FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1995
Commission File Number 0-11448
LSB BANCSHARES, INC.
One LSB Plaza
Lexington, North Carolina 27292
(704) 246-6500
Incorporated in the State of North Carolina
IRS Employer Identification No. 56-1348147
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Par Value $5.00 Per Share
LSB Bancshares, Inc., has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports) and has been subject to such filing requirements for the past 90 days.
The number of shares outstanding as of September 30, 1995 was 4,299,074.
LSB BANCSHARES, INC.
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1995 and December 31, 1994
Consolidated Statements of Income
Three Months Ended September 30, 1995 and 1994
Nine Months Ended September 30, 1995 and 1994.
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1995 and 1994.
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 1995 and 1994.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I. Financial Information
Item 1. Financial Statements
LSB Bancshares, Inc.
Consolidated Balance Sheets
(In Thousands) September 30 December 31
1995 1994
Assets
Cash and Due from Banks $ 16,156 $ 17,326
Federal Funds Sold 13,675 12,275
Investment Securities:
Held to Maturity, Market value $81,414 and $84,836 85,311 87,042
Available for Sale, at Market Value 21,570 22,870
Loans:
Commercial 67,147 60,910
Installment 49,166 48,127
Mortgage 102,727 96,215
Total Loans 219,040 205,252
Less, Reserve for Loan Losses (2,709) (2,641)
Net Loans 216,331 202,611
Premises and Equipment 8,844 9,007
Other Assets 6,075 5,961
Total Assets $ 367,962 $ 357,092
Liabilities
Deposits:
Demand $ 39,532 $ 40,230
Savings, N.O.W. and Money Market Accounts 161,172 160,503
Certificates of Deposit of less than $100,000 96,688 90,615
Certificates of Deposit of $100,000 or more 20,387 18,558
Total Deposits 317,779 309,906
Securities Sold Under Agreements to Repurchase 1,051 707
Other Liabilities 1,958 2,004
Total Liabilities 320,788 312,617
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 21,495 21,338
Paid-In Capital 11,256 11,123
Retained Earnings 14,217 12,327
Net Unrealized Loss on Securities Available for Sale 206 (313)
Total Shareholders' Equity 47,174 44,475
Total Liabilities and Shareholders' Equity $ 367,962 $ 357,092
LSB Bancshares, Inc.
Consolidated Statements of Income
(In Thousands Except Share Data) Three Months Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
Interest Income
Interest and Fees on Loans $ 5,241 $ 4,390 $ 14,971 $ 12,665
Interest on Investment Securities:
Taxable 1,178 1,047 3,589 3,125
Tax Exempt 478 490 1,452 1,453
Federal Funds Sold 333 281 827 647
Total Interest Income 7,230 6,208 20,839 17,890
Interest Expense
Deposits 2,978 2,239 8,479 6,083
Securities Sold Under Agreements to Repurchase 14 17 38 57
Total Interest Expense 2,992 2,256 8,517 6,140
Net Interest Income 4,238 3,952 12,322 11,750
Provision for Loan Losses 63 81 189 173
Net Interest Income After Provision
for Loan Losses 4,175 3,871 12,133 11,577
Noninterest Income
Service Charges on Deposit Accounts 442 466 1,331 1,345
Gains/Losses on Sales of Mortgages (2) (41) 6 (358)
Gains on Sales of Securities 0 0 0 49
Other Operating Income 364 260 958 831
Total Noninterest Income 804 685 2,295 1,867
Noninterest Expense
Personnel Expense 1,882 1,790 5,592 5,193
Occupancy Expense 191 193 590 568
Equipment Depreciation and Maintenance 169 154 491 458
Other Operating Expense 966 973 3,184 2,917
Total Noninterest Expense 3,208 3,110 9,857 9,136
Income Before Income Taxes 1,771 1,446 4,571 4,308
Income Taxes 463 342 1,136 1,021
Net Income $ 1,308 $ 1,104 $ 3,435 $ 3,287
Net Income Per Share $ 0.30 $ 0.26 $ 0.80 $ 0.77
Weighted Average Shares Outstanding 4,295,972 4,267,442 4,286,357 4,260,880
LSB Bancshares, Inc
Consolidated Statements of Cash Flows
(In Thousands) Nine Months Ended September 30
1995 1994
Cash Flow From Operating Activities
Net income $ 3,435 $ 3,287
Adjustments to reconcile net income to net cash:
Depreciation and amortization 525 514
Securities premium amortization and
discount accretion, net (244) (117)
(Increase) decrease in loans held for sale 699 (3,687)
Deferred income taxes 183 0
Income taxes payable (54) 17
(Increase) decrease in income earned
but not received (633) (228)
Increase (decrease)in interest accrued
but not paid 211 91
Provision for loan losses 189 173
Gain on sale of investment securities 0 (49)
Gain on sale of premise and equipment (1) (2)
Net cash provided by operating activities 4,310 (1)
Cash Flow From Investing Activites
Purchases of securities held to maturity (12,438) (25,006)
Proceeds from maturities of securities held to maturity 14,499 19,114
Proceeds from sales of securities held to maturity 0 4,026
Purchases of securities available for sale (7,983) (16,787)
Proceeds from maturities of securities available for sale 9,985 2,500
Proceeds from sales of securities available for sale 0 4,047
Net (increase) decrease in loans made to customers (14,608) (5,095)
Purchases of premises and equipment (400) (205)
Proceeds from sale of premises and equipment 39 12
Net (increase)decrease in Federal Funds sold (1,400) 6,400
(Increase) decrease in other assets 68 (121)
Net cash used by investing activities (12,238) (11,115)
Cash Flow From Financing Activities
Net increase (decrease) in demand deposits,
NOW, money market and savings accounts (30) (972)
Net increase (decrease) in time deposits 7,903 8,646
Net increase (decrease) in securities
sold under agreements to repurchase 344 (414)
Dividends paid (1,545) (1,419)
Net increase (decrease) in other liabilities (203) (210)
Common stock Issued 289 179
Net cash provided by financing activities 6,758 5,810
Increase (decrease) in cash (1,170) (5,306)
Cash at the beginning of the period 17,326 19,911
Cash at end of period $ 16,156 $ 14,605
Supplemental Disclosures Of Cash Flow Information
Cash paid during the years for:
Interest $ 8,306 $ 5,964
Income Taxes 1,010 1,040
Supplemental Disclosures
Transfer of loans to other real estate owned $ 354 $ 9
Unrealized losses on securities available for sale:
Increase (decrease) in securities available for sale $ 787 $ (202)
Increase (decrease) in deferred taxes 268 (69)
Increase (decrease) in shareholders' equity 519 (133)
LSB Bancshares, Inc.
Notes to Consolidated Finacial Statements
Nine Months Ended September 30, 1995 and 1994
Note 1. Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the nine-month period ended September 30, 1995 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 1995.
The accompanying unaudited Consolidated Financial Statements include the
accounts of LSB Bancshares, Inc. (the Corporation) and its wholly-owned
subsidiary Lexington State Bank (the Bank) and the Bank's wholly-owned
subsidiaries Peoples Finance Company of Lexington, Inc. and LSB Financial
Services, Inc.
For further information, refer to the Consolidated Financial Statements
and footnotes thereto included in the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1994.
Note 2. Investment Securities
Investment securities totaling $52,709,000 and $51,008,000 as of
September 30, 1995 and 1994, were pledged to secure public deposits as
required by law.
Note 3. Loans (Table In Thousands)
A summary of consolidated loans follows:
September 30
1995 1994
Commercial $ 67,147 $ 59,564
Installment 46,669 46,463
Mortgage 102,727 96,429
Credit Cards 2,497 2,201
Total $219,040 $204,657
As of January, 1995, Bancshares adopted Financial Accounting Standards
No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan" and
amended by SFAS 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures". SFAS 114 requires creditors to
establish a valuation allowance when it is probable that all the principal
and interest due under the contractual terms of a loan will not be
collected. Impairment under SFAS 114 is measured based on the
LSB Bancshares, Inc.
Notes to Consolidated Financial Statements (cont.)
Nine Months Ended September 30, 1995 and 1994
present value of expected future cash flows discounted at a loan's
effective interest rate, the observable market value of a loan or the fair
value of collateral if the loan is collateral dependent. SFAS 118 amends
SFAS 114 to allow a creditor to use existing methods for recognizing
interest income on an impaired loan.
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, residental mortgage and consumer
loans. Bancshares generally considers most loans 90 days or more past due
and all nonaccrual loans to be impaired. Interest income on impaired
loans is recognized consistent with Bancshares' income recognition
policies. For all impaired loans other than nonaccrual loans, interest
income is recorded on an accrual basis. Interest income on nonaccrual
loans is recognized on a cash basis. The adoption of SFAS 114 and SFAS
118 did not have a material effect on Bancshares' financial position or
results of operations and required no increase to the reserve for loan
and lease losses.
At September 30, 1995, the total investment in loans that are considered
impaired under SFAS 114 was $4,210,672 (of which $883,473 were nonaccrual
loans). A related valuation allowance of $457,232 was determined for the
total amount of impaired loans. The average recorded investment in
impaired loans for the quarter ended September 30, 1995, was
approximately $3,873,620.
Note 4. Reserve for Loan Losses
(In Thousands)
The following set forth the analysis of the consolidated reserve for loan
Nine Months Ended
September 30
1995 1994
Balances at beginning of periods $ 2,641 $ 2,775
Provision for loan losses 189 173
Recoveries of amounts previously
charged off 75 46
Loan losses (196) (343)
Balances at end of periods $ 2,709 $ 2,651
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Three Months Ended September 30, 1995 Compared to Three Months
Ended September 30, 1994
Net Interest Income
The primary source of earnings for the Corporation is net interest income,
which represents the dollar amount by which interest generated by earning
assets exceeds the cost of funds. Earning assets consist primarily of
loans and investment securities and cost of funds is the interest paid on
interest-bearing deposits.
Net interest income of $4,238,000 for the third quarter of 1995 was up
$286,000 or 7.2% compared to $3,952,000 for the third quarter of 1994.
The increasing interest rate environment of 1994, which began to slow
during the first quarter of 1995, reversed direction in the second quarter
of 1995 and began to flatten out in the third quarter. The prime interest
rate, which reached 9.00% in February of 1995, dropped 25 basis points to
8.75% on July 10, 1995. The prime interest rate is used as an interest
rate indicator by banks. Relatively stable interest rates, coupled with a
reasonable growth in the bank's loan portfolio, contributed to the gain in
net interest income experienced in the third quarter.
Noninterest Income and Expense
Noninterest income for the third quarter of 1995 was up $119,000 or 17.4%
compared to the third quarter of 1994. The gain is due in part to the
absence of losses incurred in the third quarter of 1994 related to
mortgages the Bank carried for sale to the Federal Home Loan Mortgage
Corporation and accounted for in accordance with the Financial Accounting
Standards Board Statement No. 65 (SFAS 65), "Accounting for Certain
Mortgage Banking Activities". Fee income from service charges on deposit
accounts for the third quarter of 1995 declined $24,000 or 5.2% compared
to the second quarter of 1994. The Bank announced an increase in service
charge fees in September 1995 to become effective November 1, 1995.
Management believes the adjustment in service charge fees will
significantly increase noninterest income. Other operating income for
the third quarter of 1995 was up $104,000 or 40.0% compared to the third
quarter of 1994. The majority of this increase is short-term lease income
from Other Real Estate property while awaiting final disposition.
Noninterest expense for the third quarter of 1995 increased $98,000 or
3.2% compared to the third quarter of 1994. The contributing factor to
this smaller than normal increase in noninterest expense was a reduction
in the Federal Deposit Insurance Corporation (FDIC) insurance premium and
a refund from the FDIC for overpayment of prior insurance premiums
paid. The FDIC announced in September of this year a premium reduction
in deposit insurance of $.19 per $100 of deposits for the most credit-
worthy banks. This reduction was effective June 1, 1995, which resulted
in a refund to the Bank of $192,000 for over payment of prior premiums.
The total benefit to third quarter earnings for the Bank was $220,000.
Personnel expense, comprised of salaries and fringe benefits, increased
$92,000 or 5.1%. Occupancy expense for the third quarter of 1995
decreased $2,000 or 1.0% compared to the third quarter of 1994.
Equipment depreciation and maintenance expense for the third quarter of
1995 increased $15,000 or 9.7% compared to the corresponding period of
1994.
Nine Months Ended September 30, 1995 Compared to Nine Months Ended
September 30, 1994
Net Interest Income
Net interest income for the first nine months of 1995 was up $572,000 or
4.9% compared to the first nine months of 1994. The gain in net interest
income is attributable to an increase in loans of $13.8 million or 6.7%
during the first nine months of 1995 over the corresponding period of 1994
and the relatively stable interest rate environment. Growth in the loan
portfolio came primarily from the commercial loan portfolio, which
increased $6.2 million or 10.2% and the mortgage loan portfolio, which
increased $6.5 million or 6.8%.
Noninterest Income and Expense
Noninterest income for the first nine months of 1995 was up $428,000 or
22.9% compared to the first nine months of 1994. As with the three-
month comparison, the improvement in noninterest income is due to the
absence of losses incurred in the third and prior quarters of 1994 related
to mortgages the Bank held-for-sale and, in accordance with SFAS 65,
marked to the lower of cost or market. The growth in noninterest income,
adjusted for the mortgage losses, was 3.1%. Fee income from service
charges on deposit accounts for the first nine months of 1995 was down
$14,000 or 1.0% compared to the first nine months of 1994. Other
operating income for the same period increased $127,000 or 15.3%. The
majority of the nine month increase in other operation income is the
result of short-term lease income from Other Real Estate property that is
awaiting final disposition.
Noninterest expense for the first nine months of 1995 was up $721,000 or
7.9% compared to the first nine months of 1994. Personnel expense
increased $399,000 or 7.7% compared to the first nine months of 1994.
Occupancy expense increased $22,000 or 3.9% during this period while
equipment depreciation and maintenance expense increased $33,000 or
7.2%. Other operating expense increased $267,000 or 9.2% the first nine
months of 1995 compared to the first nine months of 1994. The benefit
realized by the Bank in the third quarter of 1995 from the action taken by
the FDIC in reducing deposit insurance premiums and refunding premium
over-payments was offset by expenses related to Other Real Estate property
owned by the Bank.
Asset Quality and Provision for Loan Losses
The reserve for loan losses was $2,709,000 or 1.24% of loans outstanding
at September 30, 1995 compared to $2,641,000 or 1.29% of loans
outstanding at December 31, 1994 and $2,651,000 or 1.30% at September
30, 1994. Nonperforming loans totaled $3,121,000 or 1.42% of loans
outstanding at September 30, 1995 compared to $2,249,000 or 1.10% of
loans outstanding at September 30, 1994. Nonperforming loans include
nonaccrual loans, restructured loans, other real estate acquired through
foreclosed properties and accruing loans ninety days or more past due. At
September 30, 1995 the Bank had $372,000 in restructured loans, $883,000
in nonaccrual loans and $988,000 in other real estate. Accruing loans
past due 90 days or more were $878,000 at September 30, 1995 compared to
$1,293,000 at September 30, 1994. The accrual of interest generally
discontinues on any loan that becomes 90 days past due as to principal or
interest unless collection of both principal and interest is assured by
way of collateralization, guarantees or other security and the loan is
considered to be in the process of collection. At September 30, 1995,
the reserve for loan losses was .87 times the nonperforming loans,
compared to 1.26 times at December 31, 1994 and 1.18 times nonperforming
loans at September 30, 1994.
Loans classified for regulatory purposes as loss, doubtful, substandard or
special mention that have not been disclosed as nonperforming 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
Accrued taxes applicable to income for the nine-month period ended
September 30, 1995 was up $115,000 compared to the nine-month period
ended September 30, 1994. Pretax income for the first nine months of 1995
was $4,571,000, an increase of $263,000 or 6.1% compared to $4,308,000
for the first nine months of 1994. The increase in accrued taxes for the
first nine months of 1995 is attributable to the higher operating income.
Capital Resources and Shareholders' Equity
Regulatory guidelines require minimum levels of capital, based on a risk
weighting of each asset category and off-balance sheet contingencies. At
September 30, 1995, based on these measures, the Bank's ratio for Tier 1
capital was 21.17% compared to the regulatory minimum risk-based capital
ratio requirement of 4%. The Bank's Tier 2 capital ratio at this date was
22.39% compared to the regulatory requirement of 8%. Tier 1 or core
capital, as defined by federal bank regulators, equals common
shareholders' equity capital less goodwill and other disallowed intangible
assets. Tier 2 capital is the allowable portion, as defined by the federal
regulators, of the allowance for loan losses and 100% of Tier 1 capital.
Federal banking guidelines for risk-based capital limit the amount of the
allowance for loan losses allowable in Tier 2 or total capital to 1.25% of
risk-weighted assets.
Interest Rate Sensitivity and Liquidity
Asset/liability management is the process used to monitor exposure to
interest rate risk, balance sheet trends, pricing policies and the Bank's
liquidity position. The goals of asset/liability management are to ensure
profitability and performance, minimize risk, adhere to proper liquidity
and maintain sound capital.
Profitability and performance are affected by balance sheet composition
and interest rate movements. Market conditions, interest rate trends and
the economic environment are all evaluated in the asset/liability
management decision-making process. As core deposits are the primary
funding sources for assets, proportionate balances are maintained within
earning assets and interest-bearing liabilities.
To minimize risk of interest rate movements, the asset/liability
management process seeks to match maturities and repricing opportunities
of interest-sensitive assets and liabilities. This interest rate risk is
monitored by way of an interest sensitivity analysis, which is presented
in Table 1 as of September 30, 1995. On that date, the gap between
interest-sensitive assets and interest-sensitive liabilities was a
negative $61,563,000 or .75. Management believes that is an acceptable
level under current economic conditions.
Asset/liability management also addresses proper liquidity positioning and
sound capital. To a great extent, adequate liquidity and a strong capital
base are by-products of profitability and performance. The Bank requires
liquidity in order to fund current and future extensions of credit, meet
deposit withdrawals and otherwise sustain operations. As an integral part
of the asset/liability management process, the liquidity position is
closely monitored and evaluated regularly.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. None filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date November 9, 1995 LSB BANCSHARES. INC.
(Registrant)
Monty J. Oliver
Chief Financial Officer
Principal Accounting Officer