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 June 30, 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 June 30, 2000 was 8,467,961.
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LSB BANCSHARES, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2000 and 1999, December 31, 1999
Consolidated Statements of Income
Three Months Ended June 30, 2000 and 1999
Six Months Ended June 30, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity
Six Months Ended June 30, 2000 and 1999
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999
Notes to Consolidated Financial Statements
Six Months Ended June 30, 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 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
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 Banchshares, Inc.
Consolidated Balance Sheets (Unaudited) (Unaudited)
(In Thousands) June 30 December 31 June 30
2000 1999 1999
-------- -------- --------
ASSETS
Cash and Due From Banks $ 35,397 $ 33,971 $ 33,034
Interest-Bearing Bank Balances 4,844 14,527 11,966
Federal Funds Sold and Securities Purchased
Under Resale Agreements 24,075 27,270 30,460
Investment Securities:
Held to Maturity, MV $73,141, $66,884 and $63,904 74,834 68,551 64,584
Available for Sale, at Market Value 76,770 60,268 67,104
Loans 542,264 506,078 475,931
Less, Reserve for Loan Losses (5,503) (5,246) (5,277)
-------- -------- --------
Net Loans 536,761 500,832 470,654
Premises and Equipment 11,478 11,215 11,370
Other Assets 10,958 10,194 9,932
-------- -------- --------
TOTAL ASSETS $775,117 $726,828 $699,104
======== ======== ========
LIABILITIES
Deposits
Demand $ 75,889 $ 73,916 $ 70,259
Savings, NOW and Money Market Accounts 307,211 297,966 292,873
Certificates of Deposit of less than $100,000 190,929 172,453 161,594
Certificates of Deposit of $100,000 or more 56,208 61,087 59,899
-------- -------- --------
Total Deposits 630,237 605,422 584,625
Securities Sold Under Agreements to Repurchase 25,821 1,299 4,667
Borrowings from the Federal Home Loan Bank 42,500 45,150 36,033
Other Liabilities 4,204 4,233 3,478
-------- -------- --------
TOTAL LIABILITIES 702,762 656,104 628,803
-------- -------- --------
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 8,467,961 Shares
in 2000 and 8,442,918 and 8,511,720 shares in 1999 42,340 42,215 42,559
Paid-In Capital 10,125 10,151 11,482
Common Stock Acquired for
Directors' Deferred Plan (783) 0 0
Retained Earnings 21,318 18,953 16,582
Accumulated Other Comprehensive Income (645) (595) (322)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 72,355 70,724 70,301
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $775,117 $726,828 $699,104
======== ======== ========
Memorandum: Standby Letters of Credit $ 3,399 $ 3,129 $ 3,155
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) (Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
INTEREST INCOME
Interest and Fees on Loans $ 12,224 $ 10,547 $ 23,749 $ 20,498
Interest on Investment Securities:
Taxable 1,776 1,328 3,204 2,742
Tax Exempt 447 471 909 951
Interest-Bearing Bank Balances 127 183 349 355
Federal Funds Sold and Securities
Purchased Under Resale Agreements 483 464 974 979
---------- ---------- ---------- ----------
Total Interest Income 15,057 12,993 29,185 25,525
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 6,014 4,936 11,740 9,798
Securities Sold Under Agreements to Repurchase 377 41 455 86
Borrowings from the Federal Home Loan Bank 651 445 1,282 859
---------- ---------- ---------- ----------
Total Interest Expense 7,042 5,422 13,477 10,743
---------- ---------- ---------- ----------
NET INTEREST INCOME 8,015 7,571 15,708 14,782
Provision for Loan Losses 385 235 580 400
---------- ---------- ---------- ----------
Net Interest Income After Provision
for Loan Losses 7,630 7,336 15,128 14,382
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service Charges on Deposit Accounts 890 766 1,735 1,507
Gains on Sales of Mortgages 25 96 44 206
Other Operating Income 1,030 1,000 2,128 1,880
---------- ---------- ---------- ----------
Total Noninterest Income 1,945 1,862 3,907 3,593
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Personnel Expense 3,457 3,062 6,852 6,104
Occupancy Expense 333 324 659 642
Equipment Depreciation and Maintenance 348 322 699 627
Other Operating Expense 2,063 2,065 4,021 3,907
---------- ---------- ---------- ----------
Total Noninterest Expense 6,201 5,773 12,231 11,280
---------- ---------- ---------- ----------
Income Before Income Taxes 3,374 3,425 6,804 6,695
Income Taxes 1,044 951 2,071 1,963
---------- ---------- ---------- ----------
NET INCOME $ 2,330 $ 2,474 $ 4,733 $ 4,732
========== ========== ========== ==========
Earnings Per Share:
Basic $ 0.28 $ 0.29 $ 0.56 $ 0.55
Diluted 0.27 0.28 0.55 0.54
Weighted Average Shares Outstanding
Basic 8,462,496 8,549,955 8,459,548 8,597,099
Diluted 8,532,016 8,712,628 8,537,903 8,760,608
Cash Dividends Declared per Share $ 0.14 $ 0.14 $ 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
(Unaudited)
(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 4,732 4,732
Change in unrealized loss on securities
available for sale, net of deferred
income taxes (987) (987)
-------
Comprehensive income 3,745
Cash dividends declared on
common stock (2,398) (2,398)
Common stock issued for stock
options exercised 178 138 316
Common stock acquired (1,233) (3,559) (4,792)
-------------------------------------------------------------------------
Balances at June 30, 1999 $42,559 $11,482 $16,582 $(322) $70,301
=========================================================================
Balances at December 31, 1999 $42,215 $10,151 $18,953 $(595) $70,724
Net Income 4,733 4,733
Change in unrealized loss on securities
available for sale, net of deferred
income taxes (50) (50)
-------
Comprehensive income 4,683
Common Stock Acquired for
Directors' Deferred Plan $(783) (783)
Cash dividends declared on
common stock (2,368) (2,368)
Common stock issued for stock
options exercised 204 129 333
Common stock acquired (79) (155) (234)
-------------------------------------------------------------------------
Balances at June 30, 2000 $42,340 $10,125 $(783) $21,318 $(645) $72,355
=========================================================================
Notes to consolidated financial statements are an integral part hereof.
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LSB Bancshares, Inc.
Consolidated Statements of Cash Flow
(Unaudited)
(In Thousands)
Six Months
Ended June 30
-------------------
2000 1999
-------- --------
CASH FLOW FROM OPERATING ACTIVITIES
Net Income $ 4,733 $ 4,732
Adjustments to reconcile net income to net cash:
Depreciation and amortization 670 649
Securities premium amortization and
discount accretion, net (51) 25
(Increase) decrease in loans held for sale 2,113 3,784
Deferred income taxes 24 583
Income taxes payable (285) (268)
(Increase) decrease in income earned but not received (912) 70
Increase (decrease) in interest accrued but not paid 663 63
Provision for loan losses 580 400
Gain on sale of premise and equipment 1 (18)
-------- --------
Net Cash provided by operating activities 7,536 10,020
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (15,132) (10,550)
Proceeds from maturities of securities held to maturity 8,879 5,869
Proceeds from sales of securities held to maturity 0 0
Purchases of securities available for sale (22,256) 0
Proceeds from maturities of securities available for sale 5,693 15,194
Proceeds from sales of securities available for sale 0 0
Net (increase) decrease in loans made to customers (38,621) (43,871)
Purchases of premises and equipment (937) (516)
Proceeds from sale of premises and equipment 3 42
Net (increase) decrease in federal funds sold
and securities purchased under resale agreements 3,195 10,135
(Increase) decrease in other assets 155 (1,035)
-------- --------
Net cash used by investing activities (59,021) (24,732)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW, money market and savings accounts 11,218 3,949
Net increase (decrease) in time deposits 13,597 13,348
Net increase (decrease) in securities
sold under agreements to repurchase 24,521 (869)
Proceeds from issuance of long term debt 0 20,000
Payments on long term debt (2,650) (12,808)
Cash Dividends Paid (2,368) (2,398)
Net increase (decrease) in other liabilities (407) (188)
Proceeds from issuance of common stock 333 316
Common stock repurchased (234) (4,792)
Common stock acquired for Directors' Deferred Plan (783)
-------- --------
Net cash provided by financing activities 43,227 16,558
-------- --------
Increase (decrease) in cash and cash equivalents (8,258) 1,846
Cash and cash equivalents at the beginning of the period 48,498 43,154
-------- --------
Cash and cash equivalents at the end of the period $ 40,240 $ 45,000
======== ========
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for:
Interest $ 12,814 $ 10,680
Income Taxes 2,332 2,383
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS
Transfer of loans to other real estate owned $ 116 $ 239
Unrealized losses on securities available for sale:
Change in securities available for sale (82) (1,616)
Change in deferrred income taxes 32 630
Change in shareholders' equity (50) (987)
Notes to consolidated financial statements are an integral part hereof.
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LSB Bancshares, Inc.
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2000 and 1999
NOTE 1. BASIS OF PRESENTATION
The accompanying interim 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 six-month period ended June
30, 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
Investment 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 June 30, 2000 and
December 31, 1999 were as follows (in thousands):
June 30, 2000
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------- ---- ------ -------
Securities held to maturity:
U.S. Treasury and other U.S.
government agency obligations $42,541 $ 2 $1,407 $41,136
State, county and municipal securities 32,293 367 655 32,005
------- ---- ------ -------
Total securities held to maturity $74,834 $369 $2,062 $73,141
======= ==== ====== =======
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------- ---- ------ -------
Securities available for sale:
U.S. Treasury and other U.S.
government agency obligations $74,496 $ 5 $1,064 $73,437
State, county and municipal securities 853 3 0 856
Federal Home Loan Bank stock 2,477 0 0 2,477
------- ---- ------ -------
Total securities available for sale $77,826 $ 8 $1,064 $76,770
======= ==== ====== =======
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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 June 30, 2000.
Investment securities with amortized cost of $109,604,720 and
$112,938,193, as of June 30, 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:
June 30
2000 1999
-------- --------
Commercial, financial, & agricultural $167,514 $153,418
Real estate - construction 34,079 23,554
Real estate - mortgage 264,315 220,252
Installment loans to individuals 64,780 64,784
Lease financing 373 860
Other 11,203 13,063
-------- --------
Total loans, net of unearned income $542,264 $475,931
======== ========
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, year to date interest
income totaling $207,607 was recorded on an accrual basis. Interest
income on nonaccrual loans is recognized on a cash basis. Cash totaling
$6,149 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
$70,004. 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 June 30, 2000, the total investment in loans that are considered
impaired under SFAS 14 was $5,993,183, including nonaccrual loans of
$312,000. A related valuation allowance of $927,000 was determined for
the total amount of impaired loans. The average recorded investment in
impaired loans for the quarter ended June 30, 2000 was approximately
$6,110,000.
At June 30, 2000, loans totaling $9,077,460 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:
June 30
2000 1999
------ ------
Balances at beginning of periods $5,246 $5,048
Provision for loan losses 580 400
Recoveries of amounts previously
charged off 98 110
Loan losses (421) (281)
------ ------
Balances at end of periods $5,503 $5,277
====== ======
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 ("SFAS65"), "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 definition of SFAS 134 and, as such, does not anticipate any
material effect on its
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financial position and operating results from adoption of the standard.
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 and six months ended June
30, 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 Investment Services, Inc. ("LSB Investment
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 JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 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 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 $15,057,000 for the second quarter of 2000 was
up $2,064,000 or 15.9% compared to $12,993,000 for the second quarter
of 1999. Total interest expense of $7,042,000 for the second quarter of
2000 was up $1,620,000 or 29.9% compared to $5,422,000 for the second
quarter of 1999. These results produced net interest income of
$8,015,000 for the second quarter of 2000, for a gain of $444,000 or
5.9% compared to $7,571,000 for the second quarter of 1999. Loan
demand, while slowing somewhat, remained relatively strong during the
second quarter of 2000, accounting for the increase in net interest
income. The Federal Reserve has raised interest rates six times over
the past year in an effort to slow the economy. As a result of the
action taken by the Federal Reserve, the prime interest rate increased
three times during the second half of 1999 and another three times the
first half of 2000. Loans constitute the largest group of earning
assets and therefore generate the majority of Bancshares' interest
income. Consequently, the bank has seen some narrowing of its interest
margins, particularly in the second quarter of 2000. For the period
ended June 30, 2000, Bancshares' loan portfolio increased $36,186,000
or 7.2% over December 31, 1999 and $66,333,000 or 13.7% over June 30,
1999. For the period ended June 30, 2000, deposits increased
$24,815,000 or 4.1% over December 31, 1999 and $45,612,000 or 7.8% over
June 30, 1999.
Noninterest Income and Expense
Noninterest income for the second quarter of 2000 was up $83,000 or
4.5% compared to the second quarter of 1999. Fee income related to
service charges on deposit accounts for the second quarter of 2000
increased $124,000 or 16.2% compared to the second quarter of 1999.
Gains on the sale of mortgage loans for the second quarter of 2000 were
$25,000 compared to $96,000 for the second quarter of 1999. During the
second quarter of the year, as with the first quarter, fewer mortgages
were sold as mortgage activity slowed from rising interest rates. Other
operating income for the second quarter of 2000 increased a modest
$30,000 compared to the corresponding period of 1999.
Noninterest expense for the second quarter of 2000 increased $428,000
or 7.4% compared to the second quarter of 1999. Personnel expense for
the second quarter of the year, comprised of salaries and fringe
benefits, increased $395,000 or 12.9% over the second quarter of 1999.
Occupancy expense for the second quarter remained relatively flat, as
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it did in the first quarter, with an increase of $9,000 or 2.8%
compared to the second quarter of the previous year. Equipment
depreciation and maintenance expense also posted a modest increase in
the second quarter of 2000 of $26,000 or 8.1% compared to the second
quarter of 1999. Other operating expense for the second quarter of 2000
decreased $2,000 compared to the second quarter of 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Net Interest Income
Total interest income of $29,185,000 for the first six months of 2000
was up $3,660,000 or 14.3% compared to $25,525,000 for the first six
months of 1999. Total interest expense for the first half of 2000 of
$13,477,000 increased $2,734,000 or 25.4% compared to the corresponding
six months of 1999. Net interest income of $15,708,000 for the first
half of 2000 was up $926,000 or 6.3% compared to $14,782,000 for the
first half of 1999. Rising interest rates during the second half of
1999 and the first half of 2000 were contributing factors to narrowing
interest margins and slowing net interest growth.
Noninterest Income and Expense
Noninterest income for the first half of 2000 was up $314,000 or 8.7%
compared to the first half of 1999. Fee income related to service
charges on deposit accounts for the first six months of 2000 was up
$228,000 or 15.1% compared to the first six months of 1999. Gains on
the sale of mortgage loans for the first six months of 2000 were down
$162,000 or 78.6% compared to the first six months of 1999. The rising
interest rate environment slowed mortgage loan growth and the
subsequent sales of this product. Other operating income for the first
six months of 2000 was up $248,000 or 13.2% compared to the first six
months of 1999. The majority of this increase came from the Bank's
bankcard division and its investment services subsidiary. The bankcard
division produced increased revenue of $165,000 or 30.4% for the first
half of 2000 compared to the corresponding period of 1999. Commissions
generated by the investment services subsidiary increased $174,000 or
55.4% the first six months of 2000 compared to the first six months of
1999. The investment services subsidiary generates commission income
through the sale of mutual funds, annuities and equities.
Noninterest expense for the first six months of 2000 increased $951,000
or 8.4% compared to the same period of 1999. Personnel expense for the
first six months of 2000, comprised of salaries and fringe benefits,
increased $748,000 or 12.3% compared to the first six months of 1999.
Occupancy expense for the period being compared increased by a modest
$17,000 or 2.6%. Equipment depreciation and maintenance expense for the
first six months of 2000 increased $72,000 or 11.5%. Other operating
expense increased $114,000 or 2.9% the first half of 2000 compared to
the first half of 1999. Noninterest expenses for the reporting period
were within the Bank's budgeted projections.
Asset Quality and Provision for Loan Losses
The reserve for loan losses was $5,503,000 or 1.01% of loans
outstanding at June 30, 2000 compared to $5,246,000 or 1.04% of loans
outstanding at December 31, 1999 and $5,277,000 or 1.11% at June 30,
1999. Non-performing loans totaled $2,578,000 or .47% of loans
outstanding at June 30, 2000 compared to $2,090,000 or .41% of loans
outstanding at December 31, 1999, and $2,247,000 or .47% of loans
outstanding at June 30, 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 June 30, 2000, Bancshares had $47,000 in restructured loans and
$1,006,000 in other real estate and $427,000 in nonaccrual loans.
Accruing loans past due 90 days or more were $1,098,000 at June 30,
2000 compared to $821,000 at December 31, 1999 and $996,000 at June 30,
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 June 30, 2000, the reserve for loan losses
was 2.13 times non-performing loans, compared to 2.51 times at December
31, 1999 and 2.35 times non-performing loans at June 30, 1999.
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
13
changes in interest rates.
The provision for loan and lease losses that was charged to operations
for the first six months of 2000 was $580,000 compared to $400,000 for
the corresponding period in 1999. Net charge-offs amounted to $323,000,
or .12% of average loans outstanding, on an annualized basis, during
the first six months of 2000. The quality of the loan portfolio
continues to be of a high 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.
6/30/00 12/31/99 6/30/99
------- -------- -------
RESERVE FOR LOAN LOSSES
Beginning Balance $5,246 $5,048 $5,048
Provision for loan losses 580 780 400
Net (charge-off) recoveries (323) (582) (171)
------ ------ ------
Ending balance 5,503 5,246 5,277
RISK ASSETS
Nonaccrual loans $ 427 $ 96 $ 0
Foreclosed real estate 1,006 1,036 1,100
Restructured loans 47 137 151
Loans 90 days or more past due
and still accruing 1,098 821 996
------ ------ ------
Total risk assets 2,578 2,090 2,247
ASSET QUALITY RATIOS
Nonaccrual loans as a percentage of total loans 0.08% 0.02% 0.00%
Nonperforming assets as a percentage of:
Total assets 0.33 0.29 0.32
Loans plus foreclosed property 0.47 0.41 0.47
Net charge-offs as a percentage of average loans 0.12 X 0.12 0.08 X
Reserve for loan losses as a percentage of loans 1.01 1.04 1.11
Ratio of reserve for loan losses to:
Net charge-offs 8.52 X 9.01 15.43 X
Nonaccrual loans 12.89 54.65 N/M
*N/M Denotes Non Meaningful
X Denotes Annualized
Income Taxes
Accrued taxes applicable to income for the six-month period ended June
30, 2000 were $2,071,000 compared to $1,963,000 for the six-month
period ended June 30, 1999. Pretax income for the first six months of
2000 of $6,804,000 was $109,000 above the $6,695,000 for the first six
months of 1999. The change in accrued taxes for the periods being
14
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 June 30, 2000, based on these measures,
Bancshares' had a Tier 1 capital ratio of 14.23% compared to the
regulatory requirement of 4% and total capital ratio of 15.31% 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 June 30, 2000, Bancshares' Tier 1 leverage ratio was
9.35%.
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 half of 2000, Bancshares
purchased 21,700 shares under the plan at an average cost of $14.14.
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.
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 six-months ended June 30, 2000 and 1999 are provided in
the Consolidated Statements of Cash Flow.
15
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 June 30, 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 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
During the second 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 six
months ended June 30, 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 August 10, 2000 LSB BANCSHARES., INC.
---------------------
(Registrant)
By: /s/ Monty J. Oliver
-------------------
Monty J. Oliver
Chief Financial Officer
Principal Accounting Officer