1
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 March 31, 2000
Commission File Number 0-11448
LSB BANCSHARES, INC.
One LSB Plaza
Lexington, North Carolina 27292
(336) 248-6500
Incorporated in the State of North Carolina
IRS Employer Identification No. 56-1348147
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Par Value $5.00 Per Share
LSB Bancshares, Inc., has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and has been subject to such filing requirements for the past 90
days.
The number of shares outstanding as of March 31, 2000 was 8,453,703.
2
LSB BANCSHARES, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2000 and 1999, December 31, 1999
Consolidated Statements of Income
Three Months Ended March 31, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended March 31, 2000 and 1999
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2000 and 1999
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LSB Bancshares, Inc.
Consolidated Balance Sheets
(In Thousands)
March 31 December 31 March 31
2000 1999 1999
--------- --------- ---------
ASSETS
Cash and Due From Banks $ 30,075 $ 33,971 $ 27,470
Interest-Bearing Bank Balances 5,326 14,527 12,820
Federal Funds Sold and Securities Purchased
Under Resale Agreements 43,925 27,270 49,730
Investment Securities:
Held to Maturity, MV $77,123, $66,884 and $59,782 78,943 68,551 58,937
Available for Sale, at Market Value 80,643 60,268 70,825
Loans 522,299 506,078 451,411
Less, Reserve for Loan Losses (5,369) (5,246) (5,174)
--------- --------- ---------
Net Loans 516,930 500,832 446,237
Premises and Equipment 11,134 11,215 11,494
Other Assets 10,855 10,194 9,680
--------- --------- ---------
TOTAL ASSETS $ 777,831 $ 726,828 $ 687,193
========= ========= =========
LIABILITIES
Deposits
Demand $ 74,734 $ 73,916 $ 68,961
Savings, NOW and Money Market Accounts 320,848 297,966 287,091
Certificates of Deposit of less than $100,000 182,317 172,453 162,421
Certificates of Deposit of $100,000 or more 54,702 61,087 59,771
--------- --------- ---------
Total Deposits 632,601 605,422 578,244
Securities Sold Under Agreements to Repurchase 26,125 1,299 5,293
Borrowings from the Federal Home Loan Bank 42,500 45,150 26,867
Other Liabilities 5,590 4,233 4,804
--------- --------- ---------
TOTAL LIABILITIES 706,816 656,104 615,208
--------- --------- ---------
SHAREHOLDERS' EQUITY
Preferred Stock, Par Value $.01 Per Share:
Authorized 10,000,000 shares; none issued 0 0 0
Common Stock, Par Value $5 Per Share:
Authorized 50,000,000 Shares; Issued 8,453,703 Shares
in 2000 and 8,442,918 and 8,618,374 shares in 1999 42,269 42,215 43,092
Paid-In Capital 10,080 10,151 13,318
Common Stock Acquired for
Directors' Deferred Plan (776) 0 0
Retained Earnings 20,173 18,953 15,298
Accumulated Other Comprehensive Income (731) (595) 277
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 71,015 70,724 71,985
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 777,831 $ 726,828 $ 687,193
========= ========= =========
Memorandum: Standby Letters of Credit $ 2,915 $ 3,129 $ 3,140
Notes to consolidated financial statements are an integral part hereof.
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LSB Bancshares, Inc.
Consolidated Statements of Income
(In Thousands except Share Data)
Three Months Ended
March 31
--------------------------
2000 1999
---------- ----------
Interest Income
Interest and Fees on Loans $ 11,525 $ 9,951
Interest on Investment Securities:
Taxable 1,428 1,414
Tax Exempt 462 480
Interest-Bearing Bank Balances 222 172
Federal Funds Sold and Securities
Purchased Under Resale Agreements 491 515
---------- ----------
Total Interest Income 14,128 12,532
---------- ----------
Interest Expense
Deposits 5,726 4,862
Securities Sold Under Agreements to Repurchase 78 45
Borrowings from the Federal Home Loan Bank 631 414
---------- ----------
Total Interest Expense 6,435 5,321
---------- ----------
Net Interest Income 7,693 7,211
Provision for Loan Losses 195 165
---------- ----------
Net Interest Income After Provision
for Loan Losses 7,498 7,046
---------- ----------
Noninterest Income
Service Charges on Deposit Accounts 845 741
Gains on Sales of Mortgages 19 110
Other Operating Income 1,098 880
---------- ----------
Total Noninterest Income 1,962 1,731
---------- ----------
Noninterest Expense
Personnel Expense 3,395 3,042
Occupancy Expense 326 318
Equipment Depreciation and Maintenance 351 305
Other Operating Expense 1,958 1,842
---------- ----------
Total Noninterest Expense 6,030 5,507
---------- ----------
Income Before Income Taxes 3,430 3,270
Income Taxes 1,027 1,012
---------- ----------
Net Income $ 2,403 $ 2,258
========== ==========
Earnings Per Share:
Basic $ 0.28 $ 0.26
Diluted 0.28 0.26
Weighted Average Shares Outstanding
Basic 8,456,601 8,644,244
Diluted 8,547,048 8,808,468
Cash Dividends Declared per Share $ 0.14 $ 0.14
Notes to consolidated financial statements are an integral part hereof.
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LSB Bancshares, Inc.
Consolidated Statements of
Changes in Shareholders' Equity
(In Thousands)
Accumulated
Common Other Total
Common Paid-In Stock Retained Comprehensive Shareholders'
Stock Capital Acquired Earnings Income Equity
----------------------------------------------------------------------------------------
Balances at December 31, 1998 $ 43,614 $ 14,903 $ 14,248 $ 665 $ 73,430
Net Income 2,258 2,258
Change in unrealized loss on
securities available for sale,
net of deferred income taxes (388) (388)
-----------------
Comprehensive income 1,870
Cash dividends declared on
common stock (1,208) (1,208)
Common stock issued for stock
options exercised 56 45 101
Common stock acquired (578) (1,630) (2,208)
----------------------------------------------------------------------------------------
Balances at March 31, 1999 $ 43,092 $ 13,318 $ 15,298 $ 277 $ 71,985
========================================================================================
Balances at December 31, 1999 $ 42,215 $ 10,151 $ 18,953 $ (595)$ 70,724
Net Income 2,403 2,403
Change in unrealized loss on
securities available for sale,
net of deferred income taxes (136) (136)
-----------------
Comprehensive income 2,267
Common Stock Acquired for
Directors' Deferred Plan $ (776) (776)
Cash dividends declared on
common stock (1,183) (1,183)
Common stock issued for stock
options exercised 132 84 216
Common stock acquired (78) (155) (234)
----------------------------------------------------------------------------------------
Balances at March 31, 2000 $ 42,269 $ 10,080 $ (776)$ 20,173 $ (731)$ 71,015
========================================================================================
Notes to consolidated financial statements are an integral part hereof.
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LSB Bancshares, Inc.
Consolidated Statements of Cash Flow
(In Thousands)
Three Months Ended March 31
---------------------------
2000 1999
-------- --------
Cash Flow from Operating Activities
Net Income $ 2,403 $ 2,258
Adjustments to reconcile net income to net cash:
Depreciation and amortization 336 321
Securities premium amortization and
discount accretion, net 1 9
(Increase) decrease in loans held for sale 1,285 (283)
Deferred income taxes (24) 172
Income taxes payable 1,054 845
(Increase) decrease in income earned but not received (799) (238)
Increase (decrease) in interest accrued but not paid 310 (7)
Provision for loan losses 195 165
Gain on sale of premise and equipment (1) (16)
-------- --------
Net Cash provided by operating activities 4,760 3,226
-------- --------
Cash Flow From Investing Activities
Purchases of securities held to maturity (11,134) (3,595)
Proceeds from maturities of securities held to maturity 750 4,563
Proceeds from sales of securities held to maturity 0 0
Purchases of securities available for sale (22,257) 0
Proceeds from maturities of securities available for sale 1,650 12,467
Proceeds from sales of securities available for sale 0 0
Net (increase) decrease in loans made to customers (17,578) (15,153)
Purchases of premises and equipment (256) (308)
Proceeds from sale of premises and equipment 3 36
Net (increase) decrease in federal funds sold
and securities purchased under resale agreements (16,655) (9,135)
(Increase) decrease in other assets 224 (446)
-------- --------
Net cash used by investing activities (65,253) (11,571)
-------- --------
Cash Flow from Financing Activities
Net increase (decrease) in demand deposits,
NOW, money market and savings accounts 23,700 (3,130)
Net increase (decrease) in time deposits 3,479 14,048
Net increase (decrease) in securities
sold under agreements to repurchase 24,826 (244)
Proceeds from issuance of long term debt 0 10,000
Payments on long term debt (2,650) (11,975)
Dividends Paid (1,184) (1,207)
Net increase (decrease) in other liabilities 18 96
Proceeds from issuance of common stock 216 101
Common stock repurchased (233) (2,208)
Common stock acquired for Directors' Deferred Plan (776)
-------- --------
Net cash provided by financing activities 47,396 5,481
-------- --------
Increase (decrease) in cash and cash equivalents (13,097) (2,864)
Cash and cash equivalents at the beginning of the period 48,498 43,154
-------- --------
Cash and cash equivalents at the end of the period $ 35,401 $ 40,290
======== ========
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Supplemental Disclosures of Cash Flow Information
Cash paid during the years for:
Interest $ 6,125 $ 5,328
Income Taxes (3) (2)
Supplemental Disclosures of Noncash Transactions
Transfer of loans to other real estate owned $ 0 $ 160
Unrealized losses on securities available for sale:
Change in securities available for sale (223) (637)
Change in deferred income taxes 87 248
Change in shareholders' equity (136) (389)
Notes to consolidated financial statements are an integral part hereof.
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LSB Bancshares, Inc.
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2000 and 1999
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 three-month period ended March 31,
2000 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2000.
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, 1999.
NOTE 2. INVESTMENT SECURITIES
The valuations of investment securities as of March 31, 2000 and
December 31, 1999 were as follows (in thousands):
March 31, 2000
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Securities held to maturity:
U.S. Treasury and other U.S.
government agency obligations $43,886 $ 2 $ 1,479 $42,409
State, county and municipal securities 35,057 354 697 34,714
------- ------- ------- -------
Total securities held to maturity $78,943 $ 356 $ 2,176 $77,123
======= ======= ======= =======
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Securities available for sale:
U.S. Treasury and other U.S.
government agency obligations $78,510 $ 6 $ 1,204 $77,312
State, county and municipal securities 853 1 0 854
Federal Home Loan Bank stock 2,477 0 0 2,477
------- ------- ------- -------
Total securities available for sale $81,840 $ 7 $ 1,204 $80,643
======= ======= ======= =======
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December 31, 1999
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Securities held to maturity:
U.S. Treasury and other U.S.
government agency obligations $34,556 $ 4 $ 1,306 $33,254
State, county and municipal securities 33,995 429 794 33,630
------- ------- ------- -------
Total securities held to maturity $68,551 $ 433 $ 2,100 $66,884
======= ======= ======= =======
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Securities available for sale:
U.S. Treasury and other U.S.
government agency obligations $58,132 $ 27 $ 1,001 $57,158
State, county and municipal securities 853 3 4 852
Federal Home Loan Bank stock 2,258 0 0 2,258
------- ------- ------- -------
Total securities available for sale $61,243 $ 30 $ 1,005 $60,268
======= ======= ======= =======
No investment securities were sold for the period ended March 31, 2000.
Investment securities with amortized cost of $110,643,567 and
$112,938,193, as of March 31, 2000 and December 31, 1999, respectively,
were pledged to secure public deposits and for other purposes.
NOTE 3. LOANS (Table in thousands)
A summary of consolidated loans follows:
March 31
2000 1999
-------- --------
Commercial, financial, & agricultural $159,013 $144,846
Real estate - construction 30,256 20,133
Real estate - mortgage 256,941 210,260
Installment loans to individuals 64,888 61,642
Lease financing 775 932
Other 10,426 13,598
-------- --------
Total loans, net of unearned income $522,299 $451,411
======== ========
As of January 1, 1995, the Corporation adopted SFAS 114 as amended by
SFAS 118 for impaired loans. The statements subject all loans to
impairment recognition except for large groups of smaller-balance
homogeneous loans such as credit card, residential mortgage and
consumer loans. The Corporation generally considers loans to be
impaired when future payments of principal and interest are in doubt.
Included in impaired loans are loans that are consistently past due,
loans 90 days or more past due and nonaccrual loans. Interest income on
impaired loans is recognized consistent with the Corporation's income
recognition policy of daily accrual of income until the loan is
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determined to be uncollectible and placed in a nonaccrual status. For
all impaired loans other than nonaccrual loans, interest income
totaling $95,294 for the period was recorded on an accrual basis.
Interest income on nonaccrual loans is recognized on a cash basis. Cash
totaling $4,906 has been collected on these loans since being placed in
a nonaccrual status. Interest income on nonaccrual loans that would
have been recorded in accordance with the original terms of the notes
was $53,092. The adoption of SFAS 114 and SFAS 118 did not have a
material effect on the Corporation's financial position or results of
operations and required no increase to the reserve for loan and lease
losses.
At March 31, 2000, the total investment in loans that are considered
impaired under SFAS 14 was $6,247,000, including nonaccrual loans of
$390,000. A related valuation allowance of $891,000 was determined for
the total amount of impaired loans. The average recorded investment in
impaired loans for the quarter ended March 31, 2000 was approximately
$5,148,000.
At March 31, 2000, loans totaling $9,905,000 were held for sale stated
at the lower of cost or market on an individual loan basis.
NOTE 4. RESERVE FOR LOAN LOSSES (in thousands)
The following sets forth the analysis of the consolidated reserve for
loan losses:
March 31
2000 1999
------- -------
Balances at beginning of periods $ 5,246 $ 5,048
Provision for loan losses 195 165
Recoveries of amounts previously
charged off 45 80
Loan losses (117) (119)
------- -------
Balances at end of periods $ 5,369 $ 5,174
======= =======
NOTE 5. OTHER ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133 ("SFAS 133"), "Accounting for Derivative Instruments
and Hedging Activities". SFAS 133 establishes accounting and reporting
standards for derivative instruments, including derivative instruments
that are embedded in other contracts, and for hedging activities. SFAS
133 requires that all derivatives be recognized as either assets or
liabilities on the balance sheet at their fair value. Requirements of
SFAS 133 could affect the amount of an institution's recorded assets,
liabilities, equity as well as its regulatory capital levels. As
defined under SFAS 133, derivatives carry a designation of (a) no hedge
designation, (b) fair value hedge, (c) cash flow hedge, or (d) foreign
currency hedge. SFAS 133 was originally effective for fiscal periods,
both years and quarters, beginning after June 15, 1999, but has now
been extended by SFAS 137 to June 15, 2000. Bancshares does not
presently have any derivative instruments within the definition of SFAS
133 and as such, does not anticipate any material effect on its
financial position and operating results from adoption of the standard.
Statement No. 134 ("SFAS 134"), "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise" was issued by FASB effective for
the first fiscal quarter beginning after December 15, 1998. SFAS 134
amends Statement 65 ("SFAS 65"), "Accounting for Certain Mortgage
Banking Activities" to require entities engaged in mortgage banking
activities to classify mortgage-backed securities resulting from the
securitization of mortgage loans held for sale, based on its ability
and intent to sell or hold those investments. Classification of any
retained mortgage-backed securities would be in accordance with the
provisions of Statement 115 ("SFAS 115") "Accounting for Certain
Investments in Debt and Equity Securities". Any retained
mortgage-backed securities that an entity commits to sell before or
during the securitization process must be classified as trading.
Bancshares does not presently securitize any of its mortgage loans
within the
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definition of SFAS 134 and, as such, does not anticipate any material
effect on its financial position and operating results from adoption of
the standard.
Year 2000 Issue
In May 1997, the Federal Financial Institutions Examination Council
(FFIEC) issued an Interagency Statement "Year 2000 Project Management
Awareness" to emphasize the critical issues that needed to be addressed
to implement an effective Year 2000 project management plan. The FFIEC
Statement identified five phases of the Year 2000 project management
process. In the awareness phase, the corporation was to define the
issues and potential challenges associated with the Year 2000 problem.
In the assessment phase, an evaluation was to be conducted to determine
the size and complexity of ensuring Year 2000 readiness. During the
renovation phase, required system upgrades were to be made. In the
validation phase, testing of all computer systems and software would be
done to meet the corporation's Y2K compatibility standards. The final
step established was the implementation phase, which incorporated Year
2000 ready systems into day-to-day operation.
The "Year 2000 problem" resulted from the inability of computer systems
to identify the change from the years of the 1900's to the year 2000.
This came about because most computer hardware and software systems had
historically used only two digits to identify the applicable year.
Hence, as the turn of the century approached, the systems would be
unable to distinguish between 1900 and 2000 resulting in possible
errors and system failures causing wide spread disruption to business
operations.
Bancshares acknowledged the importance of this issue and established a
Year 2000 Project Team (Y2K) to ensure Year 2000 compliance.
Bancshares' Year 2000 Plan followed the guidelines outlined by the
Federal Financial Institutions Examination Council. For the millennium
project, a Y2K Team was established consisting of senior officers
within the company's operations area, information systems area, audit
department, corporate area and senior management. Senior management,
with Board of Directors' approval and oversight, established the
commitment of resources and prioritization.
Bancshares completed the Y2K conversion in 1999 with no significant
systems problems relative to its critical systems, including branches,
subsidiaries and operations. Since the beginning of the year 2000,
Bancshares' customers have had normal and complete access to their
accounts through the branch offices, ATM's and telebanking. Bancshares
experienced no disruptions resulting from third party relationships,
vendors or major customers. In order to ensure that business remained
normal, Bancshares maintained the status of its Y2K Team through the
first quarter of 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The discussion presented herein is intended to provide an overview of
the changes in financial condition and results of operations for LSB
Bancshares, Inc, ("Bancshares") and its wholly owned subsidiary,
Lexington State Bank ("LSB") for the three months ended March 31, 2000
and 1999. 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 complement the unaudited financial
statements, footnotes and supplemental financial data in this Form 10Q,
and should be read in conjunction therewith.
This report contains certain forward-looking statements related to
anticipated future operating and financial performance, and other
similar statements of expectations. These forward-looking statements
are based on estimates, beliefs and assumptions made by management and
are not guarantees of future performance. Actual results may differ
from those expressed or implied as the result of various factors, among
which are movements in interest rates, competitive product or pricing
pressures, changes in economic conditions, and changes in regulatory
policies.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Net Interest Income
The primary source of earnings for the Corporation is net interest
income, which represents the dollar amount by which interest generated
from earning assets exceeds
12
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 and borrowed funds.
Total interest income of $14,128,000 for the first quarter of 2000 was
up $1,596,000 or 12.7% compared to $12,532,000 for the first quarter of
1999. Total interest expense of $6,435,000 for the first quarter of
2000 was up $1,114,000 or 20.9% compared to $5,321,000 for the first
quarter of 1999. These results produced net interest income of
$7,693,000 for the first quarter of 2000, for a gain of $482,000 or
6.7% compared to $7,211,000 for the first quarter of 1999. The gain in
net interest income for the first quarter of 1999 was primarily the
result of strong loan demand at the beginning of the year. As the first
quarter of 2000 ended, loan demand began to slow following two Federal
Reserve interest rate increases. The three prime interest rate
increases during the second half of 1999 primarily affected loan
yields, while the two increases in 2000 had more of an affect on loan
demand. Loans constitute the largest group of earning assets and
therefore generate the majority of Bancshares' interest income. For the
period ended March 31, 2000, Bancshares' loan portfolio increased
$16,221,000 or 3.2% over December 31, 1999 and $70,888,000 or 15.7%
over March 31, 1999. For the period ended March 31, 2000, deposits
increased $27,179,000 or 4.5% over December 31, 1999 and $54,357,000 or
9.4% over March 31, 1999.
Noninterest Income and Expense
Noninterest income for the first quarter of 2000 was up $231,000 or
13.3% compared to the first quarter of 1999. Fee income related to
service charges on deposit accounts for the first quarter of 2000
increased $104,000 or 14.0% compared to the first quarter of 1999.
Gains on the sale of mortgage loans for the first quarter of 2000 were
$19,000 compared to $110,000 for the first quarter of 1999. Fewer
mortgages were sold during the first quarter of 2000 as mortgage
activity slowed as the result of recent interest rate increases. Other
operating income for the first quarter of 2000 increased $218,000 or
24.8% compared to the first quarter of 1999. Fee income from the Bank's
bankcard division, produced an increase of $89,000 or 34.3% for the
first quarter of 2000 compared to the first quarter of 1999.
Commissions generated by the financial services' subsidiary increased
$164,000 or 153.4% the first quarter of 2000 compared to the first
quarter of 1999 as the result of staff restructuring. The bank's
financial services subsidiary generates commission income from the sale
of mutual funds, annuities and equities.
Noninterest expense for the first quarter of 2000 increased $523,000 or
9.5% compared to the first quarter of 1999. Personnel expense for the
first quarter of 2000, comprised of salaries and fringe benefits,
increased $353,000 or 11.6% over the first quarter of 1999. The
increase for the first quarter of 2000 in occupancy expense was $8,000
or 2.5% compared to the first quarter of 1999. Equipment depreciation
and maintenance expense, on the other hand, increased $46,000 or 15.1%
for the period being compared. Other operating expense for the first
quarter of 2000 increased $116,000 or 6.3% compared to the first
quarter of 1999. Other expenses for the financial services' subsidiary
for the first quarter of 2000 increased $17,000 or 111.6% compared to
the first quarter of 1999. These expenses were more than offset however
by income generated. Postage expense for the first quarter of 2000
increased $22,000 or 16.1% compared to the first quarter of 1999 as the
result of a one-time promotion. Bankcard expense for the first quarter
of 2000 increased $19,000 or 8.7% compared to the first quarter of
1999.
Asset Quality and Provision for Loan Losses
The reserve for loan losses was $5,369,000 or 1.03% of loans
outstanding at March 31, 2000 compared to $5,246,000 or 1.04% of loans
outstanding at December 31, 1999 and $5,174,000 or 1.15% at March 31,
1999. Non-performing loans totaled $2,151,000 or .41% of loans
outstanding at March 31, 2000 compared to $2,090,000 or .41% of loans
outstanding at December 31, 1999, and $2,045,000 or .45% of loans
outstanding at March 31, 1999. Nonperforming loans include nonaccrual
loans, restructured loans, other real estate acquired through
foreclosed properties and accruing loans ninety days or more past due.
As of March 31, 2000, Bancshares had $132,000 in restructured loans and
$902,000 in other real estate and $454,000 in nonaccrual loans.
Accruing loans past due 90 days or more were $663,000 at March 31, 2000
compared to $821,000 at December 31, 1999 and $861,000 at March 31,
1999. 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 March 31, 2000, the reserve for loan losses
was 2.50 times non-performing loans, compared to 2.51 times at December
31, 1999 and 2.53 times non-performing loans at March 31, 1999.
13
Responsibility for market risk management resides with the
Asset/Liability Management Committee ("ALCO"). The ALCO Committee
monitors market conditions, interest rate trends and the economic
environment in its decision-making process. Based upon its view of
existing and expected market conditions, balance sheet strategies are
adopted to optimize net interest income while minimizing the risk
associated with unanticipated changes in interest rates.
The provision for loan and lease losses at March 31, 2000 was $195,000
compared to $165,000 in 1999. Net charge-offs amounted to $72,000, or
.06% of average loans outstanding, on an annualized basis, during the
first three months of 2000. The quality of the loan portfolio continues
to be of the highest level, which is reflected in the loan loss
provision expensed.
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.
In the opinion of management, all loans where serious doubts exist as
to the ability of borrowers to comply with the present repayment terms
have been included in the schedule presented.
3/31/00 12/31/99 3/31/99
------- -------- -------
RESERVE FOR LOAN LOSSES
Beginning Balance $ 5,246 $ 5,048 $ 5,048
Provision for loan losses 195 780 165
Net (charge-off) recoveries (72) (582) (39)
------- ------- -------
Ending balance 5,369 5,246 5,174
RISK ASSETS
Nonaccrual loans $ 454 $ 96 $ 0
Foreclosed real estate 902 1,036 1,026
Restructured loans 132 137 158
Loans 90 days or more past due
and still accruing 663 821 861
------- ------- -------
Total risk assets 2,151 2,090 2,045
ASSET QUALITY RATIOS
Nonaccrual loans as a percentage of total loans 0.09% 0.02% 0.00%
Nonperforming assets as a percentage of:
Total assets 0.28 0.29 0.30
Loans plus foreclosed property 0.41 0.41 0.45
Net charge-offs as a percentage of average loans 0.06 X 0.12 0.08 X
Reserve for loan losses as a percentage of loans 1.03 1.04 1.15
Ratio of reserve for loan losses to:
Net charge-offs 18.64 X 9.01 33.17 X
Nonaccrual loans 11.83 54.65 N/M
*N/M Denotes Non Meaningful
X Denotes Annualized
14
Income Taxes
Accrued taxes applicable to income for the three-month period ended
March 31, 2000 were $1,027,000 compared to $1,012,000 for the
three-month period ended March 31, 1999. Pretax income for the first
three months of 2000 of $3,430,000 was $160,000 above the $3,270,000
for the first three months of 1999. The change in accrued taxes for the
periods being compared is primarily attributable to this difference in
pretax 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.
Regulatory agencies divide capital into Tier 1 or core capital and
total capital. Tier 1 capital, as defined by regulatory agencies,
consists primarily of common shareholders' equity less goodwill and
certain other intangible assets. Total capital consists of Tier 1
capital plus the allowable portion of the reserve for loan losses and
certain long-term debt. At March 31, 2000, based on these measures,
Bancshares' had a Tier 1 capital ratio of 14.58% compared to the
regulatory requirement of 4% and total capital ratio of 15.67% compared
to an 8% regulatory requirement.
Additional regulatory capital measures include the Tier 1 leverage
ratio. The Tier 1 leverage ratio is defined as Tier 1 capital divided
by average total assets less goodwill and certain other intangibles and
has a regulatory minimum of 3.0%, with most institutions required to
maintain a ratio of at least 4.0% to 5.0%, depending primarily upon
risk profiles. At March 31, 2000, Bancshares' Tier 1 leverage ratio was
9.65%.
In November of 1998, the Board of Directors of Bancshares ("Board")
approved a stock repurchase program for up to 300,000 shares of its
common stock, or approximately 3.4% of its outstanding shares. The
Board authorized the repurchase of shares of common stock in the open
market or privately negotiated transactions on a time-to-time and
ongoing basis, depending upon market conditions and subject to
compliance with all applicable securities laws and regulations. The
repurchase plan is intended to help Bancshares achieve its goal of
building shareholder value and maintaining appropriate capital levels.
On August 11, 1999, Bancshares approved an extension of its stock
repurchase program for up to an additional 300,000 shares of its common
stock, or approximately 3.5% of its then outstanding shares. During
1999, 361,498 shares had been repurchased and retired at an average
cost of $18.99 per share. During the first quarter of 2000, Bancshares
purchased 15,700 shares under the plan at an average cost of $14.86.
Market Risk Management
Bancshares' market risk arises primarily from the interest rate risk
inherent in its lending and deposit-taking activities. The objectives
of market risk management are to ensure long-range profitability
performance and minimize risk, adhere to proper liquidity and maintain
sound capital. To meet these goals, the Asset/Liability Management
Committee ("ALCO") monitors the exposure to interest rate risk, balance
sheet trends, pricing policies and liquidity position. The objectives
are to achieve relatively stable net interest margins and assure
liquidity through coordinating the volumes, maturities or repricing
opportunities of earning assets, deposits and borrowed funds. This is
accomplished through strategic pricing of asset and liability accounts.
As a result of this management, appropriate maturities and/or repricing
opportunities are developed to produce consistent earnings during
changing interest rate environments.
Based upon its view of existing and expected market conditions, ALCO
adopts balance sheet strategies intended to optimize net interest
income to the extent possible while minimizing the risk associated with
unanticipated changes in interest rates. Core deposits have
historically been the primary funding sources for asset growth.
Correspondent relationships have also been maintained with several
large banks in order to have access to federal funds purchases when
needed. The Bank also has available lines of credit maintained with the
Federal Home Loan Bank (the "FHLB") which can be used for funding
and/or liquidity needs. The Bank has also executed a retail CD
brokerage agreement, which provides an additional source for liquidity
or funding needs.
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. On March
31, 2000 the gap between interest-sensitive assets and
interest-sensitive liabilities was a negative $226,536,000 or .59.
Under current economic conditions, management believes that is an
acceptable level.
15
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. Details of cash
flows for the three-months ended March 31, 2000 and 1999 are provided
in the Consolidated Statements of Cash Flow.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk reflects the risk of economic loss resulting from adverse
changes in market price and interest rates. This risk of loss can be
reflected in diminished current market values and/or reduced potential
net interest income in future periods.
Bancshares' market risk arises primarily from the interest rate risk
inherent in its lending and deposit-taking activities. The structure of
Bancshares' loan and deposit portfolios is such that a significant
decline in interest rates may adversely impact net market values and
net interest income. Bancshares' does not maintain a trading account
nor is it subject to currency exchange risk or commodity price risk.
Responsibility for monitoring interest rate risk rests with the
Asset/Liability Management Committee ("ALCO") which is appointed by the
Board of Directors. ALCO meets on a regular basis to review interest
rate risk exposure and liquidity positions. Balance sheet management
and funding strategies are reviewed to ensure that any potential impact
on earnings and liquidity, resulting from a fluctuation in interest
rates is within acceptable standards.
Management believes that there have been no significant changes in
market risk as disclosed in Bancshares' quarterly report on Form 10-Q
for the period ended March 31, 2000. Management believes that the goal
of avoiding material negative changes in net income as a result of
changing interest rates has been accomplished.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on April 19, 2000.
Proxies were solicited in connection with the Annual Meeting in
accordance with Regulation 14 under the Securities Exchange Act of
1934, as amended, pursuant to a Proxy Statement dated March 20, 2000,
in the form as filed by the Company with the Securities and Exchange
Commission on March 20, 2000.
At the Annual Meeting, the shareholders of the Company (i) elected five
members to the Company's Board of Directors, (ii) ratified the
appointment of Turlington and Company LLP to conduct the independent
audit for the year 2000 and (iii) voted against a shareholder proposal
relating to minimum share ownership requirements for members of the
Board of Directors of the Company, each as more fully described in the
Proxy Statement. Of the 8,463,511 shares of the Company's common stock
represented and entitled to vote at the Annual Meeting, the number of
shares cast for, against and withheld, and the number of abstentions
and broker non-votes, as to each proposal are set forth below:
16
1. Election of Directors.
For (Proxy) Withheld
----------- --------
Robert F. Lowe 5,710,387 240,124
Roberts E. Timberlake 5,706,565 243,946
Lloyd G. Walter, Jr. 5,801,139 149,372
Julius S. Young, Jr. 5,773,011 177,500
Sue H. Hunter 5,752,202 198,309
2. Ratification of appointment of Turlington and Company LLP, CPA's, to
conduct the independent audit for the year 2000.
For Against Abstaining
--- ------- ----------
5,871,932 49,325 29,254
3. Shareholder proposal by W. Robert Koontz relating to minimum share
ownership requirements for Directors.
For Against Abstaining Non-Vote
--- ------- ---------- --------
902,995 3,654,864 334,003 1,058,648
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
During the first quarter of 2000, the Corporation filed the
following:
(27) Financial Data Schedule (for SEC use only)
B. Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during
the three months ended March 31, 2000.
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 May 5, 2000
LSB BANCSHARES, INC.
--------------------
(Registrant)
By: /s/ Monty J. Oliver
-------------------
Monty J. Oliver
Chief Financial Officer
Principal Accounting Officer