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 September 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 September 30, 2000 was
8,428,328.
2
LSB BANCSHARES, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2000 and 1999, December 31, 1999
Consolidated Statements of Income
Three Months Ended September 30, 2000 and 1999
Nine Months Ended September 30, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and 1999
Notes to Consolidated Financial Statements
Nine Months Ended September 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 Bancshares, Inc.
Consolidated Balance Sheets (Unaudited) (Unaudited)
(In Thousands) September 30 December 31 September 30
2000 1999 1999
----------------- ---------------- ------------------
ASSETS
Cash and Due From Banks $ 32,547 $ 33,971 $ 38,888
Interest-Bearing Bank Balances 4,224 14,527 4,904
Federal Funds Sold and Securities Purchased
Under Resale Agreements 59,190 27,270 36,140
Investment Securities:
Held to Maturity, MV $72,069, $66,884 and $67,708 72,831 68,551 68,552
Available for Sale, at Market Value 77,092 60,268 64,654
Loans 548,791 506,078 489,640
Less, Reserve for Loan Losses (5,715) (5,246) (5,240)
----------------- ---------------- ------------------
Net Loans 543,076 500,832 484,400
Premises and Equipment 11,627 11,215 11,324
Other Assets 12,372 10,194 10,559
----------------- ---------------- ------------------
TOTAL ASSETS $ 812,959 $ 726,828 $ 719,421
================= ================ ==================
LIABILITIES
Deposits
Demand $ 68,136 $ 73,916 $ 75,084
Savings, NOW and Money Market Accounts 326,549 297,966 309,130
Certificates of Deposit of less than $100,000 201,341 172,453 164,857
Certificates of Deposit of $100,000 or more 73,744 61,087 55,122
----------------- ---------------- ------------------
Total Deposits 669,770 605,422 604,193
Securities Sold Under Agreements to Repurchase 26,614 1,299 4,848
Borrowings from the Federal Home Loan Bank 37,450 45,150 35,150
Other Liabilities 6,144 4,233 3,807
----------------- ---------------- ------------------
TOTAL LIABILITIES 739,978 656,104 647,998
----------------- ---------------- ------------------
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 8,428,328 Shares
in 2000 and 8,442,918 and 8,524,347 shares in 1999 42,142 42,215 42,622
Paid-In Capital 9,830 10,151 11,267
Common Stock Acquired for
Directors' Deferred Plan (796) 0 0
Retained Earnings 22,163 18,953 17,788
Accumulated Other Comprehensive Income (358) (595) (254)
----------------- ---------------- ------------------
TOTAL SHAREHOLDERS' EQUITY 72,981 70,724 71,423
----------------- ---------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 812,959 $ 726,828 $ 719,421
================= ================ ==================
Memorandum: Standby Letters of Credit $ 3,500 $ 3,129 $ 3,142
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 Nine Months Ended
September 30 September 30
------------------------------- ------------------------------
2000 1999 2000 1999
--------------- ------------- ------------- --------------
INTEREST INCOME
Interest and Fees on Loans $ 12,694 $ 10,851 $ 36,443 $ 31,349
Interest on Investment Securities:
Taxable 1,710 1,350 4,914 4,092
Tax Exempt 424 462 1,333 1,413
Interest-Bearing Bank Balances 124 114 473 469
Federal Funds Sold and Securities
Purchased Under Resale Agreements 695 561 1,669 1,540
--------------- ------------- ------------- --------------
Total Interest Income 15,647 13,338 44,832 38,863
--------------- ------------- ------------- --------------
INTEREST EXPENSE
Deposits 6,691 5,142 18,431 14,940
Securities Sold Under Agreements to Repurchase 388 37 843 123
Borrowings from the Federal Home Loan Bank 672 489 1,954 1,348
--------------- ------------- ------------- --------------
Total Interest Expense 7,751 5,668 21,228 16,411
--------------- ------------- ------------- --------------
NET INTEREST INCOME 7,896 7,670 23,604 22,452
Provision for Loan Losses 815 215 1,395 615
--------------- ------------- ------------- --------------
Net Interest Income After Provision
for Loan Losses 7,081 7,455 22,209 21,837
--------------- ------------- ------------- --------------
NONINTEREST INCOME
Service Charges on Deposit Accounts 917 808 2,652 2,315
Gains on Sales of Mortgages 41 31 85 237
Gains on Sales of Investment Securities 187 0 187 0
Other Operating Income 915 865 3,043 2,745
--------------- ------------- ------------- --------------
Total Noninterest Income 2,060 1,704 5,967 5,297
--------------- ------------- ------------- --------------
NONINTEREST EXPENSE
Personnel Expense 3,436 3,094 10,288 9,198
Occupancy Expense 311 329 970 971
Equipment Depreciation and Maintenance 376 322 1,075 949
Other Operating Expense 2,079 2,129 6,100 6,036
--------------- ------------- ------------- --------------
Total Noninterest Expense 6,202 5,874 18,433 17,154
--------------- ------------- ------------- --------------
Income Before Income Taxes 2,939 3,285 9,743 9,980
Income Taxes 913 884 2,984 2,847
--------------- ------------- ------------- --------------
NET INCOME $ 2,026 $ 2,401 $ 6,759 $ 7,133
=============== ============= ============= ==============
Earnings Per Share:
Basic $ 0.24 $ 0.28 $ 0.80 $ 0.83
Diluted 0.24 0.28 0.79 0.82
Weighted Average Shares Outstanding
Basic 8,442,872 8,527,663 8,453,990 8,573,954
Diluted 8,479,419 8,663,910 8,516,014 8,728,192
Cash Dividends Declared per Share $ 0.14 $ 0.14 $ 0.42 $ 0.42
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 7,133 7,133
Change in unrealized loss on securities
available for sale, net of deferred
income taxes (919) (919)
-----------------
Comprehensive income 6,214
Cash dividends declared on
common stock (3,593) (3,593)
Common stock issued for stock
options exercised 368 262 630
Common stock acquired (1,360) (3,898) (5,258)
----------------------------------------------------------------------------------------
Balances at September 30, 1999 $ 42,622 $ 11,267 $ 17,788 $ (254)$ 71,423
========================================================================================
Balances at December 31, 1999 $ 42,215 $ 10,151 $ 18,953 $ (595)$ 70,724
Net Income 6,759 6,759
Change in unrealized loss on securities
available for sale, net of deferred
income taxes 237 237
-----------------
Comprehensive income 6,996
Common Stock Acquired for
Directors' Deferred Plan $ (796) (796)
Cash dividends declared on
common stock (3,549) (3,549)
Common stock issued for stock
options exercised 204 129 333
Common stock acquired (277) (450) (727)
----------------------------------------------------------------------------------------
Balances at September 30, 2000 $ 42,142 $ 9,830 $ (796)$ 22,163 $ (358)$ 72,981
========================================================================================
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)
Nine Months Ended September 30
----------------------------------------------
2000 1999
----------------- -----------------
CASH FLOW FROM OPERATING ACTIVITIES
Net Income $ 6,759 $ 7,133
Adjustments to reconcile net income to net cash:
Depreciation and amortization 1,020 976
Securities premium amortization and
discount accretion, net (180) 42
(Increase) decrease in loans held for sale 1,510 1,655
Deferred income taxes 24 497
Income taxes payable (74) (129)
(Increase) decrease in income earned but not received (601) (613)
Increase (decrease) in interest accrued but not paid 847 98
Net (increase) decrease in other assets (1,756) (935)
Net increase (decrease) in other liabilities 1,138 (33)
Provision for loan losses 1,395 615
Gain on sale of investment securities (187) 0
Gain on sale of premise and equipment (3) (26)
----------------- -----------------
Net cash provided by operating activities 9,892 9,280
----------------- -----------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (15,132) (15,520)
Proceeds from maturities of securities held to maturity 10,879 17,741
Proceeds from sales of securities held to maturity 0 0
Purchases of securities available for sale (67,345) 0
Proceeds from maturities of securities available for sale 51,061 6,869
Proceeds from sales of securities available for sale 189 0
Net (increase) decrease in loans made to customers (45,148) (55,705)
Purchases of premises and equipment (1,446) (800)
Proceeds from sale of premises and equipment 18 54
Net (increase) decrease in federal funds sold
and securities purchased under resale agreements (31,920) 4,455
----------------- -----------------
Net cash used by investing activities (98,844) (42,906)
----------------- -----------------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW, money market and savings accounts 22,804 25,032
Net increase (decrease) in time deposits 41,545 11,835
Net increase (decrease) in securities
sold under agreements to repurchase 25,315 (689)
Proceeds from issuance of long term debt 0 20,000
Payments on long term debt (7,700) (13,691)
Cash Dividends Paid (3,549) (3,593)
Proceeds from issuance of common stock 333 630
Common stock repurchased (727) (5,259)
Common stock acquired for Directors' Deferred Plan (796)
----------------- -----------------
Net cash provided by financing activities 77,225 34,265
----------------- -----------------
Increase (decrease) in cash and cash equivalents (11,727) 639
Cash and cash equivalents at the beginning of the period 48,498 43,154
----------------- -----------------
Cash and cash equivalents at the end of the period $ 36,771 $ 43,793
================= =================
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for:
Interest $ 20,382 $ 16,337
Income Taxes 3,042 2,806
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS
Transfer of loans to other real estate owned $ 602 $ 296
Unrealized losses on securities available for sale:
Change in securities available for sale 388 (1,505)
Change in deferred income taxes (151) 586
Change in shareholders' equity 237 (919)
Notes to consolidated financial statements are an integral part hereof.
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LSB Bancshares, Inc.
Notes to Consolidated Financial Statements
Nine Months Ended September 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 nine-month period ended
September 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 September 30, 2000 and
December 31, 1999 were as follows (in thousands):
September 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 $ 40,534 $ 35 $ 895 $ 39,674
State, county and municipal securities 32,297 529 431 32,395
------------- ------------ ------------ -------------
Total securities held to maturity $ 72,831 $ 564 $ 1,326 $ 72,069
============= ============ ============ =============
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------ ------------ -------------
Securities available for sale:
U.S. Treasury and other U.S.
government agency obligations $ 74,349 $ 10 $ 610 $ 73,749
State, county and municipal securities 852 14 0 866
Federal Home Loan Bank stock 2,477 0 0 2,477
------------- ------------ ------------ -------------
Total securities available for sale $ 77,678 $ 24 $ 610 $ 77,092
============= ============ ============ =============
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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
============ ============= ============= ============
Investment securities were sold for $189,165 and a gain of $186,545
during the period ended September 30, 2000.
Investment securities with amortized cost of $123,676,775 and
$112,938,193, as of September 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:
September 30
2000 1999
-------------- --------------
Commercial, financial, & agricultural $ 170,999 $ 154,554
Real estate - construction 35,619 27,070
Real estate - mortgage 267,117 229,020
Installment loans to individuals 64,172 66,286
Lease financing 158 837
Other 10,726 11,873
-------------- --------------
Total loans, net of unearned income $ 548,791 $ 489,640
============== ==============
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 $321,484 was recorded on an accrual basis. Interest
income on nonaccrual loans is recognized on a cash basis. Cash totaling
$6,149 has been collected year to date on nonaccrual loans. Interest
income on current nonaccrual loans that would have been recorded in
accordance with the original terms of the notes was $22,474. 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 September 30, 2000, the total investment in loans that are
considered impaired under SFAS 114 was $6,111,622, including nonaccrual
loans of $256,918. A related valuation allowance of $955,201 was
determined for the total amount of impaired loans. The average recorded
investment in impaired loans for the quarter ended September 30, 2000
was approximately $6,144,530.
At September 30, 2000, loans totaling $9,680,540 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:
Nine Months Ended
September 30
2000 1999
------------ ------------
Balances at beginning of periods $ 5,246 $ 5,048
Provision for loan losses 1,395 615
Recoveries of amounts previously
charged off 144 127
Loan losses (1,070) (550)
------------ ------------
Balances at end of periods $ 5,715 $ 5,240
============ ============
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. SFAS 133 has also been
amended by SFAS 138, which provides additional guidance in implementing
the original pronouncement. The effective date of SFAS 138 is the same
as SFAS 133 for entities that have not adopted SFAS 133 before 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
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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 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 nine months ended
September 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 SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
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 $15,647,000 for the third quarter of 2000 was
up $2,309,000 or 17.3% compared to $13,338,000 for the third quarter of
1999. Total interest expense of $7,751,000 for the third quarter of
2000 was up $2,083,000 or 36.8% compared to $5,668,000 for the third
quarter of 1999. These results produced net interest income of
$7,896,000 for the third quarter of 2000, for a gain of $226,000 or
2.9% compared to $7,670,000 for the third quarter of 1999. Loan demand
during the third quarter of 2000 remained at relatively the same pace
as during the second quarter and accounted for the increase in net
interest income. The Federal Reserve, which raised interest rates six
times over the past year in an effort to slow the economy, relaxed its
position during the third quarter. The prime interest rate, which
increased three times in the second half of 1999 and another three
times in the first half of 2000, has remained at 9.50% for the third
quarter of 2000. Loans constitute the largest group of earning assets
and therefore generate the majority of Bancshares' interest income. For
the period ended September 30, 2000, Bancshares' loan portfolio
increased $42,713,000 or 8.4% over December 31, 1999 and $59,151,000 or
12.1% over September 30, 1999. For the period ended September 30, 2000,
deposits increased $64,348,000 or 10.6% over December 31, 1999 and
$65,577,000 or 10.9% over September 30, 1999. The cost of funds
increased during the third quarter as the majority of the deposit
growth came from higher rate certificates of deposit. Consequently, the
bank has seen some narrowing of its interest margins during the current
quarter.
Noninterest Income and Expense
Noninterest income for the third quarter of 2000 was up $356,000 or
20.9% compared to the third quarter of 1999. Fee income related to
service charges on deposit accounts for the third quarter of 2000
increased $109,000 or 13.5% compared to the third quarter of 1999.
Gains on the sale of mortgage loans for the third quarter of 2000 were
$41,000 compared to $31,000 for the third quarter of 1999. In the third
quarter of 2000, the Bank sold stock distributed from the North
Carolina Enterprise Corporation, a venture capital firm of which the
bank is an investor. Consequently, a gain on sales of investment
securities of $187,000 was realized. Other operating income for the
third quarter of 2000 increased a modest $50,000 compared to the
corresponding period of 1999.
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Noninterest expense for the third quarter of 2000 increased $328,000 or
5.6% compared to the third quarter of 1999. Personnel expense for the
third quarter of the year, comprised of salaries and fringe benefits,
increased $342,000 or 11.1% over the third quarter of 1999. The expense
provision for employee health insurance was increased $115,000 in the
third quarter of 2000 compared to the corresponding period of 1999.
Occupancy expense for the third quarter decreased $18,000 or 5.5%
compared to the third quarter of 1999. Equipment depreciation and
maintenance expense posted an increase in the third quarter of 2000 of
$54,000 or 16.8% compared to the third quarter of 1999. Other operating
expense for the third quarter of 2000 decreased $50,000 or 2.3%
compared to the third quarter of 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Net Interest Income
Total interest income of $44,832,000 for the first nine months of 2000
was up $5,969,000 or 15.4% compared to $38,863,000 for the first nine
months of 1999. Total interest expense of $21,228,000 for the first
nine months of 2000 increased $4,817,000 or 29.4% compared to the
corresponding nine months of 1999. Net interest income of $23,604,000
for the first nine months of 2000 was up $1,152,000 or 5.1% compared to
$22,452,000 for the first nine months of 1999. Rising interest rates on
bank time deposits during the third quarter of 2000 were contributing
factors to narrowing interest margins and slowing net interest growth.
Noninterest Income and Expense
Noninterest income for the first nine months of 2000 was up $670,000 or
12.6% compared to the first nine months of 1999. Fee income related to
service charges on deposit accounts for the first nine months of 2000
was up $337,000 or 14.6% compared to the first nine months of 1999.
Gains on the sale of mortgage loans for the nine month period ended
September 30, 2000 were down $152,000 or 64.1% compared to the
comparable period of 1999. The rising interest rate environment slowed
mortgage loan growth and the subsequent sales of this product. Other
operating income for the first nine months of 2000 was up $298,000 or
10.9% compared to the first nine months of 1999. The increase resulted
from the Bank's bankcard division and its investment services
subsidiary. The bankcard division produced increased revenue of
$247,000 or 29.2% for the nine-month period ended September 30, 2000
compared to the corresponding period of 1999. Commissions generated by
the investment services subsidiary increased $206,000 or 46.6% the
first nine months of 2000 compared to the first nine months of 1999.
The investment services subsidiary generates commission income through
the sale of mutual funds, annuities and equities.
Noninterest expense for the first nine months of 2000 increased
$1,279,000 or 7.5% compared to the same period of 1999. Personnel
expense for the first nine months of 2000, comprised of salaries and
fringe benefits, increased $1,090,000 or 11.9% compared to the first
nine months of 1999. Expense for the provision for employee health
insurance for the first nine months of 2000 was increased $265,000
compared to the corresponding period of 1999. Occupancy expense for the
period being compared remained relatively flat. Equipment depreciation
and maintenance expense for the first nine months of 2000 increased
$126,000 or 13.3%. Other operating expense increased a modest $64,000
or 1.1% the first nine months of 2000 compared to the first nine months
of 1999. With the exception of the provision for employee health
insurance, 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 $5,715,000 or 1.04% of loans
outstanding at September 30, 2000 compared to $5,246,000 or 1.04% of
loans outstanding at December 31, 1999 and $5,240,000 or 1.07% at
September 30, 1999. Non-performing loans totaled $2,827,000 or .51% of
loans outstanding at September 30, 2000 compared to $2,090,000 or .41%
of loans outstanding at December 31, 1999, and $1,862,000 or .38% of
loans outstanding at September 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 September 30, 2000, Bancshares had $47,000 in
restructured loans and $1,492,000 in other real estate and $257,000 in
nonaccrual loans. Accruing loans past due 90 days or more were
$1,031,000 at September 30, 2000 compared to $821,000 at December 31,
1999 and $566,000 at September 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
13
in the process of collection. At September 30, 2000, the reserve for
loan losses was 2.02 times non-performing loans, compared to 2.51 times
at December 31, 1999 and 2.81 times non-performing loans at September
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 changes in interest rates.
The provision for loan and lease losses that was charged to operations
for the third quarter of 2000 was $815,000 compared to $215,000 for the
third quarter of 1999. For the first nine months of 2000 the provision
for loan and lease losses was $1,395,000 compared to $615,000 for the
corresponding period in 1999. Net charge-offs amounted to $926,000, or
.23% of average loans outstanding, on an annualized basis, during the
first nine months of 2000. In management's opinion the quality of the
loan portfolio continues to be of a high level.
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.
14
ASSET QUALITY ANALYSIS
9/30/00 12/31/99 9/30/99
------------- ------------ ------------
RESERVE FOR LOAN LOSSES
Beginning Balance $ 5,246 $ 5,048 $ 5,048
Provision for loan losses 1,395 780 615
Net (charge-off) recoveries (926) (582) (423)
------------- ------------ ------------
Ending balance 5,715 5,246 5,240
RISK ASSETS
Nonaccrual loans $ 257 $ 96 $ 116
Foreclosed real estate 1,492 1,036 1,036
Restructured loans 47 137 144
Loans 90 days or more past due
and still accruing 1,031 821 566
------------- ------------ ------------
Total risk assets 2,827 2,090 1,862
ASSET QUALITY RATIOS
Nonaccrual loans as a percentage of total loans 0.05% 0.02% 0.02%
Nonperforming assets as a percentage of:
Total assets 0.35 0.29 0.26
Loans plus foreclosed property 0.51 0.41 0.38
Net charge-offs as a percentage of average loans 0.23 X 0.12 0.12 X
Reserve for loan losses as a percentage of loans 1.04 1.04 1.07
Ratio of reserve for loan losses to:
Net charge-offs 4.63 X 9.01 9.29 X
Nonaccrual loans 22.24 54.65 45.17
*N/M Denotes Non Meaningful
X Denotes Annualized
Income Taxes
Accrued taxes applicable to income for the nine-month period ended
September 30, 2000 were $2,984,000 compared to $2,847,000 for the
nine-month period ended September 30, 1999. Pretax income for the first
nine months of 2000 of $9,743,000 was down $237,000 from the $9,980,000
for the first nine months of 1999. The change in accrued taxes for the
periods being compared is primarily the result of the exercise of
nonqualified stock options in 1999.
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 September 30, 2000, based on these measures,
Bancshares' had a Tier 1 capital ratio of 13.93% compared to the
regulatory requirement of 4% and total capital ratio of 15.03% 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 September 30, 2000, Bancshares' Tier 1 leverage ratio
was 9.19%.
15
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 were repurchased and retired at an average cost of
$18.99 per share. During the first nine months of 2000, Bancshares
purchased 55,333 shares under the plan at an average cost of $13.13.
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 nine months ended September 30, 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.
16
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 September 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 third 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 nine
months ended September 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 November 13, 2000 LSB BANCSHARES., INC.
----------------------------------------
(Registrant)
By: /s/ Monty J. Oliver
------------------------------------
Monty J. Oliver
Chief Financial Officer
Principal Accounting Officer