ 34,394 41,731 33,529 1,071 -------$110,725 ======== December 31, 1994 Carrying Market Value Value --------------------$ 40,684 39,176 $ 39,731 37,863 D Car --$ 3 2

U.S. Treasury Securities....................... U.S. government agencies obligations........... Obligations of state and political subdivisions................................. Federal Home Loan Bank......................... Total securities...........................

30,052 -------$109,912 ========

30,112 -------$107,706 ========

2 --$ 9 ===

(1) As of the latest reported period, the registrant is not aware of any issuer, and the aggregate book value and aggregate market value of the securities of such issuer, when the aggregate book value of such securities exceeds 10% of the registrant's shareholders'equity. balance and net interest income analysis for the years 1995, 1994 and 1993. The net interest margin, also shown in Table 1, is computed by dividing net interest income by average earning assets and provides an indication of LSB's efficiency in generating income from earning assets. With the moderate interest rate changes in 1995, LSB's net interest margin increased three basis points to 5.13% from the 5.10% posted in 1994. Increased loan volume at improved interest yields produced an improved volume and rate variance compared to 1994 and thereby significantly contributed to the gain in LSB's net interest income. The gain in net interest income for 1995 was $856,000 or 5.2% compared to a gain of $841,000 or 5.4% in 1994. A more detailed discussion of the volume and rate variance is held under the sections of Earning Assets and Interest-Bearing Liabilities. An analysis of volume and rate variance is presented in Table 2. Interest rates on interest-bearing liabilities in 1995 increased 85 basis points, while the interest yields on earning assets increased 73 basis points. Interest expense for the current year increased $2,753,000 or 31.7%, while interest income increased $3,609,000 or 14.6%. INVESTMENT SECURITIES PORTFOLIO MATURITY SCHEDULE
TABLE 5 (In Thousands) December 31, 1995 Carrying Weighted Value Average Yield(1) ------------------------$ 9,747 24,517 -------34,264 $ 6.76% 6.60 6.64

U.S. Treasury securities: Within one year...................... One to five years.................... Total..............................

SUMMARY OF INVESTMENT SECURITIES PORTFOLIO
TABLE 4 (In Thousands) December 31, 1995 Carrying Market Value Value ---------------------$ 34,265 41,749 31,883 1,071 -------$108,968 ======== $ 34,394 41,731 33,529 1,071 -------$110,725 ======== December 31, 1994 Carrying Market Value Value --------------------$ 40,684 39,176 $ 39,731 37,863 D Car --$ 3 2

U.S. Treasury Securities....................... U.S. government agencies obligations........... Obligations of state and political subdivisions................................. Federal Home Loan Bank......................... Total securities...........................

30,052 -------$109,912 ========

30,112 -------$107,706 ========

2 --$ 9 ===

(1) As of the latest reported period, the registrant is not aware of any issuer, and the aggregate book value and aggregate market value of the securities of such issuer, when the aggregate book value of such securities exceeds 10% of the registrant's shareholders'equity. balance and net interest income analysis for the years 1995, 1994 and 1993. The net interest margin, also shown in Table 1, is computed by dividing net interest income by average earning assets and provides an indication of LSB's efficiency in generating income from earning assets. With the moderate interest rate changes in 1995, LSB's net interest margin increased three basis points to 5.13% from the 5.10% posted in 1994. Increased loan volume at improved interest yields produced an improved volume and rate variance compared to 1994 and thereby significantly contributed to the gain in LSB's net interest income. The gain in net interest income for 1995 was $856,000 or 5.2% compared to a gain of $841,000 or 5.4% in 1994. A more detailed discussion of the volume and rate variance is held under the sections of Earning Assets and Interest-Bearing Liabilities. An analysis of volume and rate variance is presented in Table 2. Interest rates on interest-bearing liabilities in 1995 increased 85 basis points, while the interest yields on earning assets increased 73 basis points. Interest expense for the current year increased $2,753,000 or 31.7%, while interest income increased $3,609,000 or 14.6%. INVESTMENT SECURITIES PORTFOLIO MATURITY SCHEDULE
TABLE 5 (In Thousands) December 31, 1995 Carrying Weighted Value Average Yield(1) ------------------------$ 9,747 24,517 -------34,264 -------4,255 37,495 -------41,749 -------$ 6.76% 6.60 6.64

U.S. Treasury securities: Within one year...................... One to five years.................... Total.............................. U.S. government agencies obligations: Within one year...................... One to five years.................... Total..............................

8.01 6.65 6.78

Obligations of states and political subdivisions: Within one year...................... One to five years.................... Five to ten years.................... After ten years...................... Total.............................. Federal Home Loan Bank.................

4,221 7,094 9,922 10,646 -------31,883 -------1,071

11.95 10.68 10.10 8.69 9.99 7.25

Total portfolio........................

$108,968 ========

7.69

(1) Income related to securities and loans from federal income taxes is stated on a fully taxable-equivalent basis, assuming a federal income tax rate of 34%, and is then reduced by the non-deductible portion of interest expense. EARNING ASSETS As reported in Table 1, the gain in average earning assets for 1995 was somewhat less than that of the previous year. Total earning assets for 1995 increased $14,721,000 or 4.5% compared to 1994, which posted a gain of $22,601,000 or 7.5% over 1993. The 1993 gain in earning assets was $9,053,000 or 3.1%. Growth in the loan portfolio in 1995 was similar to that experienced in 1994. The average balance of the loan portfolio for 1995 increased $11,791,000 or 5.8% compared to gains of $12,816,000 or 6.8% in 1994 and $12,212,000 or 6.9% in 1993. As shown in Table 2, the 1995 increase in loan balances accounted for an income gain related to volume of $1,043,000 compared to 1994's gain of $994,000. The positive rate variance in 1995 of $2,002,000 resulted from the significant increase of 95 basis points in average loan yields. Average volumes of taxable investment securities were increased in 1995. As shown in Table 2, this produced a positive volume variance of $405,000. Yields on these investments increased a marginal 14 basis points in 1995, creating a positive rate variance of $99,000. Average volumes of tax exempt investment securities were increased $678,000 in 1995. This resulted in a positive volume variance of $63,000, as shown in Table 2. The yield on tax exempt investment securities declined 42 basis points, producing a negative rate variance of $126,000. To fund the growth in the loan portfolio, the average funds invested in federal funds sold were reduced $4,323,000. This produced a negative volume variance of $204,000. Yields on these investments increased 66 basis points in 1995, creating a positive rate variance of $327,000. As of the latest reported period, the registrant is not aware of any issuer, and the aggregate book value and aggregate market value of the securities of such issuer, when the aggregate book value of such securities exceeds ten percent of the registrant's shareholders' equity. 15

AVERAGE TOTAL DEPOSITS
TABLE 6 (In Thousands) 1995 Average Average Balance Rate ------------------------$ 38,925 61,669 2.85% 63,566 3.63 33,897 2.59 119,393 5.41 --------$ 317,450 ========= 1994 Average Average Balance Rate ------------------$ 38,203 38,765 2.13% 81,815 2.96 32,912 2.67 112,224 4.00 -------$303,919 ======== 19 Average Balance ---------$ 34,653 32,517 80,999 28,501 109,485 -------$286,155 ========

Demand deposits............... N.O.W. account deposits....... Money market deposits......... Regular savings deposits...... Time deposits................. Total deposits (1)..........

December 31, 1995 Over 3 Over 6 3 Months Through Through Over 23 Or Less 6 months 12 months Months ------------------------------------------------------------------Time deposit maturity schedule:(2) Time deposits of $100,000 or more.. $ 13,583 $7,384 $1,756 $255

(1) The bank has no deposits in foreign offices. (2) The bank has no other time deposits of $100,000 or more issued by domestic offices. INTEREST-BEARING LIABILITIES

AVERAGE TOTAL DEPOSITS
TABLE 6 (In Thousands) 1995 Average Average Balance Rate ------------------------$ 38,925 61,669 2.85% 63,566 3.63 33,897 2.59 119,393 5.41 --------$ 317,450 ========= 1994 Average Average Balance Rate ------------------$ 38,203 38,765 2.13% 81,815 2.96 32,912 2.67 112,224 4.00 -------$303,919 ======== 19 Average Balance ---------$ 34,653 32,517 80,999 28,501 109,485 -------$286,155 ========

Demand deposits............... N.O.W. account deposits....... Money market deposits......... Regular savings deposits...... Time deposits................. Total deposits (1)..........

December 31, 1995 Over 3 Over 6 3 Months Through Through Over 23 Or Less 6 months 12 months Months ------------------------------------------------------------------Time deposit maturity schedule:(2) Time deposits of $100,000 or more.. $ 13,583 $7,384 $1,756 $255

(1) The bank has no deposits in foreign offices. (2) The bank has no other time deposits of $100,000 or more issued by domestic offices. INTEREST-BEARING LIABILITIES The gain in average interest-bearing liabilities for 1995 was not quite as large as that of the previous year. The volume increase in interest-bearing liabilities for 1995 was $11,754,000 or 4.4% compared to increases of $14,522,000 or 5.7% in 1994 and $4,283,000 or 1.7% in 1993. Interest rates paid on liabilities increased 85 basis points in 1995, compared to an increase of seven basis points in 1994 and a decline of 81 basis points in 1993. The majority of LSB's interest-bearing liabilities consist of savings and time deposits. The increase in these deposits for 1995 was $12,809,000 or 4.8%, compared to gains of $14,214,000 or 5.7% in 1994 and $3,494,000 or 1.4% in 1993. The volume variance, shown in Table 2, produced by 1995's gain in interestbearing deposits, was $431,000. The dramatic increase in interest rates paid in 1995 produced a rate variance of $2,349,000. Securities sold under agreements to repurchase account for a small proportion of total interest-bearing liabilities. The average volume of these liabilities declined $1,055,000 or 45.5% in 1995, while the interest rate paid increased 50 basis points. The total variance in these liabilities for 1995 was a negative $27,000. Average deposits are presented in Table 6 by type and rate for the years 1995, 1994 and 1993. Average interest rates paid on interest-bearing deposits increased from 1994 to 1995, with the exception of regular savings deposits. The most dramatic increase was in time deposit interest rates which increased 141 basis points in 1995 after a very modest increase of eight basis points in 1994 and a decline of 88 basis points in 1993. N.O.W. account interest rates increased 72 basis points in 1995 following a decline of 14 basis points in 1994 and a decline of 49 basis points in 1993. The average rate paid on money market deposits increased 67 basis points in 1995, following an increase of 22 basis points in 1994 and a decline of 65 basis points in 1993. Interest rates on regular savings deposits dropped eight basis points in 1995 following an increase of nine basis points in 1994 and a drop of 65 basis points in 1993. LSB experienced growth in each deposit category in 1995. Time deposits increased $7,169,000 or 6.4% in 1995 following a modest increase of $2,739,000 or 2.5% in 1994 and a decline of $7,072,000 or 6.1% in 1993. During 1995, certain large municipal deposit accounts transferred from money market to N.O.W. accounts, adjusting these two categories by approximately $20 million dollars. Taking this adjustment into consideration, the growth in money market accounts in 1995 was 2.1% and the growth in N.O.W. accounts was 7.5%. Money market deposits gained $816,000 or 1.0% in 1994, compared to a 1993 gain of $2,005,000 or 2.5%. N.O.W. account deposits gained $6,248,000 or 19.2% in 1994, compared to a 1993 gain of $4,511,000 or 16.1%. Regular savings accounts posted a modest gain of $985,000 or 3.0% in 1995 compared to an

increase of $4,411,000 or 15.5% in 1994 and an increase of $4,050,000 or 16.6% in 1993. CAPITAL RESOURCES AND SHAREHOLDERS' EQUITY Deregulation continues to place burdens on the banking industry's capital position. Within this environment of regulatory change, sound capital adequacy continues to represent a major safety factor for both shareholders and depositors. A well-capitalized financial institution can withstand the pressures of an uncertain economy. It is also in an excellent position to maximize growth opportunities as economic conditions improve. It is primarily this safety factor that governmental regulators look for. Regulatory guidelines require minimum levels of capital based on a risk weighting of each asset category and off balance sheet contingencies. At December 31, 1995, based on these measures, Bancshares' ratio for Tier 1 capital was 21.09% compared to the regulatory minimum risk-based capital ratio requirement of 4%. Bancshares' Tier 2 capital ratio at this date was 22.29% compared to the regulatory requirement of 8%. 16

SUMMARY OF LOAN PORTFOLIO
TABLE 7 (In Thousands) Loans secured by real estate: Secured by real estate, excluding loans secured by 1-4 family residences............................. Revolving credit secured by 1-4 family residences...................... Other loans secured by 1-4 family residences............................. Total loans secured by real estate..... Commercial, financial and agricultural... Installment loans to individuals......... All other loans.......................... Total loans, net of unearned income*... 1995 1994 1993 1992 ---------------------------------------------------------

$ 39,429 22,066 81,365 -------142,860 28,170 48,107 7,531 -------$226,668 ========

$ 42,811 18,699 68,461 -------129,971 22,952 44,943 7,386 -------$205,252 ========

$ 43,144 17,983 67,384 -------128,511 20,742 41,949 4,970 -------$196,172 ========

$ 41,181 16,832 62,580 -------120,593 23,939 34,852 4,494 -------$183,878 ========

(*) The bank has no foreign loan activity. MATURITY SCHEDULE OF LOANS (1)
December 31, 1995 Commercial and Industrial Mortgage --------------------------------------------$ 49,836 $ 27,167

Due in 1 year or less............................. Due after 1 year through 5 years: Fixed interest rates.......................... Floating interest rates....................... Due after 5 years: Fixed interest rates.......................... Floating interest rates.......................

12,787 8,163

15,722 16,091

1,372 2,823

6,884 36,851

(1) Excluding installment loans. In January of 1996, the Board of Directors announced a five-for-four stock split payable February 15, 1996. This will add approximately one million shares to Bancshares' outstanding stock. During 1995, capital stock issued under Bancshares' stock option benefit plan added 31,376 shares to the company's outstanding capital

SUMMARY OF LOAN PORTFOLIO
TABLE 7 (In Thousands) Loans secured by real estate: Secured by real estate, excluding loans secured by 1-4 family residences............................. Revolving credit secured by 1-4 family residences...................... Other loans secured by 1-4 family residences............................. Total loans secured by real estate..... Commercial, financial and agricultural... Installment loans to individuals......... All other loans.......................... Total loans, net of unearned income*... 1995 1994 1993 1992 ---------------------------------------------------------

$ 39,429 22,066 81,365 -------142,860 28,170 48,107 7,531 -------$226,668 ========

$ 42,811 18,699 68,461 -------129,971 22,952 44,943 7,386 -------$205,252 ========

$ 43,144 17,983 67,384 -------128,511 20,742 41,949 4,970 -------$196,172 ========

$ 41,181 16,832 62,580 -------120,593 23,939 34,852 4,494 -------$183,878 ========

(*) The bank has no foreign loan activity. MATURITY SCHEDULE OF LOANS (1)
December 31, 1995 Commercial and Industrial Mortgage --------------------------------------------$ 49,836 $ 27,167

Due in 1 year or less............................. Due after 1 year through 5 years: Fixed interest rates.......................... Floating interest rates....................... Due after 5 years: Fixed interest rates.......................... Floating interest rates.......................

12,787 8,163

15,722 16,091

1,372 2,823

6,884 36,851

(1) Excluding installment loans. In January of 1996, the Board of Directors announced a five-for-four stock split payable February 15, 1996. This will add approximately one million shares to Bancshares' outstanding stock. During 1995, capital stock issued under Bancshares' stock option benefit plan added 31,376 shares to the company's outstanding capital stock. In 1995, Bancshares' Board of Directors voted to increase the quarterly cash dividend to 12 cents per share, an increase of 9.1% over the previously stated quarterly rate. Total cash dividends declared as a percentage of net income amounted to 43.09% in 1995 compared to 42.05% in 1994 and 40.52% in 1993. In 1995, shareholders' equity increased 5.8% compared to 7.0% in 1994 and 7.9% in 1993. The number of shareholders holding Bancshares stock increased slightly to 1,916 at December 31, 1995 compared to 1,911 at December 31, 1994. Participants in Bancshares' dividend reinvestment plan total 996, representing 52.0% of total shareholders. The total number of shares that are 100% reinvestment of dividends are 1,034,154 shares or 24.1% of the outstanding stock. NONINTEREST INCOME Noninterest income for 1995 increased $641,000 or 24.6% compared to a decrease of $611,000 or 19.0% in 1994 and an increase of $602,000 or 23.0% in 1993. A large part of the 1995 increase results from the absence of the losses sustained in 1994 from mortgages LSB carried for sale to Freddie Mac in the secondary market. These mortgages were marked held for sale at the lower of cost or market value in accordance with the Financial

Accounting Standards Board Statement No. 65 (SFAS 65), "Accounting for Certain Mortgage Banking Activities". Service charges on deposit accounts remained virtually unchanged in 1995 compared to 1994. The 1994 increase in service charges on deposit accounts was $23,000 or 1.3%, while those in 1993 increased $83,000 or 4.9%. The gain in other operating income for 1995 was $310,000 or 27.9% compared to an increase of $58,000 or 5.5% in 1994 and an increase of $256,000 or 32.2% in 1993. Financial statement Note 11 details material items contained in other operating income. Other items contributing to the 1995 gain in other operating income were: services fees of $92,000 generated by LSB Financial Services, short term lease income of $118,000 from other real estate property owned and $35,000 of dividend income from the Federal Home Loan Bank, which LSB joined in the third quarter of 1995. Credit card fee income increased $68,000 or 31.1% in 1995 compared to an increase of $54,000 or 32.7% in 1994. 17

NONINTEREST EXPENSE Total noninterest expense for 1995 increased $914,000 or 7.5% compared to $762,000 or 6.7% in 1994 and $1,270,000 or 12.5% in 1993. Personnel expense represented the largest dollar increase of noninterest expense. Personnel expense, consisting of both employee salaries and benefits, increased $523,000 or 7.5% in 1995 compared to $385,000 or 5.9% in 1994 and $648,000 or 11.0% in 1993. In 1995, full-time equivalent employees totaled 250, for a net decrease of five employees in the current year compared to a gain of two employees in 1994 and a gain of four employees in 1993. Occupancy expense increased $22,000 or 2.9% in 1995 compared to a decrease of $12,000 or 1.6% in 1994 and an increase of $120,000 or 18.3% in 1993. Equipment depreciation and maintenance expense was up $48,000 or 7.8% in 1995 compared to increases of $90,000 or 17.2% in 1994 and $143,000 or 37.7% in 1993. The gain in other operating expenses in 1995 was $321,000 or 8.3% compared to gains of $299,000 or 8.4% in 1994 and $359,000 or 11.0% in 1993. Financial statement Note 11 details the material items contained in other operating expenses. Automated services expense for 1995 was $761,000 compared to $765,000 in 1994 and $739,000 in 1993. Stationery, printing and supplies expense increased $41,000 or 8.3% in 1995 compared to an increase of $89,000 or 22.1% in 1994. This expense remained relatively unchanged in 1993 compared to 1992. The Federal Deposit Insurance Corporation (FDIC) reduced its insurance premium assessment in the third quarter of 1995 and also issued a refund for overpayment of prior insurance premiums paid. Consequently, the FDIC assessment decreased $306,000 or 46.2% in 1995 compared to an increase of $32,000 or 5.1% in 1994 and an increase of $6,000 or 1.0% in 1993. ASSET QUALITY AND PROVISION FOR LOAN LOSSES The reserve for loan losses was $2,730,000 or 1.20% of loans outstanding at December 31, 1995 compared to $2,641,000 or 1.29% of loans outstanding at December 31, 1994. The provision for loan losses was increased $33,000 or 15.1% in 1995 compared to a decrease of $722,000 or 76.7% in 1994. Net charge offs for 1995 were $163,000 or .08% of average loans outstanding, compared to 1994 net charge offs of $353,000 or .17% of average loans. Additional information regarding the reserve for loan losses is contained in Table 8, "Analysis of Reserve for Loan Losses". Nonperforming assets increased at December 31, 1995, up $429,000 from December 31, 1994, and represented .67% of total assets. Nonperforming assets include nonaccrual loans, restructured loans, other real estate acquired through foreclosed properties and accruing loans ninety days or more past due. Nonaccrual loans totaling $1,040,000 at December 31, 1995 represented four loans secured by real estate and one commercial and industrial loan. Restructured loans at December 31, 1995 totaled $289,000. Accruing loans past due 90 days or more were $206,000 at December 31, 1995, a decrease of 80.1% from the level of $1,035,000 at December 31, 1994. The accrual of interest is generally discontinued on all loans that become 90 days past due as to principal or interest unless collection of both principal and interest is assured by

NONINTEREST EXPENSE Total noninterest expense for 1995 increased $914,000 or 7.5% compared to $762,000 or 6.7% in 1994 and $1,270,000 or 12.5% in 1993. Personnel expense represented the largest dollar increase of noninterest expense. Personnel expense, consisting of both employee salaries and benefits, increased $523,000 or 7.5% in 1995 compared to $385,000 or 5.9% in 1994 and $648,000 or 11.0% in 1993. In 1995, full-time equivalent employees totaled 250, for a net decrease of five employees in the current year compared to a gain of two employees in 1994 and a gain of four employees in 1993. Occupancy expense increased $22,000 or 2.9% in 1995 compared to a decrease of $12,000 or 1.6% in 1994 and an increase of $120,000 or 18.3% in 1993. Equipment depreciation and maintenance expense was up $48,000 or 7.8% in 1995 compared to increases of $90,000 or 17.2% in 1994 and $143,000 or 37.7% in 1993. The gain in other operating expenses in 1995 was $321,000 or 8.3% compared to gains of $299,000 or 8.4% in 1994 and $359,000 or 11.0% in 1993. Financial statement Note 11 details the material items contained in other operating expenses. Automated services expense for 1995 was $761,000 compared to $765,000 in 1994 and $739,000 in 1993. Stationery, printing and supplies expense increased $41,000 or 8.3% in 1995 compared to an increase of $89,000 or 22.1% in 1994. This expense remained relatively unchanged in 1993 compared to 1992. The Federal Deposit Insurance Corporation (FDIC) reduced its insurance premium assessment in the third quarter of 1995 and also issued a refund for overpayment of prior insurance premiums paid. Consequently, the FDIC assessment decreased $306,000 or 46.2% in 1995 compared to an increase of $32,000 or 5.1% in 1994 and an increase of $6,000 or 1.0% in 1993. ASSET QUALITY AND PROVISION FOR LOAN LOSSES The reserve for loan losses was $2,730,000 or 1.20% of loans outstanding at December 31, 1995 compared to $2,641,000 or 1.29% of loans outstanding at December 31, 1994. The provision for loan losses was increased $33,000 or 15.1% in 1995 compared to a decrease of $722,000 or 76.7% in 1994. Net charge offs for 1995 were $163,000 or .08% of average loans outstanding, compared to 1994 net charge offs of $353,000 or .17% of average loans. Additional information regarding the reserve for loan losses is contained in Table 8, "Analysis of Reserve for Loan Losses". Nonperforming assets increased at December 31, 1995, up $429,000 from December 31, 1994, and represented .67% of total assets. Nonperforming assets include nonaccrual loans, restructured loans, other real estate acquired through foreclosed properties and accruing loans ninety days or more past due. Nonaccrual loans totaling $1,040,000 at December 31, 1995 represented four loans secured by real estate and one commercial and industrial loan. Restructured loans at December 31, 1995 totaled $289,000. Accruing loans past due 90 days or more were $206,000 at December 31, 1995, a decrease of 80.1% from the level of $1,035,000 at December 31, 1994. The accrual of interest is generally discontinued on all loans that become 90 days past due as to principal or interest unless collection of both principal and interest is assured by way of collateralization, guarantees or other security and the loan is ANALYSIS OF RESERVE FOR LOAN LOSSES
TABLE 8 (In Thousands) As of Or For Dece

1995 1994 -----------------------Average amount of loans outstanding, net of unearned income................... $214,380 $202,589 $1 Amount of loans outstanding, net of unearned income........................... 226,668 205,252 1 Reserve for loan losses: Balance on January 1.......................................................... $ 2,641 $ 2,775 $ ---------------Loans charged off: Secured by real estate....................................................... 49 0 Commercial and industrial.................................................... 15 284 Installment.................................................................. 143 118 Credit card.................................................................. 56 28

Total charge-offs........................................................... Recoveries of loans previously charged off: Secured by real estate....................................................... Commercial and industrial.................................................... Installment.................................................................. Credit card..................................................................

-------263 --------

-------430 -------7 10 45 15 -------77 -------353 -------219 -------$ 2,641 ======== .17%

---

11 0 75 14 -------Total recoveries............................................................ 100 -------Net loans charged off......................................................... 163 -------Provision for loan losses..................................................... 252 -------Balance on December 31........................................................ $ 2,730 ======== Ratio of net charge-offs of loans to average loans outstanding during the year. .08%

----$ ==

18

NONPERFORMING ASSETS
TABLE 9 (In Thousands) 1995 1994 ---------------------Nonaccrural loans: Secured by real estate........................................................ Commercial and industrial..................................................... Restructured loans............................................................. Other real estate acquired through foreclosed properties....................... Accruing loans which are contractually past due 90 days or more................ $ 990 50 289 988 206 -----$2,523 ====== 1.11% .67 $ 0 0 0 1,059 1,035 -----$2,094 ====== 1.02% .59

Total nonperforming assets..................................................... Nonperforming assets to: Loans outstanding at end of year.............................................. Total assets at end of year................................................... The loss of interest income associated with nonperforming loans at December 31:

1995 1994 ---------------------Interest income that would have been recorded in accordance with original terms................................................................ Less interest income actually recorded.........................................

$

17

$

71

3 -----$ 14 ======

0 -----$ 71 ======

Loss of interest income........................................................

considered to be in the process of collection. Table 9, "Nonperforming Assets", discloses the components of nonperforming assets. At December 31, 1995, the reserve for loan losses was 1.08 times the nonperforming loans, down from 1.26 times the nonperforming loans at December 31, 1994. Based on the current loan portfolio and levels of current problem assets and potential problem loans, management believes the provision for loan losses to be adequate. In management's judgement, the allocation of the reserve for loan losses for 1995 reflected in Table 10 accurately reflects the inherent risks associated with each of the various lending categories. As a part of credit administration, management regularly reviews and grades its loan portfolio for purposes of determining asset quality and the need to make additional provisions for loan losses. The reserve for loan losses

NONPERFORMING ASSETS
TABLE 9 (In Thousands) 1995 1994 ---------------------Nonaccrural loans: Secured by real estate........................................................ Commercial and industrial..................................................... Restructured loans............................................................. Other real estate acquired through foreclosed properties....................... Accruing loans which are contractually past due 90 days or more................ $ 990 50 289 988 206 -----$2,523 ====== 1.11% .67 $ 0 0 0 1,059 1,035 -----$2,094 ====== 1.02% .59

Total nonperforming assets..................................................... Nonperforming assets to: Loans outstanding at end of year.............................................. Total assets at end of year................................................... The loss of interest income associated with nonperforming loans at December 31:

1995 1994 ---------------------Interest income that would have been recorded in accordance with original terms................................................................ Less interest income actually recorded.........................................

$

17

$

71

3 -----$ 14 ======

0 -----$ 71 ======

Loss of interest income........................................................

considered to be in the process of collection. Table 9, "Nonperforming Assets", discloses the components of nonperforming assets. At December 31, 1995, the reserve for loan losses was 1.08 times the nonperforming loans, down from 1.26 times the nonperforming loans at December 31, 1994. Based on the current loan portfolio and levels of current problem assets and potential problem loans, management believes the provision for loan losses to be adequate. In management's judgement, the allocation of the reserve for loan losses for 1995 reflected in Table 10 accurately reflects the inherent risks associated with each of the various lending categories. As a part of credit administration, management regularly reviews and grades its loan portfolio for purposes of determining asset quality and the need to make additional provisions for loan losses. The reserve for loan losses represents management's estimate of an amount adequate to provide for the risk of future losses inherent in the loan portfolio. In its on-going analysis of the reserve for loan losses and its adequacy, management considers LSB's historical loan loss experience, the economic risks associated with each of the lending categories, the amount of past due and nonperforming loans, underlying collateral values securing loans and credit concentrations or other factors which might affect potential credit losses. LSB is also subject to regulatory examinations and determinations as to the adequacy of its reserve for loan losses, which may take into account such factors as the methodology used to calculate the reserve and the size of the reserve in comparison to peer banks identified by the regulatory agencies. During 1995, all credit relationships of $50,000 or more were reviewed as a part of LSB's credit administration. A review of large credits was conducted at a regulatory agency examination, and smaller credits were reviewed by an independent outside consultant. Neither of these latter two reviews revealed any material problem credits that had not been previously identified by management. There are, however, additional risks of future losses which cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy and factors affecting particular borrowers, management's judgement as to the adequacy of the reserve for loan losses is necessarily

approximate and imprecise. In its oversight of the credit review process, management has not identified any undue economic risks associated with the various lending categories, nor any significant credit concentrations within these categories. Loans classified for regulatory purposes as loss, doubtful, substandard or special mention that have not been disclosed in Table 9, "Nonperforming Assets", do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. INCOME TAXES Bancshares' effective tax rate increased to 26.2% in 1995 from 24.2% in 1994 compared to 23.7% in 1993. Financial statement Note 7 provides a reconciliation between the amount of taxes computed using the statutory tax rate and the actual tax expense. The increase in Bancshares' effective tax rate for 1995 was primarily the result of higher taxable income. 19

INFLATION For financial institutions, the effects of inflation and governmental programs to control it tend to vary from nonbank companies. The impact is more likely to be felt by banking institutions in the interest rate associated with earning assets and interest-bearing liabilities. Reduced inflation tends to improve interest margins associated with interest-bearing assets and liabilities. Broad-ranged economic conditions, such as inflation, and governmental efforts to spur economic growth, are difficult for individual companies to respond to effectively. Consistent long-term management is the key to dealing with such conditions. The objective of management in such times is to remain positioned for growth when the economy rebounds. Management seeks to do this through its long-range budget and profit-planning process. ACCOUNTING AND REGULATORY ISSUES In May 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS 121 establishes accounting standards for the impairment of long-lived assets (i.e., plant or fixed assets), to certain identifiable intangibles, to goodwill related to those assets to be held and used, and to long-lived assets and certain identifiable intangible assets to be disposed of. Under the Statement, long-lived assets and certain identifiable intangibles are required to be separated into two categories for purposes of accounting for an impairment of assets - those to be held and used and those to be disposed of. Assets to be held and used are to be reviewed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss occurs when the sum of the expected future cash flows, not discounted and without interest charges, is less than the carrying amount of the assets. Under SFAS 121, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of that are subject to the reporting requirements of APB-30, "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", are to be measured at the lower of carrying amount or net realizable value. Long-lived assets to be disposed of that are not subject to APB-30 requirements are to be accounted for at the lower of carrying amount or fair value less cost to sell when management has committed to a plan to dispose of the assets. SFAS 121 is effective for financial statements for fiscal years beginning after December 15, 1995. The effect on Bancshares' financial position and operating results from the adoption of SFAS 121 is anticipated to be immaterial. In May 1995, FASB issued Statement No. 122 ("SFAS 122"), "Accounting for Mortgage Servicing Rights". SFAS 122 is an amendment to SFAS 65, "Accounting for Certain Mortgage Banking Activities". SFAS 122 amends SFAS 65 to eliminate the accounting distinction between rights to service mortgage loans that are acquired through loan origination and those acquired through purchase. Among other matters, SFAS 122 requires that an entity recognize as separate assets rights to service mortgage loans for others however those

INFLATION For financial institutions, the effects of inflation and governmental programs to control it tend to vary from nonbank companies. The impact is more likely to be felt by banking institutions in the interest rate associated with earning assets and interest-bearing liabilities. Reduced inflation tends to improve interest margins associated with interest-bearing assets and liabilities. Broad-ranged economic conditions, such as inflation, and governmental efforts to spur economic growth, are difficult for individual companies to respond to effectively. Consistent long-term management is the key to dealing with such conditions. The objective of management in such times is to remain positioned for growth when the economy rebounds. Management seeks to do this through its long-range budget and profit-planning process. ACCOUNTING AND REGULATORY ISSUES In May 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS 121 establishes accounting standards for the impairment of long-lived assets (i.e., plant or fixed assets), to certain identifiable intangibles, to goodwill related to those assets to be held and used, and to long-lived assets and certain identifiable intangible assets to be disposed of. Under the Statement, long-lived assets and certain identifiable intangibles are required to be separated into two categories for purposes of accounting for an impairment of assets - those to be held and used and those to be disposed of. Assets to be held and used are to be reviewed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss occurs when the sum of the expected future cash flows, not discounted and without interest charges, is less than the carrying amount of the assets. Under SFAS 121, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of that are subject to the reporting requirements of APB-30, "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", are to be measured at the lower of carrying amount or net realizable value. Long-lived assets to be disposed of that are not subject to APB-30 requirements are to be accounted for at the lower of carrying amount or fair value less cost to sell when management has committed to a plan to dispose of the assets. SFAS 121 is effective for financial statements for fiscal years beginning after December 15, 1995. The effect on Bancshares' financial position and operating results from the adoption of SFAS 121 is anticipated to be immaterial. In May 1995, FASB issued Statement No. 122 ("SFAS 122"), "Accounting for Mortgage Servicing Rights". SFAS 122 is an amendment to SFAS 65, "Accounting for Certain Mortgage Banking Activities". SFAS 122 amends SFAS 65 to eliminate the accounting distinction between rights to service mortgage loans that are acquired through loan origination and those acquired through purchase. Among other matters, SFAS 122 requires that an entity recognize as separate assets rights to service mortgage loans for others however those servicing rights are acquired. This amendment to SFAS 65 eliminates the accounting distinction between rights to service mortgage loans for others that are acquired through loan origination activities and those acquired through purchase transactions. Under SFAS 122, servicing rights would be calculated based on the present value of the fair market value of the servicing fees, with consideration given to any prepayment assumptions and amortization over the life of the loan. While this would be an addition to income at the time of the sale of a mortgage, it would be a reduction to income over the life of the loan and at the time a sold mortgage pays off early. SFAS 122 also amends SFAS 65 regarding the evaluation and measurement of impairment of capitalized mortgage servicing rights. As amended, mortgage servicing rights are to be stratified based on one or more of the predominant risk characteristics of the underlying loans - loan type, size, note rate, date of origination, term and geographic location. The amount ALLOCATION OF RESERVE FOR LOAN LOSSES*
TABLE 10 (In Thousands) 1995 Loans % Total Amount Loans ---------------$1,297 33.1% 1994 Loans % Total Amount Loans ---------------$1,254 29.7% 1993 Loans % Total Amount Loans ---------------$1,330 27.3% 1992 Loa Tot Amount Loa -------------$1,682 28.

Commercial..................

Mortgage.................... Installment................. Credit card................. Unallocated.................

642 675 26 90 -----$2,730 ======

45.3 20.4 1.2

620 652 25 90 -----$2,641 ======

46.9 22.3 1.1

625 682 28 110 -----$2,775 ======

49.6 22.1 1.0

635 287

50. 21.

----100.0% =====

----100.0% =====

----100.0% =====

100 -----$2,704 ======

---100. ====

Total............

(*)The reserve for loan losses has been allocated only on an approximate basis. The entire amount of the reserve is available to absorb losses occurring in any category. The allocation is not necessarily indicative of future losses. 20

QUARTERLY FINANCIAL DATA
TABLE 11 (In Thousands except per share data) Interest income......................... Interest expense........................ December 31, 1995 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr ---------------------------------------$6,638 $6,971 $7,230 $7,212 2,651 2,874 2,992 2,931 --------------------3,987 63 -----4,097 63 -----4,238 63 -----4,281 63 -----Dece 1st Qtr 2nd Q ---------------$5,714 $5,9 1,899 1,9 --------3,815 66 -----3,9 ----

Net interest income..................... Provision for loan losses...............

Net interest income after provision for loan losses.............

3,924 -----736 -----3,294 -----1,366 328 -----$1,038 ====== $ .24

4,034 -----755 -----3,355 -----1,434 345 -----$1,089 ====== $ .25

4,175 -----804 -----3,208 -----1,771 468 -----$1,308 ====== $ .30

4,218 -----949 -----3,255 -----1,912 565 -----$1,347 ====== $ .31

3,749 -----700 -----3,018 -----1,431 341 -----$1,090 ====== $ .26

3,9 ---4 ---3,0 ---1,4 3 ---$1,0 ==== $ .

Noninterest income......................

Noninterest expense.....................

Income before income taxes.............. Income taxes............................

Net income..............................

Earnings per share *

(*) Earnings per share have been restated in this table to give effect to the five-for-four stock split paid March 31, 1994. of impairment recognized should be the amount by which the capitalized mortgage servicing rights exceed their fair value. SFAS 65 as amended by SFAS 122 also requires additional disclosures pertaining to mortgage servicing rights. Among them are disclosures of the fair value of capitalized mortgage servicing rights and the methods used to estimate that fair value - the risk characteristics of the underlying loans used to stratify capitalized mortgage servicing rights for purposes of measuring impairment and for each period for which results of operations are presented, the activity in the valuation allowances for capitalized mortgage servicing rights, aggregate additions charged and reductions credited to operations and aggregated direct write-downs charged against the allowance. SFAS 122 is effective for financial years beginning after December 15, 1995. While Bancshares originates mortgages for sale in the secondary market to Freddie Mac, the mortgage servicing rights resulting from this activity is relatively small. Consequently, the effect on Bancshares' financial position and operating results from the adoption of SFAS 122 is anticipated to be minimal. In October 1995, FASB issued Statement No. 123, "Accounting for Stock-Based Compensation". SFAS 123

QUARTERLY FINANCIAL DATA
TABLE 11 (In Thousands except per share data) Interest income......................... Interest expense........................ December 31, 1995 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr ---------------------------------------$6,638 $6,971 $7,230 $7,212 2,651 2,874 2,992 2,931 --------------------3,987 63 -----4,097 63 -----4,238 63 -----4,281 63 -----Dece 1st Qtr 2nd Q ---------------$5,714 $5,9 1,899 1,9 --------3,815 66 -----3,9 ----

Net interest income..................... Provision for loan losses...............

Net interest income after provision for loan losses.............

3,924 -----736 -----3,294 -----1,366 328 -----$1,038 ====== $ .24

4,034 -----755 -----3,355 -----1,434 345 -----$1,089 ====== $ .25

4,175 -----804 -----3,208 -----1,771 468 -----$1,308 ====== $ .30

4,218 -----949 -----3,255 -----1,912 565 -----$1,347 ====== $ .31

3,749 -----700 -----3,018 -----1,431 341 -----$1,090 ====== $ .26

3,9 ---4 ---3,0 ---1,4 3 ---$1,0 ==== $ .

Noninterest income......................

Noninterest expense.....................

Income before income taxes.............. Income taxes............................

Net income..............................

Earnings per share *

(*) Earnings per share have been restated in this table to give effect to the five-for-four stock split paid March 31, 1994. of impairment recognized should be the amount by which the capitalized mortgage servicing rights exceed their fair value. SFAS 65 as amended by SFAS 122 also requires additional disclosures pertaining to mortgage servicing rights. Among them are disclosures of the fair value of capitalized mortgage servicing rights and the methods used to estimate that fair value - the risk characteristics of the underlying loans used to stratify capitalized mortgage servicing rights for purposes of measuring impairment and for each period for which results of operations are presented, the activity in the valuation allowances for capitalized mortgage servicing rights, aggregate additions charged and reductions credited to operations and aggregated direct write-downs charged against the allowance. SFAS 122 is effective for financial years beginning after December 15, 1995. While Bancshares originates mortgages for sale in the secondary market to Freddie Mac, the mortgage servicing rights resulting from this activity is relatively small. Consequently, the effect on Bancshares' financial position and operating results from the adoption of SFAS 122 is anticipated to be minimal. In October 1995, FASB issued Statement No. 123, "Accounting for Stock-Based Compensation". SFAS 123 establishes a fair value based method of accounting for stock options and other equity instruments used in employee compensation plans. Employee compensation plans covered by SFAS 123 include all arrangements by which employees receive shares of stock or other equity instruments if the employer incurs liabilities to employees in amounts based on the price of the employer's stock. This includes stock options, restricted stock, stock appreciation rights and stock purchase plans. Under SFAS 123, equity instruments are recognized at the fair value of the consideration received for them. The fair value method of accounting for stock options and other instruments applies this general principle, measuring compensation cost for employers as the excess of the fair value of the equity instrument over the amount paid by the employee. SFAS 123 also requires significantly expanded disclosures, including disclosure of the pro forma amount of net income and earnings per share as if the fair value based method were used to account for stock-based compensation, if the intrinsic value method of APB-25 is retained. The disclosure requirements of SFAS 123 are applicable for financial statements for fiscal years beginning after December 15, 1995. The anticipated effect of SFAS 123 on Bancshares' financial position and operating results is expected to be minimal. In November 1995, the Federal Reserve Board issued a Supplement to Supervisory Release ("SR") 95-51, "Rating the Adequacy of Risk Management Processes and Internal Controls at State Member Bank and Bank

Holding Companies". SR 95-51 instructs Federal Reserve System examiners to assign a formal supervisory rating to the adequacy of an institution's risk management processes, including its internal controls. The specific rating of risk management and internal controls will be given significant weight when examiners evaluate management under the bank (CAMEL) and bank holding company (BOPEC) rating systems. The formal rating of risk management is intended to highlight and incorporate both the quantitative and qualitative aspects of an examiner's review of an institution's overall process of identifying, measuring, monitoring and controlling risk and to facilitate appropriate follow-up action. SR 95-51 places emphasis on an active role by senior management and the board of directors, adequate policies and limits, accurate and independent measurement procedures and assessments of risk and strong internal controls. Risk management ratings will be assigned for examinations and inspections commencing on or after January 2, 1996. Adoption of this examination policy by the regulatory agencies will not affect the financial position and operating results of Bancshares. 21

CONSOLIDATED BALANCE SHEETS
Dec (In Thousands) 1995 - -------------------------------------------------------------------------------------------------------

ASSETS Cash and Due from Banks, (Note 2)................................................ Federal Funds Sold............................................................... Investment Securities (Note 3): Held to Maturity, Market value $84,679 and $84,836............................. Available for Sale, Market value $26,046 and $22,870........................... Loan (Note 10): Commercial..................................................................... Installment.................................................................... Mortgage....................................................................... Total Loans.................................................................. Less, Reserve for Loan Losses (Note 4)......................................... Net Loans.................................................................... Premises and Equipment (Note 5).................................................. Other Assets..................................................................... Total Assets................................................................. LIABILITIES Deposits: Demand....................................................................... Savings, N.O.W. and Money Market Accounts.................................... Certificates of Deposit of less than $100,000................................ Certificates of Deposit of $100,000 or more.................................. Total Deposits............................................................ Securities Sold Under Agreements to Repurchase............................... Other Liabilities............................................................ Total Liabilities......................................................... SHAREHOLDERS' EQUITY Capital Stock: Common, authorized 10,000,000 shares, Par Value $5, issued 4,299,074 shares in 1995 and 4,267,698 shares in 1994................... Paid-In Capital.................................................................. Retained Earnings................................................................ Unrealized Gain (Loss) on Securities Available for Sale, Net of Taxes............ Total Shareholders' Equity................................................ Total Liabilities and Shareholders' Equity................................

$ 17,581 -------10,025 -------82,922 -------26,046 -------74,980 48,972 102,715 - -----226,667 (2,730) -------223,937 8,733 --------5,782 -------$375,026 ========

$ 42,660 159,894 97,757 22,978 -------323,289 1,494 2,133 -------326,916 --------

21,495 11,255 15,048 312 -------48,110 -------$375,026 ========

Commitments and Contingencies (Note 9) Notes to consolidated financial statements are an integral part hereof.

CONSOLIDATED BALANCE SHEETS
Dec (In Thousands) 1995 - -------------------------------------------------------------------------------------------------------

ASSETS Cash and Due from Banks, (Note 2)................................................ Federal Funds Sold............................................................... Investment Securities (Note 3): Held to Maturity, Market value $84,679 and $84,836............................. Available for Sale, Market value $26,046 and $22,870........................... Loan (Note 10): Commercial..................................................................... Installment.................................................................... Mortgage....................................................................... Total Loans.................................................................. Less, Reserve for Loan Losses (Note 4)......................................... Net Loans.................................................................... Premises and Equipment (Note 5).................................................. Other Assets..................................................................... Total Assets................................................................. LIABILITIES Deposits: Demand....................................................................... Savings, N.O.W. and Money Market Accounts.................................... Certificates of Deposit of less than $100,000................................ Certificates of Deposit of $100,000 or more.................................. Total Deposits............................................................ Securities Sold Under Agreements to Repurchase............................... Other Liabilities............................................................ Total Liabilities......................................................... SHAREHOLDERS' EQUITY Capital Stock: Common, authorized 10,000,000 shares, Par Value $5, issued 4,299,074 shares in 1995 and 4,267,698 shares in 1994................... Paid-In Capital.................................................................. Retained Earnings................................................................ Unrealized Gain (Loss) on Securities Available for Sale, Net of Taxes............ Total Shareholders' Equity................................................ Total Liabilities and Shareholders' Equity................................

$ 17,581 -------10,025 -------82,922 -------26,046 -------74,980 48,972 102,715 - -----226,667 (2,730) -------223,937 8,733 --------5,782 -------$375,026 ========

$ 42,660 159,894 97,757 22,978 -------323,289 1,494 2,133 -------326,916 --------

21,495 11,255 15,048 312 -------48,110 -------$375,026 ========

Commitments and Contingencies (Note 9) Notes to consolidated financial statements are an integral part hereof. 22

CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31 (In Thousands, except per share amounts) 1995 1994 1993 - ----------------------------------------------------------------------------------------------INTEREST INCOME Interest and Fees on Loans........................... Interest on Investment Securities: Taxable.......................................... Tax Exempt.......................................

$20,290 4,767 1,928

$17,245 4,263 1,942

$16,080 4,330 1,895

CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31 (In Thousands, except per share amounts) 1995 1994 1993 - ----------------------------------------------------------------------------------------------INTEREST INCOME Interest and Fees on Loans........................... Interest on Investment Securities: Taxable.......................................... Tax Exempt....................................... Federal Funds Sold.................................. Total Interest Income............................

$20,290 4,767 1,928 1,066 ------28,051 -------

$17,245 4,263 1,942 943 ------24,393 -------

$16,080 4,330 1,895 611 ------22,916 -------

INTEREST EXPENSE Deposits............................................ Securities Sold Under Agreements to Repurchase ..... Total Interest Expense..........................

11,402 46 ------11,448 ------16,603 252 ------16,351 -------

8,622 73 ------8,695 -------15,698 219 ------15,479 -------

7,987 61 ------8,048 -------14,868 941 ------13,927 -------

NET INTEREST INCOME...................................... PROVISION FOR LOAN LOSSES (NOTE 4)....................... NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......

NONINTEREST INCOME Service Charges on Deposit Accounts................... Gains (Losses) on Sales of Mortgages................. Gains on Sales of Investment Securities.............. Other Operating Income (Note 11)..................... Total Noninterest Income.......................... NONINTEREST EXPENSE Personnel Expense.................................... Occupancy Expense.................................... Equipment Depreciation and Maintenance............... Other Operating Expense (Note 11).................... Total Noninterest Expense......................... INCOME BEFORE INCOME TAXES............................... Income Taxes (Note 7).................................... NET INCOME...............................................

1,816 8 1,420 ------3,244 ------7,469 784 660 4,199 ------13,112 ------6,483 1,701 ------$ 4,782 =======

1,812 (368) 49 1,110 ------2,603 ------6,946 762 612 3,878 ------12,198 ------5,884 1,422 ------$ 4,462 =======

1,789 373 1,052 ------3,214 ------6,561 774 522 3,579 ------11,436 ------5,705 1,349 ------$ 4,356 =======

Earnings Per Share: Based on 4,289,536 for 1995, 4,262,584 for 1994 and 4,240,312 for 1993 average shares outstanding adjusted for five-for-four stock split paid March 31, 1994.....................................

$ 1.11

$

1.05

$

1.03

Notes to consolidated financial statements are an integral part hereof. 23

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Net Unrealiz Common Stock Paid In Retained (Loss) on Sec (In Thousands except for shares) Shares Amount Capital Earnings Available f - -------------------------------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Net Unrealiz Common Stock Paid In Retained (Loss) on Sec (In Thousands except for shares) Shares Amount Capital Earnings Available f - ------------------------------------------------------------------------------------------------------Balance at December 31, 1992........... 3,383,597 $16,918 $10,958 $11,413 Net income............................. Cash dividends declared on common stock......................... Common stock issued for stock options exercised.................... Balance at December 31, 1993........... Net income............................. Cash dividends declared on common stock......................... Common stock issued in five-forfour stock split, including cash for fractional shares................ Common stock issued for stock options exercised.................... Unrealized gain on securities available for sale, impact of accounting change at January 1, 1994, net of deferred income taxes................................ Unrealized loss on securities available for sale, net of deferred income taxes................ Balance at December 31, 1994........... Net income............................. Cash dividends declared on common stock......................... Common stock issued for stock options exercised ................... Unrealized gain on securities available for sale, net of deferred income taxes................ Balance at December 31, 1995........... --------4,299,074 ========= ------$21,495 ======= ------$11,255 ======= ------$15,048 ======= --------4,267,698 ------21,338 ------11,123 ------12,327 4,782 4,356

(1,766)

14,929 --------3,398,526

75 ------16,993

82 ------11,040

------14,003 4,462

-------

(1,876)

850,053

4,250

(4,262)

19,119

95

83

$

95

(408) ------(313)

(2,061)

31,376

157

132

625 ------$ 312 =======

Notes to consolidated financial statements are an integral part hereof. 24

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 (In Thousands) 1995 1994 - ------------------------------------------------------------------------------------------------------CASH FLOW FROM OPERATING ACTIVITIES Net Income.......................................... Adjustments to reconcile net income to net cash: Depreciation and amortization..................... $ 4,782 706 $ 4,462 685 $

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 (In Thousands) 1995 1994 - ------------------------------------------------------------------------------------------------------CASH FLOW FROM OPERATING ACTIVITIES Net Income.......................................... Adjustments to reconcile net income to net cash: Depreciation and amortization..................... Securities premium amorization and discount accretion, net.................................. (Increase)decrease in loans held for sale......... Deferred Income Tax............................... Income taxes payable.............................. (Increase) decrease in interest earned but not received.................................... (Increase) decrease in interest accrued but not paid........................................ Provision for loan losses........................ Gain on sale of investment securities............ Gain on sale of premises and equipment........... Net cash provided by operating activities...... CASH FLOW FROM INVESTING ACTIVITIES Purchases of securities held to maturity............ Proceeds from maturities of securities held to maturity....................................... Proceeds from sales of securities held to maturity.. Purchases of securities available for sale.......... Proceeds from maturities of securities available for sale.......................................... Proceeds from sales of securities available for sale.............................................. Net increase in loans made to customers............. Purchases of premises and equipment................. Proceeds from sale of premises and equipment........ Net (increase) decrease in federal funds sold....... Increase in other assets............................ Net cash used by investing activities............ (17,324) 21,456 (11,988) 10,000 (26,944) 20,122 4,026 (23,216) 2,500 4,047 (8,742) (249) 36 12,725 (974) -------(16,669 -------( $ 4,782 706 (252) (914) 453 (361) (297) 212 252 (2) -------4,579 -------$ 4,462 685 (258) (690) (1) 171 (219) (9) 219 (49) (6) -------4,305 -------$

---

(20,666) (505) 75 2,250 (27) -------(16,729) --------

(

( -( --

CASH FLOWS FROM FINANCING ACTIVITIES Net increase in demand deposits, N.O.W., money market and savings accounts................. Net increase (decrease) in time deposits............ Net increase (decrease) in securities sold under agreements to repurchase.......................... Dividends and fractional shares paid................ Net increase (decrease) in other liabilities........ Common stock issued................................. Net cash provided by financing activities......... Increase (decrease) in cash and cash equivalents...... Cash and cash equivalents at beginning of years....... Cash and cash equivalents at end of years............. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the years for: Interest.......................................... Income taxes...................................... SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS Transfers of loans to other real estate owned......... Unrealized gain (loss) on securities available for sale: Change in securities available for sale............. Change in deferred income taxes..................... $ 354 $ 1,072 $

1,821 11,562 787 (2,061) 7 289 -------12,405 -------255 17,326 -------$ 17,581 ========

11,724 1,279 (1,372) (1,888) (142) 178 -------9,779 -------(2,585) 19,911 -------$ 17,326 ========

---

-$ ==

$ 11,236 1,618

$

8,669 1,265

$

$

947 322

$

(474) (161)

Change in shareholder's equity......................

625

(313)

Notes to consolidated financial statements are an integral part hereof. 25

N O T E S TO C O N S O L I A T E D FINANCIALSTATEMENTS As of or for the years ended December 31, 1995, 1994, and 1993 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and financial reporting policies of LSB Bancshares, Inc. ("Bancshares") and its subsidiaries conform to generally accepted accounting principles and prevailing industry practices. The following is a description of significant accounting policies. NATURE OF OPERATIONS Bancshares is a bank holding company organized under the laws of the State of North Carolina and registered under the Bank Holding Company Act of 1956, as amended. Bancshares conducts its domestic financial service business through Lexington State Bank and two non-bank subsidiaries, Peoples Finance Company of Lexington, Inc. and LSB Financial Services, Inc. Bancshares serves customers primarily in Davidson County, North Carolina. CONSOLIDATION The consolidated financial statements include the accounts of Bancshares and its wholly-owned subsidiaries, after eliminating intercompany balances and transactions. Securities and other property held in a fiduciary or agency capacity are not included in the consolidated balance sheets since these are not assets or liabilities of Bancshares. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Bancshares considers cash and due from banks as cash and cash equivalents for purposes of the consolidated statements of cash flows. Due from bank balances are maintained in other financial institutions. INVESTMENT SECURITIES Effective January 1, 1994, Bancshares adopted Statement of Financial Accounting Standards Number 115 "Accounting for Certain Investments in Debt and Equity Securities". Securities that may be sold in response to or in anticipation of changes in interest rates or other factors are classified as available for sale and carried at market value. The unrealized gains and losses on these securities are reported net of applicable taxes in a separate component of shareholders' equity. Securities that Bancshares has the positive intent and ability to hold to maturity are carried at amortized cost. Bancshares does not have any securities held for trading. Interest income on securities, including amortization of premiums and accretion of discounts, is recognized using the interest method. Gains and losses on the sale of securities are recognized on a specific identification basis. LOANS Loans are generally carried at the principal amount outstanding, net of deferred loan fees. Mortgage loans held for sale are carried at the lower of cost or market value. Interest income is recognized using the interest method. Net deferred loan fees are amortized into income over the term of the loan. The accrual of interest on loans is generally discontinued on all loans that become 90 days past due as to principal and interest unless collection of both principal and interest is assured by way of collateralization, guarantees or other security and the loan is considered to be in the process of collection.

N O T E S TO C O N S O L I A T E D FINANCIALSTATEMENTS As of or for the years ended December 31, 1995, 1994, and 1993 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and financial reporting policies of LSB Bancshares, Inc. ("Bancshares") and its subsidiaries conform to generally accepted accounting principles and prevailing industry practices. The following is a description of significant accounting policies. NATURE OF OPERATIONS Bancshares is a bank holding company organized under the laws of the State of North Carolina and registered under the Bank Holding Company Act of 1956, as amended. Bancshares conducts its domestic financial service business through Lexington State Bank and two non-bank subsidiaries, Peoples Finance Company of Lexington, Inc. and LSB Financial Services, Inc. Bancshares serves customers primarily in Davidson County, North Carolina. CONSOLIDATION The consolidated financial statements include the accounts of Bancshares and its wholly-owned subsidiaries, after eliminating intercompany balances and transactions. Securities and other property held in a fiduciary or agency capacity are not included in the consolidated balance sheets since these are not assets or liabilities of Bancshares. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Bancshares considers cash and due from banks as cash and cash equivalents for purposes of the consolidated statements of cash flows. Due from bank balances are maintained in other financial institutions. INVESTMENT SECURITIES Effective January 1, 1994, Bancshares adopted Statement of Financial Accounting Standards Number 115 "Accounting for Certain Investments in Debt and Equity Securities". Securities that may be sold in response to or in anticipation of changes in interest rates or other factors are classified as available for sale and carried at market value. The unrealized gains and losses on these securities are reported net of applicable taxes in a separate component of shareholders' equity. Securities that Bancshares has the positive intent and ability to hold to maturity are carried at amortized cost. Bancshares does not have any securities held for trading. Interest income on securities, including amortization of premiums and accretion of discounts, is recognized using the interest method. Gains and losses on the sale of securities are recognized on a specific identification basis. LOANS Loans are generally carried at the principal amount outstanding, net of deferred loan fees. Mortgage loans held for sale are carried at the lower of cost or market value. Interest income is recognized using the interest method. Net deferred loan fees are amortized into income over the term of the loan. The accrual of interest on loans is generally discontinued on all loans that become 90 days past due as to principal and interest unless collection of both principal and interest is assured by way of collateralization, guarantees or other security and the loan is considered to be in the process of collection. RESERVE FOR LOAN LOSSES The reserve for loan losses is that amount which is considered adequate to provide for potential losses in the portfolio. Management's evaluation of the adequacy of the reserve is based on several factors, including an analysis of the loss experience in relation to outstanding amounts, a review of impaired loans, regular examinations and appraisals of the portfolio and current conditions. FORECLOSED REAL ESTATE

Foreclosed real estate only includes formally foreclosed property. At the time of foreclosure, foreclosed real estate is recorded at the lower of the Bank's cost or the asset's fair value less costs to sell, which becomes the property's new basis. Any write downs based on the asset's fair value at date of acquisition are charged to the reserve for loan losses. After foreclosure, these assets are carried at the lower of their new cost basis or fair value less cost to sell. Costs incurred in maintaining foreclosed real estate and subsequent write downs to reflect declines in the fair value of the property are charged to operations. PREMISES AND EQUIPMENT Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed by use of the straight-line method, using the following estimated lives: buildings, 20 to 40 years; equipment, 5 to 10 years; vaults, 10 to 40 years. Leasehold improvements are being amortized by use of the straight-line method over the lesser of the estimated useful lives of the improvements or the terms of the respective leases. INCOME TAXES The provision for income taxes is based on income and expense and assets and liabilities for financial statement purposes. Deferred income taxes are computed under the provisions of Statement of Financial Accounting Standards Number 109, "Accounting for Income Taxes. 26

NOTE 2 - CASH AND DUE FROM BANKS The Bank is required to maintain a certain weekly average clearing account balance with the Federal Reserve Bank of Richmond. The required weekly average clearing account balance at December 31, 1995 and 1994 was $11,200,000 and $12,600,000, respectively. The amounts are negotiated by the Bank with the Federal Reserve Bank of Richmond. NOTE 3 - INVESTMENT SECURITIES The valuations of investment securities as of December 31, 1995 and 1994, were as follows (In Thousands):
1995 - SECURITIES HELD TO MATURITY Amoritized Cost ---------U.S. Treasury and other U.S. government agency obligations ......... State, county and municipal securities .......... Unrealized Gains ---------Unrealized Losses ---------Market Value ------

$51,039

$

130

$

19

$51,150

31,883 ------$82,922 =======

1,646 -----$1,776 ======

0 -----$ 19 ======

33,529 ------$84,679 =======

Total ...............

1995 - SECURITIES AVAILABLE FOR SALE Amoritized Cost ----------U.S. Treasury and other U.S. government agency obligations ......... State, county and municipal securities .......... Federal Home Loan Unrealized Gains ---------Unrealized Losses --------Market Value -------

$24,502

$

473

$

0

$24,975

0

0

0

0

NOTE 2 - CASH AND DUE FROM BANKS The Bank is required to maintain a certain weekly average clearing account balance with the Federal Reserve Bank of Richmond. The required weekly average clearing account balance at December 31, 1995 and 1994 was $11,200,000 and $12,600,000, respectively. The amounts are negotiated by the Bank with the Federal Reserve Bank of Richmond. NOTE 3 - INVESTMENT SECURITIES The valuations of investment securities as of December 31, 1995 and 1994, were as follows (In Thousands):
1995 - SECURITIES HELD TO MATURITY Amoritized Cost ---------U.S. Treasury and other U.S. government agency obligations ......... State, county and municipal securities .......... Unrealized Gains ---------Unrealized Losses ---------Market Value ------

$51,039

$

130

$

19

$51,150

31,883 ------$82,922 =======

1,646 -----$1,776 ======

0 -----$ 19 ======

33,529 ------$84,679 =======

Total ...............

1995 - SECURITIES AVAILABLE FOR SALE Amoritized Cost ----------U.S. Treasury and other U.S. government agency obligations ......... State, county and municipal securities .......... Federal Home Loan Bank Stock .......... Unrealized Gains ---------Unrealized Losses --------Market Value -------

$24,502

$

473

$

0

$24,975

0

0

0

0

1,071 -------

0 -------$ 473 ========

0 ------$ 0 =======

1,071 ------$26,046 =======

Total ...............

$25,573 ========

1994 - SECURITIES HELD TO MATURITY Amoritized Cost ---------U.S. Treasury and other U.S. government agency obligations ......... State, county and municipal securities .......... Total ............... Unrealized Gains ---------Unrealized Losses --------Market Value -------

$56,990

$

49

$ 2,315

$54,724

30,052 ------$87,042 =======

712 -----$ 761 ======

652 ------$ 2,967 =======

30,112 ------$84,836 =======

1994 - SECURITIES AVAILABLE FOR SALE Amoritized Cost ---------U.S. Treasury and other U.S. government agency obligations ......... State, county and municipal securities .......... Unrealized Gains ---------Unrealized Losses --------Market Value -------

$23,345

$

0

$

475

$22,870

0 ------$23,345 =======

0 -------0 ========

0 -----475 ======

0 ------$22,870 =======

Total ...............

The following is a maturity schedule of investment securities at December 31, 1995 by contractual maturity (In Thousands):
SECURITIES HELD TO MATURITY Amortized Cost --------Debt securities: Due in one year or less ........ Due after one year through five years .......... Due after five years through ten years ........... Due after ten years ............... Total debt securities .......... Equity securities: -----Total securities ...... $82,922 ======= ------$84,679 ======= Market Value -----SECURITIES AVAILABLE FOR SALE Amortized Cost --------Market Value ------

$12,750

$12,847

$ 5,000

$ 5,031

49,604

50,059

19,502

19,944

9,922

10,738

-

-

10,646 ------82,922

11,035 ------84,679

-

-

24,502 1,071(1) ------$25,573 =======

24,975 1,071(1) ------$26,046 =======

(1) At December 31, 1995, Lexington State Bank owned stock in the Federal Home Loan Bank of Atlanta with book and market values of $1,071,000, which is included in equity securities and classified as available for sale. Member institutions are required to maintain a minimum investment in the common stock of the Federal Home Loan Bank of Atlanta based on the asset size of the member institution and the amount of qualifying one-to-four family residential loans. A recap of the sales and maturities of held to maturity securities follows (In Thousands):
Years Ended December 31 1995 1994 1993 --------------------Proceeds from sales and maturities .............. Gross realized gains ..... $21,456 0 $24,148 24 $25,912 0

Gross realized losses ....

0

0

0

Two securities classified as held to maturity were sold during 1994. These securities, with sales proceeds of $4,026,000 and amortized cost of $4,002,000, resulted in a realized gain of $24,000. The specific identification method was the basis on which cost was determined. The sales helped to fund some of the Bank's growth in its commercial and installment loan portfolios. The two securities were within three months of maturity and changes in market interest rates would not have a material effect on the security's market value. A recap of the sales and maturities of available for sale securities follows (In Thousands):
Years Ended December 31 1995 1994 1993 -----------------------Proceeds from sales and maturities ............ Gross realized gains .... Gross realized losses ... $10,000 0 0 $ 6,547 25 0 $ 0 0 0

Three securities classified as available for sale were sold during 1994. These securities, with sales proceeds of 27

$4,047,000 and amortized cost of $4,022,000, resulted in a realized gain of $25,000. The specific identification method was the basis on which cost was determined. Investment securities with amortized cost of $49,582,562 and $50,005,014 as of December 31, 1995 and 1994, respectively, were pledged to secure public deposits and for other purposes. Note 4 - RESERVES FOR LOAN LOSSES An analysis of the changes in the reserve for loan losses follows (In Thousands):
Years Ended December 31 1995 1994 1993 -----------------$2,641 $2,775 42,704 252 219 941 100 (263) -----$2,730 ====== 77 (430) -----$2,641 ====== 149 (1,019) -----$2,775 ======

Balances at beginning of years .. Provision for loan losses ....... Recoveries of amounts previously charged off ........ Loan losses ..................... Balancse at end of years ........

Effective January 1, 1995, Bancshares adopted Statement of Financial Accounting Standards Number 114 "Accounting by Creditors for Impairment of a Loan" and amended by Statement of Financial Accounting Standards Number 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures". These standards require creditors to establish a valuation allowance when it is probable that all principal and interest due under the contractual terms of a loan will not be collected. Impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the observable market value of a loan or the fair value of collateral if the loan is collateral dependent. The creditor continues to use existing methods for recognizing interest income on impaired loans. Bancshares' policy for impaired loan accounting subjects all loans to impairment recognition except for large groups of smaller balance homogeneous loans such as credit card, residential mortgage and consumer loans. Bancshares generally considers most loans 90 days or more past due and all nonaccrual loans to be impaired.

$4,047,000 and amortized cost of $4,022,000, resulted in a realized gain of $25,000. The specific identification method was the basis on which cost was determined. Investment securities with amortized cost of $49,582,562 and $50,005,014 as of December 31, 1995 and 1994, respectively, were pledged to secure public deposits and for other purposes. Note 4 - RESERVES FOR LOAN LOSSES An analysis of the changes in the reserve for loan losses follows (In Thousands):
Years Ended December 31 1995 1994 1993 -----------------$2,641 $2,775 42,704 252 219 941 100 (263) -----$2,730 ====== 77 (430) -----$2,641 ====== 149 (1,019) -----$2,775 ======

Balances at beginning of years .. Provision for loan losses ....... Recoveries of amounts previously charged off ........ Loan losses ..................... Balancse at end of years ........

Effective January 1, 1995, Bancshares adopted Statement of Financial Accounting Standards Number 114 "Accounting by Creditors for Impairment of a Loan" and amended by Statement of Financial Accounting Standards Number 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures". These standards require creditors to establish a valuation allowance when it is probable that all principal and interest due under the contractual terms of a loan will not be collected. Impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the observable market value of a loan or the fair value of collateral if the loan is collateral dependent. The creditor continues to use existing methods for recognizing interest income on impaired loans. Bancshares' policy for impaired loan accounting subjects all loans to impairment recognition except for large groups of smaller balance homogeneous loans such as credit card, residential mortgage and consumer loans. Bancshares generally considers most loans 90 days or more past due and all nonaccrual loans to be impaired. The adoption of these standards did not have a material effect on Bancshares' financial position or results of operations and required no increase to the reserve for loan losses. At December 31, 1995, Bancshares had loans amounting to approximately $3,809,985 that were specifically classified as impaired. The average balance of these loans amounted to approximately $3,514,912 for the year ended December 31, 1995. The reserve for loan losses related to impaired loans amounted to approximately $488,649 at December 31, 1995. Bancshares has no commitments to loan additional funds to the borrowers of impaired loans. Note 5 - PREMISES AND EQUIPMENT Following is a summary of premises and equipment (In Thousands):
December 31 1995 1994 ------------$ 1,435 $ 1,357 7,198 7,272 4,855 4,614 13 13 389 414 ------------13,890 13,670 5,157 -----$ 8,733 ======= 4,663 ------$ 9,007 =======

Land .................................. Buildings ............................. Equipment ............................. Other ................................. Leasehold improvements ................ Total cost ......................... Less, accumulated depreciation and amortization ................... Total ..............................

Note 6 - PENSION AND EMPLOYEE BENEFIT PLANS The Bank and its subsidiaries have a noncontributory defined benefit pension plan which covers substantially all employees. The benefits are based on years of service and the average highest five consecutive years of compensation paid during the ten years preceding normal retirement. Contributions are made on an annual basis, with the total amount of such contributions being between the minimum required for funding standard account purposes and the maximum deductible for federal income tax purposes. Net pension cost consisted of the following components (In Thousands):
Years Ended December 31 1995 1994 1993 -------------Service cost for benefits earned during the periods............ Interest cost on projected benefit obligation................... Return on plan assets................... Amortization of unrecognized net assets............... Amortization of prior service cost.......................... Amortization of unrecognized loss Net pension cost........................ $ 150 126 (199) (8) (37) 24 ---$ 156 ===== $ 127 184 (179) (8) (37) 3 -----$ 90 ===== $ 127 170 (140) (8) (16) 0 ----$ 133 =====

The following table sets forth the funded status and amounts recognized for the defined benefit pension plan in the Consolidated Balance Sheets (In Thousands):
December 31 1995 1994 -----------Actuarial present value of accumulated benefit obligation, including vested benefits of $2,124 in 1995 and $2,031 in 1994.................................... Actuarial present value of projected benefit obligation for services rendered to date........................... Plan assets at fair market value, primarily U.S. government securities, listed securities and deposits in banks........... Projected benefit obligation in excess of plan assets................................ Unrecognized net assets......................... Unrecognized prior service cost................. Unrecognized net loss........................... Prepaid (accrued) pension cost..................

$ 2,194 =======

$2,103 ======

$(3,162)

$(2,755)

3,241 ------79 (46) (283) 391 ------$ 141 =======

2,499 -----(256) (53) (320) 521 -----$ (108) ======

28

To determine the actuarial present value of the projected benefit obligation, a discount rate of 8% was used for 1995, 7.5% for 1994 and 8% for 1993. A rate of increase in future compensation levels of 5.5% was used for 1995, 1994 and 1993. The expected long-range rate of return on plan assets was 7.5% for each of the three years. The Bank and its subsidiaries have an Employees' Savings Plus Plan covering substantially all employees with one year's service. Participating employees may contribute a percentage of their compensation to the Plan, with the

To determine the actuarial present value of the projected benefit obligation, a discount rate of 8% was used for 1995, 7.5% for 1994 and 8% for 1993. A rate of increase in future compensation levels of 5.5% was used for 1995, 1994 and 1993. The expected long-range rate of return on plan assets was 7.5% for each of the three years. The Bank and its subsidiaries have an Employees' Savings Plus Plan covering substantially all employees with one year's service. Participating employees may contribute a percentage of their compensation to the Plan, with the Bank and its subsidiaries matching a portion of the employee contribution. Total expense under this Plan was $108,039, $84,497 and $49,960 for 1995, 1994 and 1993, respectively. During 1994, the Bank and its subsidiaries implemented a plan to provide some health care benefits for employees for the period between early retirement and normal retirement. Only those employees who retire after age 55 and have completed 10 years of service will be eligible for these benefits. The benefits are provided through a self-insured plan administered by an insurance company whose premiums are based on claims paid during the year. Statement of Financial Accounting Standards Number 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" requires the accrual of nonpension benefits as employees render service. The liability for postretirement benefits is unfunded. Net postretirement benefit cost consisted of the following components (In Thousands):
YEARS ENDED DECEMBER 31 1995 1994 ------$ 17 $ 14 35 29 19 ----$ 71 ===== 19 ----$ 62 =====

Service cost............................. Interest cost............................ Amortization of transition obligation over 20 years............... Net postretirement benefit cost..........

The following table sets forth the status of the plan and amounts recognized for postretirement benefits in the Consolidated Balance Sheets (In Thousands): DECEMBER 31 1995 1994 --------$(202) $(157) (66) (58) (196) (183) --------(464) (398) 41 341 360 --------$ (82) $ (38) ===== =====

Accumulated postretirement benefit obligation: Retirees............................................ Currently eligible active plan participants......... Other active plan participants...................... Total............................................... Unrecognized net (gain) loss........................ Unrecognized net transition obligation.............. Accrued postretirement benefits cost................

The annual assumed rate of increase in health care costs for the plan is 12.0% and 12.5% for 1995 and 1994, respectively, and is assumed to decrease gradually to 6% in 2007 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rates by one percentage point would increase the accumulated postretirement benefit obligation for the plan by $41,672 and $38,000 as of December 31, 1995 and 1994, respectively, and the aggregate of the service and interest cost of the net periodic postretirement benefit cost by $6,750 and $6,000, respectively. The discount rate used in determining the accumulated postretirement benefit obligation was 8.0% for 1995 and 7.5% for 1994. NOTE 7 - INCOME TAXES The components of income tax expense (benefits) are as follows (In Thousands):
YEARS ENDED DECEMBER 31 1995 1994 1993

Current...................................... Deferred: Reserve for loan losses................. Depreciation............................ Pension................................. Deferred compensation................... Fee and servicing income................ Self insurance.......................... Other................................... Total...................................

---$1,570 (26) (3) 84 6 63 1 6 -----$1,701 ======

---$1,262 45 33 86 (35) 25 11 (5) -----$1,422 ======

---$1,279 (14) 60 55 (12) 21 (47) 7 -----$1,349 ======

A reconciliation of the federal statutory tax rates to the effective federal tax rate follows:
YEARS ENDED DECEMBER 31 1995 1994 1993 ---------------34.0% 34.0% 34.0% (10.4) (11.4) (11.5) 1.0 .9 .9 1.6 .7 .3 ----------26.2% 24.2% 23.7% ===== ==== ====

Federal statutory tax rates.................. Tax-exempt interest income................... Disallowed interest expense.................. Other........................................ Effective federal tax rates..................

The components of the net deferred tax asset follows (In Thousands):
DECEMBER 31 1995 1994 ------$(225) $ 105 653 627 (344) (348) (48) 37 150 155 112 175 --------298 751 0 0 --------$ 298 $ 751 ===== =====

Investment securities............................ Reserve for loan losses.......................... Depreciation..................................... Pension.......................................... Deferred compensation............................ Other............................................

Valuation allowance.............................. Total............................................

NOTE 8 - LEASES The Bank is obligated under several lease agreements which expire in 1995 through 2004. The leased property is for land and building use. Rental payments under these leases amounted to $75,570, $71,287 and $69,421 for the years ended December 31, 1995, 1994 and 1993, respectively. A summary of noncancelable lease commitments for the Bank follows (In Thousands):
YEAR ENDED DECEMBER 31 1996...................... 1997...................... 1998...................... 1999...................... 2000 and later............ LEASE COMMITMENTS $ 74 44 38 40 107 ---$303 ====

29

NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, the Bank is a party to financial instruments with off balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit, both of which involve elements of credit and interest rate risk not reflected in the Consolidated Balance Sheets. The Bank uses the same credit policies in making commitments and issuing standby letters of credit as it does for on balance sheet instruments. The Bank's exposure to credit loss in the event of nonperformance by the party to whom commitments and standby letters of credit have been extended is represented by the contractual amount of the financial instrument. 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 and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon or fully utilized, the total commitment amounts do not necessarily represent future cash requirements. Collateral, if deemed necessary, is determined on a case-by-case basis and is based on management's credit evaluation. Unfunded commitments to extend credit were $56,004,395 at December 31, 1995. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved is essentially the same as that involved in extending loan commitments to customers. Standby letters of credit were $1,482,410 at December 31, 1995. Lexington State Bank has an unused $12,022,403 line of credit from the Federal Home Loan Bank of Atlanta at December 31, 1995. Any borrowings under this line of credit would be secured by the Bank's stock in the Federal Home Loan Bank of Atlanta as well as one-to-four family mortgage loans. The Bank and Peoples together grant commercial, installment and mortgage loans to customers throughout their service area. The Bank and Peoples have a diversified loan portfolio with no specific concentration of credit risk. The Bank does have a concentration of credit risk by maintaining cash balances with other banks which are $10,293,884 in excess of Federal Deposit Insurance limits and has federal funds sold of $10,025,000. Neither Bancshares nor any of its subsidiaries is involved in any legal proceedings that would have a material adverse effect on their financial condition or results of operations. NOTE 10 - RELATED PARTY TRANSACTIONS The Bank had loans outstanding to executive officers and Directors and their affiliated companies of approximately $5,227,883 and $9,608,067 at December 31, 1995 and 1994, respectively. Such loans were made substantially on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers and do not involve more than the normal risk of collectibility. An analysis of the activity with respect to such aggregate loans to related parties is as follows (In Thousands):
Balance at January 1, 1995.................. New loans during the year................... Repayments during the year.................. Balance at December 31, 1995................ $ 9,608 1,630 (6,010) ------$ 5,228 =======

NOTE 11 - SUPPLEMENTARY INCOME STATEMENT INFORMATION The following is an analysis of material items in other operating income and other operating expenses as shown on the Consolidated Statements of Income (In Thousands):
YEARS ENDED DECEMBER 31 1995 1994 1993 --------Other operating income: Insurance commissions.......... $221 $256 $246

Trust income................... Credit cards................... Other operating expenses: Automated services............. Stationery, printing and supplies....................... FDIC assessment................

315 287 761 533 357

314 219 765 492 663

313 165 739 403 631

NOTE 12 - LSB BANCSHARES, INC. (PARENT COMPANY) The parent company's principal asset is its investment in its subsidiary, the Bank. The significant source of income of the parent company is dividends received from its subsidiary, the Bank. Certain regulatory requirements restrict the lending of funds by and between the parent company and the Bank and the amount of dividends which can be paid to the parent company. On December 31, 1995, the Bank had available retained earnings of $34,441,989 for the payment of dividends without obtaining prior regulatory approval. The parent company's condensed balance sheets as of December 31, 1995 and 1994, and the related condensed statements of income and cash flows for the years ended December 31, 1995, 1994 and 1993, are as follows (In Thousands): CONDENSED BALANCE SHEETS
DECEMBER 31 1995 1994 ------------Assets: Cash................................... Investment in wholly-owned subsidiary............................. Other assets........................... Total assets........................... $ 54 $ 152

47,518 637 ------$48,209 =======

44,458 506 ------$45,116 =======

Liabilities and shareholders' equity: Due to wholly-owned subsidiary......... Other liabilities...................... Shareholders' equity................... Total liabilities and shareholders' equity...................

$

76 335 47,798 -------

$

0 405 44,788 -------

$48,209 =======

$45,116 =======

30

CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31 1995 ---$2,060 -----174 164 -----338 -----1994 ---$1,906 -----110 147 -----257 -----1993 ---$2,059 -----108 121 -----229 ------

Dividends from subsidiary................. Professional fees......................... Other operating expense...................

Income before equity in earnings of subsidiary............... Equity in earnings

1,722

1,649

1,830

CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31 1995 ---$2,060 -----174 164 -----338 -----1994 ---$1,906 -----110 147 -----257 -----1993 ---$2,059 -----108 121 -----229 ------

Dividends from subsidiary................. Professional fees......................... Other operating expense...................

Income before equity in earnings of subsidiary............... Equity in earnings of subsidiary........................ Net income................................

1,722

1,649

1,830

3,060 -----$4,782 ======

2,813 -----$4,462 ======

2,526 -----$4,356 ======

CONDENSED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31 1995 1994 1993 ---------CASH FLOW FROM OPERATING ACTIVITIES: Net income................................ Adjustments to reconcile net income to net cash: Increase in investment in wholly-owned subsidiary.............. Net cash provided by operating activities................. CASH FLOW FROM INVESTING ACTIVITIES: (Increase) decrease in other assets....... CASH FLOW FROM FINANCING ACTIVITIES: Sale of capital stock..................... Dividends and fractional shares paid.......................... Increase (decrease) in other liabilities.......................... Net cash used by financing activities................. Increase (decrease) in cash............... Cash at beginning of years................ Cash at end of years......................

$ 4,872

$ 4,462

$ 4,356

(3,060) ------1,722 -------

(2,812) ------1,650 -------

$(2,526) ------1,830 -------

(131) -------

3 -------

(80) -------

289 (2,060) 82 ------(1,689) ------(98) 152 ------$ 54 =======

178 (1,888) 13 ------(1,697) ------(44) 196 ------$ 152 =======

157 (1,766) (41) ------(1,650) ------100 96 ------$ 196 =======

NOTE 13 - STOCK OPTIONS Bancshares has stock option plans for certain employees and directors and has reserved 317,807 shares of common stock to be available for options granted. Under the plans, options are granted at fair market value and are exercisable over a five to ten year period. The options granted, options exercisable and option prices have been adjusted for stock splits paid which have

occurred during the option period. Activity in the option plans during 1994 and 1995 is summarized as follows:
Options Outstanding ----------162,990 50,650 (20,264) ------193,376 45,650 (31,376) ------207,650 ======= Options Price Per Share ------------$ 7.68-15.20 19.50-20.00 8.83- 9.44 7.68-20.00 18.00-19.00 7.68-11.20 8.96-20.00

Balance at January 1, 1994.......... Granted............................. Exercised........................... Balance at December 31, 1994........ Granted............................. Exercised........................... Balance at December 31, 1995........

Of the options outstanding at December 31, 1995, options for 48,855 shares of common stock were exercisable at option prices ranging from $8.96 to $20.00 per share. NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards Number 107 "Disclosures about Fair Value of Financial Instruments" requires that Bancshares disclose estimated fair values for its financial instruments. Fair value estimates, methods and assumptions are set forth below for Bancshares' financial instruments: CASH AND SHORT-TERM INVESTMENTS For cash and short-term investments, including federal funds sold, the carrying amount is a reasonable estimate of fair value. INVESTMENT SECURITIES For securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. LOANS RECEIVABLE The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. DEPOSIT LIABILITIES The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at December 31, 1995. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The estimated fair values of Bancshares' financial instruments are as follows (In Thousands):
DECEMBER 31 1995 Carrying Amount -------Financial assets: Cash and short-term investments.......................... Investment securities................ Loans................................ Less reserve for loan losses............................... Estimated Fair Value ---------Carrying Amount -------1994 Estimated Fair Value ----------

$ 27,606 -------108,968 -------226,667 (2,730)

$ 27,606 -------108,257 -------224,503 -

$ 29,601 -------109,912 -------205,252 (2,641)

$ 29,601 -------107,706 -------172,098 -

losses............................... Net loans............................ Financial liabilities: Deposits............................. Securities sold under agreements to repurchase...........................

(2,730) -------223,937 323,289

-------224,503 323,167

(2,641) -------202,611 309,906

-------172,098 303,289

1,494

1,492

707

706

31
DECEMBER 31 1995 Carrying Amount -------Unrecognized financial instruments: Commitments to extend credit........................ Standby letters of credit............................... Estimated Fair Value ---------Carrying Amount -------1994 Estimated Fair Value ----------

$0 7

$0 7

$ 1 13

$ 1 13

(1) The amounts shown under "Carrying Amount" represent fees arising from these unrecognized financial instruments.

NOTE 15 - SUBSEQUENT EVENTS On January 9, 1996, LSB Bancshares, Inc. declared a five-for-four stock split to be paid on February 15, 1996 to shareholders of record on February 1, 1996. On January 9, 1996, Lexington State Bank approved a temporary amendment to the Lexington State Bank Employees' Pension Plan which would allow eligible employees to elect a special early retirement incentive benefit. This change had no impact on the 1995 financial statements. The cost of the change, which is unknown at this time, will be recorded in the first quarter of 1996. STATEMENT OF MANAGEMENT RESPONSIBILITY Management is responsible for the financial statements included in the annual report. The financial statements are prepared in accordance with generally accepted accounting principles. Other information in the annual report is consistent with the financial statements. In fulfilling its responsibility, management relies on a system of internal controls designed to safeguard Bancshares' assets from material loss or misuse. The system has been designed to ensure that transactions are properly authorized and recorded in Bancshares' financial records. Through its Audit Committee, which is comprised of outside directors, the Board of Directors fulfills its oversight responsibility for determining that the accounting policies employed by management are reasonable and that the system of internal controls is adequately reviewed and maintained. Bancshares' independent certified public accountants meet periodically with and have full and free access to the Committee, privately or with management, to discuss financial reporting matters. The Committee reports periodically to the full Board. LSB Bancshares, Inc. January 31, 1996 INDEPENDENT AUDITORS REPORT To The Board of Directors and Shareholders LSB Bancshares, Inc. Lexington, North Carolina We have audited the accompanying consolidated balance sheets of LSB Bancshares, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

DECEMBER 31 1995 Carrying Amount -------Unrecognized financial instruments: Commitments to extend credit........................ Standby letters of credit............................... Estimated Fair Value ---------Carrying Amount -------1994 Estimated Fair Value ----------

$0 7

$0 7

$ 1 13

$ 1 13

(1) The amounts shown under "Carrying Amount" represent fees arising from these unrecognized financial instruments.

NOTE 15 - SUBSEQUENT EVENTS On January 9, 1996, LSB Bancshares, Inc. declared a five-for-four stock split to be paid on February 15, 1996 to shareholders of record on February 1, 1996. On January 9, 1996, Lexington State Bank approved a temporary amendment to the Lexington State Bank Employees' Pension Plan which would allow eligible employees to elect a special early retirement incentive benefit. This change had no impact on the 1995 financial statements. The cost of the change, which is unknown at this time, will be recorded in the first quarter of 1996. STATEMENT OF MANAGEMENT RESPONSIBILITY Management is responsible for the financial statements included in the annual report. The financial statements are prepared in accordance with generally accepted accounting principles. Other information in the annual report is consistent with the financial statements. In fulfilling its responsibility, management relies on a system of internal controls designed to safeguard Bancshares' assets from material loss or misuse. The system has been designed to ensure that transactions are properly authorized and recorded in Bancshares' financial records. Through its Audit Committee, which is comprised of outside directors, the Board of Directors fulfills its oversight responsibility for determining that the accounting policies employed by management are reasonable and that the system of internal controls is adequately reviewed and maintained. Bancshares' independent certified public accountants meet periodically with and have full and free access to the Committee, privately or with management, to discuss financial reporting matters. The Committee reports periodically to the full Board. LSB Bancshares, Inc. January 31, 1996 INDEPENDENT AUDITORS REPORT To The Board of Directors and Shareholders LSB Bancshares, Inc. Lexington, North Carolina We have audited the accompanying consolidated balance sheets of LSB Bancshares, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 LSB Bancshares, Inc. and subsidiaries as of December 31, 1995 and 1994, and the

consolidated results of their operations, and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As described in Notes One and Three to the consolidated financial statements, during the year ended December 31, 1994, the Corporation changed its method of accounting for certain investment securities. Turlington and Company, L.L.P. Lexington, North Carolina January 31, 1996 32

STOCK AND DIVIDEND INFORMATION* LSB Bancshares, Inc.'s common stock is traded on the NASDAQ National Market under the symbol LXBK. The following table shows the high, low and closing sales prices reported on the NASDAQ National Market and cash dividends declared per share for the indicated periods.
Prices Cash ---------------------- Dividends 1995 High Low Close Declared ======================================================== First Quarter........ $20.00 $18.00 $18.50 .12 Second Quarter....... 20.00 18.00 19.50 .12 Third Quarter........ 20.50 18.25 19.50 .12 Fourth Quarter....... 21.00 18.50 19.75 .12 1994 ======================================================== First Quarter........ $16.50 15.00 21.50 .11 Second Quarter....... 21.50 16.50 21.50 .11 Third Quarter........ 21.50 19.00 19.88 .11 Fourth Quarter....... 20.75 17.50 18.00 .11

*Stock and dividend amounts have been adjusted for the five-for-four stock split paid March 31, 1994. 33

EXHIBIT 21 LSB Bancshares, Inc. P.O. Box 667, Lexington, North Carolina 27293-0867 SUBSIDIARIES
State of Incorporation ------------North Carolina

Name - ---Lexington State Bank (100% owned by LSB Bancshares, Inc.) LSB Financial Services, Inc. (100% owned by Lexington State Bank) Peoples Finance Company of Lexington, Inc. (100% owned by Lexington State Bank)

North Carolina

North Carolina

STOCK AND DIVIDEND INFORMATION* LSB Bancshares, Inc.'s common stock is traded on the NASDAQ National Market under the symbol LXBK. The following table shows the high, low and closing sales prices reported on the NASDAQ National Market and cash dividends declared per share for the indicated periods.
Prices Cash ---------------------- Dividends 1995 High Low Close Declared ======================================================== First Quarter........ $20.00 $18.00 $18.50 .12 Second Quarter....... 20.00 18.00 19.50 .12 Third Quarter........ 20.50 18.25 19.50 .12 Fourth Quarter....... 21.00 18.50 19.75 .12 1994 ======================================================== First Quarter........ $16.50 15.00 21.50 .11 Second Quarter....... 21.50 16.50 21.50 .11 Third Quarter........ 21.50 19.00 19.88 .11 Fourth Quarter....... 20.75 17.50 18.00 .11

*Stock and dividend amounts have been adjusted for the five-for-four stock split paid March 31, 1994. 33

EXHIBIT 21 LSB Bancshares, Inc. P.O. Box 667, Lexington, North Carolina 27293-0867 SUBSIDIARIES
State of Incorporation ------------North Carolina

Name - ---Lexington State Bank (100% owned by LSB Bancshares, Inc.) LSB Financial Services, Inc. (100% owned by Lexington State Bank) Peoples Finance Company of Lexington, Inc. (100% owned by Lexington State Bank)

North Carolina

North Carolina

EXHIBIT 23 Turlington and Company, L.L.P. 609 East Center Street Certified Public Accountants Post Office Box 1697 Lexington, North Carolina 27293-1697 Office 704-249-6856 Facsimile 704-246-8697 CONSENT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders LSB Bancshares, Inc. Lexington, North Carolina We consent to the incorporation by reference in this Annual Report (Form 10-K) of LSB Bancshares, Inc. and subsidiaries of our report dated January 31, 1996, included in the 1995 Annual Report to Shareholders of LSB

EXHIBIT 21 LSB Bancshares, Inc. P.O. Box 667, Lexington, North Carolina 27293-0867 SUBSIDIARIES
State of Incorporation ------------North Carolina

Name - ---Lexington State Bank (100% owned by LSB Bancshares, Inc.) LSB Financial Services, Inc. (100% owned by Lexington State Bank) Peoples Finance Company of Lexington, Inc. (100% owned by Lexington State Bank)

North Carolina

North Carolina

EXHIBIT 23 Turlington and Company, L.L.P. 609 East Center Street Certified Public Accountants Post Office Box 1697 Lexington, North Carolina 27293-1697 Office 704-249-6856 Facsimile 704-246-8697 CONSENT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders LSB Bancshares, Inc. Lexington, North Carolina We consent to the incorporation by reference in this Annual Report (Form 10-K) of LSB Bancshares, Inc. and subsidiaries of our report dated January 31, 1996, included in the 1995 Annual Report to Shareholders of LSB Bancshares, Inc. and subsidiaries. Our audit also included the financial statement schedules of LSB Bancshares, Inc. and subsidiaries listed in Item 14(a). These schedules are the responsibility of the Bank's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-54610) pertaining to the LSB Bancshares, Inc. and subsidiaries 1986 Employee Incentive Stock Option Plan of our report dated January 31, 1996, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) of LSB Bancshares, Inc. and subsidiaires. TURLINGTON AND COMPANY, L.L.P. Lexington, North Carolina January 31, 1996

ARTICLE 9

PERIOD TYPE

YEAR

EXHIBIT 23 Turlington and Company, L.L.P. 609 East Center Street Certified Public Accountants Post Office Box 1697 Lexington, North Carolina 27293-1697 Office 704-249-6856 Facsimile 704-246-8697 CONSENT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders LSB Bancshares, Inc. Lexington, North Carolina We consent to the incorporation by reference in this Annual Report (Form 10-K) of LSB Bancshares, Inc. and subsidiaries of our report dated January 31, 1996, included in the 1995 Annual Report to Shareholders of LSB Bancshares, Inc. and subsidiaries. Our audit also included the financial statement schedules of LSB Bancshares, Inc. and subsidiaries listed in Item 14(a). These schedules are the responsibility of the Bank's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-54610) pertaining to the LSB Bancshares, Inc. and subsidiaries 1986 Employee Incentive Stock Option Plan of our report dated January 31, 1996, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) of LSB Bancshares, Inc. and subsidiaires. TURLINGTON AND COMPANY, L.L.P. Lexington, North Carolina January 31, 1996

ARTICLE 9

PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END CASH INT BEARING DEPOSITS FED FUNDS SOLD TRADING ASSETS INVESTMENTS HELD FOR SALE INVESTMENTS CARRYING INVESTMENTS MARKET LOANS ALLOWANCE TOTAL ASSETS DEPOSITS SHORT TERM LIABILITIES OTHER LONG TERM PREFERRED MANDATORY PREFERRED COMMON OTHER SE TOTAL LIABILITIES AND EQUITY INTEREST LOAN INTEREST INVEST INTEREST OTHER INTEREST TOTAL INTEREST DEPOSIT INTEREST EXPENSE

YEAR DEC 31 1995 JAN 01 1995 DEC 31 1995 17,463 118 10,025 0 26,046 108,968 110,725 226,667 2,730 375,026 323,289 1,494 2,133 0 0 0 21,495 26,615 375,026 20,290 6,695 1,066 28,051 11,402 11,448

ARTICLE 9

PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END CASH INT BEARING DEPOSITS FED FUNDS SOLD TRADING ASSETS INVESTMENTS HELD FOR SALE INVESTMENTS CARRYING INVESTMENTS MARKET LOANS ALLOWANCE TOTAL ASSETS DEPOSITS SHORT TERM LIABILITIES OTHER LONG TERM PREFERRED MANDATORY PREFERRED COMMON OTHER SE TOTAL LIABILITIES AND EQUITY INTEREST LOAN INTEREST INVEST INTEREST OTHER INTEREST TOTAL INTEREST DEPOSIT INTEREST EXPENSE INTEREST INCOME NET LOAN LOSSES SECURITIES GAINS EXPENSE OTHER INCOME PRETAX INCOME PRE EXTRAORDINARY EXTRAORDINARY CHANGES NET INCOME EPS PRIMARY EPS DILUTED YIELD ACTUAL LOANS NON LOANS PAST LOANS TROUBLED LOANS PROBLEM ALLOWANCE OPEN CHARGE OFFS RECOVERIES ALLOWANCE CLOSE ALLOWANCE DOMESTIC ALLOWANCE FOREIGN ALLOWANCE UNALLOCATED

YEAR DEC 31 1995 JAN 01 1995 DEC 31 1995 17,463 118 10,025 0 26,046 108,968 110,725 226,667 2,730 375,026 323,289 1,494 2,133 0 0 0 21,495 26,615 375,026 20,290 6,695 1,066 28,051 11,402 11,448 16,603 252 0 13,112 6,483 6,483 0 0 4,782 1.11 0 8.50 1,040 206 289 2,275 2,641 263 100 2,730 2,730 0 0