SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 0-11448
LSB BANCSHARES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
North Carolina 56-1348147
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
LSB BANCSHARES, INC.
ONE LSB PLAZA
LEXINGTON, NORTH CAROLINA 27292
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(Address of Principal Executive Offices)
(Zip Code)
(336) 248-6500
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(Registrant's Telephone Number, Including Area Code)
Indicate by check [X] whether the registrant: (1) 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 (2) has been subject to such
filing requirements for the past 90 days Yes [X] No [ ]
LSB Bancshares, Inc. has 8,441,846 shares of common stock outstanding as of
October 31, 2001.
LSB BANCSHARES, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2001 and 2000, December 31, 2000
Consolidated Statements of Income
Three Months Ended September 30, 2001 and 2000
Nine Months Ended September 30, 2001 and 2000
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended September 30, 2001 and 2000
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2001 and 2000
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2001 and 2000
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 and Use of Proceeds
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
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LSB Bancshares, Inc.
Consolidated Balance Sheets
(In Thousands)
(Unaudited) (Unaudited)
September 30 December 31 September 30
2001 2000 2000
--------- --------- ---------
ASSETS
Cash and Due From Banks $ 31,624 $ 26,916 $ 32,547
Interest-Bearing Bank Balances 4,275 7,757 4,224
Federal Funds Sold and Securities Purchased
Under Resale Agreements 72,635 69,555 59,190
Investment Securities:
Held to Maturity, MV $57,782, $73,557 and $72,069 55,765 72,828 72,831
Available for Sale, at Market Value 95,799 52,504 77,092
Loans 557,813 549,065 548,791
Less, Reserve for Loan Losses (6,136) (5,959) (5,715)
--------- --------- ---------
Net Loans 551,677 543,106 543,076
Premises and Equipment 12,080 11,609 11,627
Other Assets 10,876 11,295 12,372
--------- --------- ---------
TOTAL ASSETS $ 834,731 $ 795,570 $ 812,959
========= ========= =========
LIABILITIES
Deposits
Demand $ 75,128 $ 75,588 $ 68,136
Savings, NOW and Money Market Accounts 347,840 318,626 326,549
Certificates of Deposit of less than $100,000 181,352 198,039 201,341
Certificates of Deposit of $100,000 or more 80,024 79,723 73,744
--------- --------- ---------
Total Deposits 684,344 671,976 669,770
Securities Sold Under Agreements to Repurchase 3,263 3,002 26,614
Borrowings from the Federal Home Loan Bank 48,300 40,450 37,450
Other Liabilities 20,567 5,899 6,144
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TOTAL LIABILITIES 756,474 721,327 739,978
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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 8,441,846 Shares
in 2001 and 8,432,824 and 8,428,328, shares in 2000 42,209 42,164 42,142
Paid-In Capital 9,860 9,837 9,830
Common Stock Acquired for Directors' Deferred Plan (871) (797) (796)
Retained Earnings 25,999 23,019 22,163
Accumulated Other Comprehensive Income 1,060 20 (358)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 78,257 74,243 72,981
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 834,731 $ 795,570 $ 812,959
========= ========= =========
Memorandum: Standby Letters of Credit $ 4,239 $ 3,384 $ 3,500
Notes to consolidated financial statements are an integral part hereof.
LSB Bancshares, Inc.
Consolidated Statements of Income
(In Thousands except Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
2001 2000 2001 2000
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INTEREST INCOME
Interest and Fees on Loans $ 12,133 $ 12,694 $ 37,093 $ 36,443
Interest on Investment Securities:
Taxable 1,331 1,710 3,913 4,914
Tax Exempt 400 424 1,234 1,333
Interest-Bearing Bank Balances 83 124 309 473
Federal Funds Sold and Securities
Purchased Under Resale Agreements 603 695 2,244 1,669
---------- ---------- ---------- ----------
Total Interest Income 14,550 15,647 44,793 44,832
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 5,215 6,691 18,424 18,431
Securities Sold Under Agreements to Repurchase 43 388 129 843
Borrowings from the Federal Home Loan Bank 684 672 1,882 1,954
---------- ---------- ---------- ----------
Total Interest Expense 5,942 7,751 20,435 21,228
---------- ---------- ---------- ----------
NET INTEREST INCOME 8,608 7,896 24,358 23,604
Provision for Loan Losses 661 815 1,432 1,395
---------- ---------- ---------- ----------
Net Interest Income After Provision
for Loan Losses 7,947 7,081 22,926 22,209
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service Charges on Deposit Accounts 1,015 917 2,980 2,652
Gains on Sales of Mortgages 144 41 253 85
Gains on Sales of Investment Securities 0 187 541 187
Other Operating Income 992 915 3,207 3,043
---------- ---------- ---------- ----------
Total Noninterest Income 2,151 2,060 6,981 5,967
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NONINTEREST EXPENSE
Personnel Expense 3,677 3,436 11,083 10,288
Occupancy Expense 349 311 1,022 970
Equipment Depreciation and Maintenance 408 376 1,170 1,075
Other Operating Expense 2,439 2,079 6,989 6,100
---------- ---------- ---------- ----------
Total Noninterest Expense 6,873 6,202 20,264 18,433
---------- ---------- ---------- ----------
Income Before Income Taxes 3,225 2,939 9,643 9,743
Income Taxes 1,047 913 3,118 2,984
---------- ---------- ---------- ----------
NET INCOME $ 2,178 $ 2,026 $ 6,525 $ 6,759
========== ========== ========== ==========
Earnings Per Share:
Basic $ 0.26 $ 0.24 $ 0.77 $ 0.80
Diluted 0.26 0.24 0.77 0.79
Weighted Average Shares Outstanding:
Basic 8,440,246 8,442,872 8,438,026 8,453,990
Diluted 8,488,792 8,479,428 8,478,051 8,516,038
Cash Dividends Declared per Share $ 0.14 $ 0.14 $ 0.42 $ 0.42
Notes to consolidated financial statements are an integral part hereof.
LSB Bancshares, Inc.
Consolidated Statements of
Changes in Shareholders' Equity
(In Thousands)
(Unaudited)
Accumulated
Directors' Other Total
Common Paid-In Deferred Retained Comprehensive Shareholders'
Stock Capital Plan Earnings Income Equity
-------------------------------------------------------------------------------------
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
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) $ (796) (1,523)
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Balances at September 30, 2000 $ 42,142 $ 9,830 $ (796) $ 22,163 $ (358) $72,981
=====================================================================================
Balances at December 31, 2000 $ 42,164 $ 9,837 $ (797) $ 23,019 $ 20 $74,243
Net Income 6,525 6,525
Change in unrealized gain on securities
available for sale, net of deferred
income taxes 1,040 1,040
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Comprehensive income 7,565
Cash dividends declared on
common stock (3,545) (3,545)
Common stock issued for stock
options exercised 45 23 68
Common stock acquired (74) (74)
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Balances at September 30, 2001 $ 42,209 $ 9,860 $ (871) $ 25,999 $ 1,060 $78,257
=====================================================================================
Notes to consolidated financial statements are an integral part hereof.
LSB Bancshares, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
Nine Months Ended
September 30
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2001 2000
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CASH FLOW FROM OPERATING ACTIVITIES
Net Income $ 6,525 $ 6,759
Adjustments to reconcile net income to net cash:
Depreciation and amortization 1,102 1,020
Securities premium amortization and
discount accretion, net 37 (180)
(Increase) decrease in loans held for sale (1,734) 1,510
Deferred income taxes (255) 24
Income taxes payable 377 (74)
(Increase) decrease in income earned but not received (89) (601)
Increase (decrease) in interest accrued but not paid (1,048) 847
Net (increase) decrease in other assets 111 (1,756)
Net increase (decrease) in other liabilities 15,339 1,138
Provision for loan losses 1,432 1,395
(Gain) loss on sale of investment securities (541) (187)
(Gain) loss on sale of premise and equipment (24) (3)
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Net Cash provided by operating activities 21,232 9,892
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CASH FLOW FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (1,504) (15,132)
Proceeds from maturities of securities held to maturity 18,579 10,879
Proceeds from sales of securities held to maturity 0 0
Purchases of securities available for sale (68,751) (67,345)
Proceeds from maturities of securities available for sale 27,100 51,061
Proceeds from sales of securities available for sale 555 189
Net (increase) decrease in loans made to customers (8,270) (45,148)
Purchases of premises and equipment (1,619) (1,446)
Proceeds from sale of premises and equipment 56 18
Net (increase) decrease in federal funds sold
and securities purchased under resale agreements (3,080) (31,920)
-------- --------
Net cash (used by) provided by investing activities (36,934) (98,844)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW, money market and savings accounts 28,754 22,804
Net increase (decrease) in time deposits (16,386) 41,545
Net increase (decrease) in securities
sold under agreements to repurchase 261 25,315
Proceeds from long term debt 10,000 0
Payments on long term debt (2,150) (7,700)
Dividends Paid (3,545) (3,549)
Proceeds from issuance of common stock 68 333
Common stock acquired (74) (1,523)
-------- --------
Net cash provided by (used by) financing activities 16,928 77,225
-------- --------
Increase (decrease) in cash and cash equivalents 1,226 (11,727)
Cash and cash equivalents at the beginning of the period 34,673 48,498
-------- --------
Cash and cash equivalents at the end of the period $ 35,899 $ 36,771
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for:
Interest $ 21,483 $ 20,382
Income Taxes 3,251 3,042
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS
Transfer of loans to other real estate owned $ 1,329 $ 602
Unrealized losses on securities available for sale:
Change in securities available for sale 1,693 388
Change in deferred income taxes (653) (151)
Change in shareholders' equity 1,040 237
Notes to consolidated financial statements are an integral part hereof.
LSB Bancshares, Inc.
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2001 and 2000
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, 2001 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2001.
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, 2000.
NOTE 2. INVESTMENT SECURITIES
The valuations of investment securities as of September 30, 2001 and
December 31, 2000 were as follows (in thousands):
September 30, 2001
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------- ------ ------ -------
Securities held to maturity:
U.S. Treasury and other U.S.
government agency obligations $25,028 $ 873 $ 0 $25,901
State, county and municipal securities 30,737 1,218 74 31,881
------- ------ ---- -------
Total securities held to maturity $55,765 $2,091 $ 74 $57,782
======= ====== ==== =======
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------- ------ ------ -------
Securities available for sale:
U.S. Treasury and other U.S.
government agency obligations $90,058 $1,681 $ 0 $91,739
State, county and municipal securities 1,356 47 3 1,400
Federal Home Loan Bank stock 2,660 0 0 2,660
------- ------ ---- -------
Total securities available for sale $94,074 $1,728 $ 3 $95,799
======= ====== ==== =======
December 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 $40,526 $ 218 $259 $40,485
State, county and municipal securities 32,302 913 143 33,072
------- ------ ---- -------
Total securities held to maturity $72,828 $1,131 $402 $73,557
======= ====== ==== =======
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------- ------ ------ -------
Securities available for sale:
U.S. Treasury and other U.S.
government agency obligations $49,142 $ 117 $116 $49,143
State, county and municipal securities 852 32 0 884
Federal Home Loan Bank stock 2,477 0 0 2,477
------- ------ ---- -------
Total securities available for sale $52,471 $ 149 $116 $52,504
======= ====== ==== =======
During the year, investment securities were sold with proceeds of
$554,558 and a gain of $540,860.
Investment securities with amortized cost of $104,095,905 and
$90,640,673, as of September 30, 2001 and December 31, 2000,
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
2001 2000
-------- --------
Commercial, financial, & agricultural $187,953 $170,999
Real estate - construction 35,624 35,619
Real estate - mortgage 261,681 267,117
Installment loans to individuals 61,759 64,172
Lease financing 93 158
Other 10,703 10,726
-------- --------
Total loans, net of unearned income $557,813 $548,791
======== ========
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
determined to be uncollectible and placed in a nonaccrual status. For
all impaired loans other than nonaccrual loans, interest income
totaling $84,573 for the period was recorded on an accrual basis.
Interest income on nonaccrual loans is recognized on a cash basis.
Interest of $18,023 was collected during the period on nonaccrual 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 $53,123. 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, 2001, the total investment in loans that are
considered impaired under SFAS 114 was $4,823,000, including nonaccrual
loans of $635,000. A related valuation allowance of $828,000 was
determined for the total amount of impaired loans. The average recorded
investment in impaired loans for the quarter ended September 30, 2001
was approximately $4,953,000.
At September 30, 2001, loans totaling $11,378,000 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:
Nine Months Ended
September 30
2001 2000
------- -------
Balances at beginning of periods $ 5,959 $ 5,246
Provision for loan losses 1,432 1,395
Recoveries of amounts previously
charged off 207 144
Loan losses (1,462) (1,070)
------- -------
Balances at end of periods $ 6,136 $ 5,715
======= =======
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. 125 ("SFAS 125"), "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" was issued by
FASB in June 1996 with an effective date of January 1, 1997. Bancshares
adopted SFAS 125 with no effect on its financial position and operating
results. In October 2000, FASB issued Statement No. 140 ("SFAS 140"),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" as a replacement of SFAS 125. SFAS 140
contains all of the main provisions of SFAS 125 but also covers issues
not previously addressed in Statement 125 concerning transfers and
servicing of financial assets. With certain exceptions, SFAS 140 is
effective for transfers and servicing of financial assets occurring
after March 31, 2001. Bancshares 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 operation for LSB
Bancshares, Inc, ("Bancshares") and its wholly owned subsidiary,
Lexington State Bank ("LSB") for the three months and
nine months ended September 30, 2001 and 2000. The consolidated
financial statements also include the accounts and results of operation
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,
including: (1) the strength of the United States economy generally and
the strength of the local economies in which Bancshares conducts
operations may be different than expected resulting in, among other
things, a deterioration in credit quality or a reduced demand for
credit, including the resultant effect on Bancshares' loan portfolio
and allowance for loan losses; (2) the effects of, and changes in,
trade, monetary and fiscal policies and laws, including interest rate
policies of the Board of Governors of the Federal Reserve System; (3)
inflation, interest rate, market and monetary fluctuations; (4) adverse
conditions in the stock market, the public debt market and other
capital markets (including changes in interest rate conditions) and the
impact of such conditions on Bancshares' capital markets and capital
management activities, including, without limitation, Bancshares'
private equity investment activities and brokerage activities; (5) the
timely development of competitive new products and services by
Bancshares and the acceptance of these products and services by new and
existing customers; (6) the willingness of customers to accept third
party products marketed by Bancshares; (7) the willingness of customers
to substitute competitors' products and services for Bancshares'
products and services and vice versa; (8) the impact of changes in
financial services' laws and regulations (including laws concerning
taxes, banking and securities); (9) technological changes; (10) changes
in consumer spending and saving habits; (11) the effect of corporate
restructurings, acquisitions and/or disposition, and the failure to
achieve the expected revenue growth and/or expense savings from such
corporate restructurings, acquisitions and/or dispositions; (12) the
growth and profitability of Bancshares' noninterest or fee income being
less than expected; (13) unanticipated regulatory or judicial
proceedings; (14) the impact of changes in accounting policies by the
Securities and Exchange Commission; (15) adverse changes in financial
performance and/or condition of Bancshares' borrowers which could
impact repayment of such borrowers' outstanding loans; and (16)
Bancshares' success at managing the risks involved in the foregoing.
Bancshares cautions that the foregoing list of important factors is not
exclusive. Bancshares does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time
by or on behalf of Bancshares.
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
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 $14.550 million for the third quarter of 2001
was down $1.097 million or 7.0% compared to $15.647 million for the
second quarter of 2000. Total interest expense of $5.942 million for
the third quarter of 2001 was down $1.809 million or 23.3% compared to
$7.751 million for the third quarter of 2000. These results produced
net interest income of $8.608 million for the third quarter of 2001,
for an increase of $712,000 or 9.0% compared to $7.896 million for the
third quarter of 2000. Improvement in the bank's net interest income
for the third quarter was the result of interest-bearing liabilities
repricing, primarily time deposits that had been at substantially
higher interest rates. This improved the net interest margin, which
reached 4.38% for the quarter. During the third quarter of 2001, the
Federal Reserve continued to reduce interest rates with two more drops,
one on August 22nd of 25 basis points and one on September 17th of 50
basis points. This brought the interest rate reductions for the year to
a total of eight. On October 3rd the Fed implemented a ninth reduction
which resulted in the prime interest rate dropping to a forty-year low
of 5.50%. Loan growth continued to slow during the third quarter of
2001. Loans constitute the largest group of earning assets and
therefore generate the majority of Bancshares' interest income. For the
period ended September 30, 2001, the loan portfolio increased $8.748
million or 1.6% over December 31, 2000 and $9.022 million or 1.6% over
September 30, 2000. For the period ended September 30, 2001, deposits
increased $12.368 million or 1.8% from December 31, 2000 and $14.574
million or 2.2% over September 30, 2000.
Noninterest Income and Expense
Noninterest income for the third quarter of 2001 was up $91,000 or 4.4%
compared to the third quarter of 2000. Fee income related to service
charges on deposit accounts for the third quarter of 2001 increased
$98,000 or 10.7% compared to the third quarter of 2000. The gain on the
sale of mortgage loans for the third quarter of 2001 was up $103,000
compared to the third quarter of 2000. Much of this income came from
existing mortgages being refinanced in the lower interest rate
environment. Other operating income for the third quarter of 2001
increased $77,000 or 8.4% compared to the third quarter of 2000. Fee
income from the Bank's bankcard division was relatively flat for the
third quarter of 2001 compared to the corresponding period in 2000.
Trust income for the third quarter of 2001 was up $80,000 or 59.1%
compared to the third quarter of 2000. Commissions generated by the
investment services' subsidiary decreased $33,000 or 20.6% the third
quarter of 2001 compared to the third quarter of 2000. The bank's
investment services subsidiary generates commission income from the
sale of mutual funds, annuities and equities.
Noninterest expense for the third quarter of 2001 increased $671,000 or
10.8% compared to the third quarter of 2000. Personnel expense for the
third quarter of 2001, comprised of salaries and fringe benefits,
increased $241,000 or 7.0% over the third quarter of 2000. The increase
for the third quarter of 2001 in occupancy expense was $38,000 or 12.2%
compared to the third quarter of 2000. Equipment depreciation and
maintenance expense increased $32,000 or 8.5% for the period being
compared. Other operating expense for the third quarter of 2001
increased $360,000 or 17.3% compared to the third quarter of 2000.
Automated processing expenses for the third quarter of 2001 decreased
$18,000 or 4.5% compared to the third quarter of 2000. Advertising
expense for the third quarter of 2001 increased $31,000 or 36.5%
compared to the third quarter of 2000. Postage expense for the period
increased $22,000 or 17.8%, while legal and professional expense was up
$127,000 or 49.1%.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Net Interest Income
Total interest income of $44.793 million for the first nine months of
2001 was down $39,000 or 0.1% compared to $44.832 million for the first
nine months of 2000. Total interest expense of $20.435 million for the
first nine months of 2001 decreased $793,000 compared to $21.228
million for the first nine months of 2000. Net interest income of
$24.358 million for the first nine months of 2001 was up $754,000 or
3.2% compared to $23.604 million for the corresponding period in 2000.
The rapidly declining interest rate environment of the first half of
2001 slowed slightly in the third quarter with the Federal Reserve
making only two rate adjustments. As a result, the prime interest rate
dropped 25 basis points in August to 6.50% and 50 basis points in
September to 6.00%. This slightly slower declining rate environment and
the bank's ability to reprice higher cost time deposits has allowed for
some improvement in the net interest margin.
Noninterest Income and Expense
Noninterest income for the first nine months of 2001 was up $1,014,000
or 17.0% compared to the first nine months of 2000. In the second
quarter of 2001, a gain of $541,000 was realized from the sale of stock
held in a corporation providing electronic transaction processing to
financial institutions. Excluding non-recurring gains from sales of
investment securities, noninterest income for the first nine months of
2001 was up $660,000 or 11.4%. Fee income related to service charges on
deposit accounts for the first nine months of 2001 increased $328,000
or 12.4% compared to the first nine months of 2000. Gains on the sale
of mortgage loans for the nine-month period ended September 30, 2001
were up $168,000 compared to the same period of 2000. Much of this gain
is the result of existing mortgages being refinanced due to the low
interest rate environment. Other operating income for the first nine
months of 2001 increased $164,000 or 5.4% compared to the first nine
months of 2000. Fee income from the Bank's bankcard division for the
nine-month period ended September 30, 2001 increased $43,000 or 3.9%
compared to the same period of 2000. General fee and commission income
for the first nine months of 2001 was up $202,000 or 25.2% compared to
comparable period of 2000. Commissions generated by the investment
services' subsidiary decreased $167,000 or 25.8% the first nine months
of 2001 compared to the first nine months of 2000. The bank's
investment services subsidiary generates commission income from the
sale of mutual funds, annuities and equities.
Noninterest expense for the first nine months of 2001 increased $1.831
million or 9.9% compared to the same period of 2000. Personnel expense
for the first nine months of 2001, comprised of salaries and fringe
benefits, increased $795,000 or 7.7% over the comparable period of
2000. The increase for the first nine months of 2001 in occupancy
expense was $52,000 or 5.4% compared to the first nine months of 2000.
Equipment depreciation and maintenance expense increased $95,000 or
8.8% for the period being compared. Other operating expense for the
first nine months of 2001 increased $889,000 or 14.6% over the first
nine months of 2000. Automated processing expenses for the first nine
months of 2001 increased $34,000 or 2.9% compared to the first nine
months of 2000. Postage expense for the period increased $70,000 or
17.0%, while legal and professional expense was up $268,000 or 31.9%.
General operating expenses for the first nine months of 2001 increased
$483,000 or 45.2% compared to the corresponding period of 2000.
Asset Quality and Provision for Loan Losses
The reserve for loan losses was $6.136 million or 1.10% of loans
outstanding at September 30, 2001 compared to $5.959 million or 1.09%
of loans outstanding at December 31, 2000 and $5.715 million or 1.04%
at September 30, 2000. Non-performing loans totaled $3.713 million or
0.66% of loans outstanding at September 30, 2001 compared to $2.984
million or .54% of loans outstanding at December 31, 2000 and $2.827
million or .51% of loans outstanding at September 30, 2000.
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, 2001, Bancshares had
$330,000 in restructured loans, $1.060 million in other real estate and
$635,000 in nonaccrual loans. Accruing loans past due 90 days or more
were $1.688 million at September 30, 2001 compared to $1.316 million at
December 31, 2000 and $1.031 at September 30, 2000. The accrual of
interest generally discontinues on any loan that becomes 90 days past
due as to principal or interest unless collection of both principal and
interest is assured by way of collateralization, guarantees or other
security and the loan is considered to be in the process of collection.
At September 30, 2001, the reserve for loan losses was 1.65 times
non-performing loans, compared to 2.00 times at December 31, 2000 and
2.02 times non-performing loans at September 30, 2000.
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 September 30, 2001 was
$1.432 million compared to $1.395 million in 2000. Net charge-offs
amounted to $1,255,000, or .30% of average loans outstanding for the
first nine months of 2001. The quality of the loan portfolio remains at
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.
ASSET QUALITY ANALYSIS
Quarter Year Quarter
Ended Ended Ended
9/30/01 12/31/00 9/30/00
------- -------- -------
RESERVE FOR LOAN LOSSES
Beginning Balance $ 5,959 $ 5,246 $ 5,246
Provision for loan losses 1,432 2,550 1,395
Net (charge-off) recoveries (1,255) (1,837) (926)
------- ------- -------
Ending balance 6,136 5,959 5,715
RISK ASSETS
Nonaccrual loans $ 635 $ 57 $ 257
Foreclosed real estate 1,060 1,273 1,492
Restructured loans 330 338 47
Loans 90 days or more past due
and still accruing 1,688 1,316 1,031
------- ------- -------
Total risk assets 3,713 2,984 2,827
ASSET QUALITY RATIOS
Nonaccrual loans as a percentage of total loans 0.11% 0.01% 0.05%
Nonperforming assets as a percentage of:
Total assets 0.44 0.38 0.35
Loans plus foreclosed property 0.66 0.54 0.51
Net charge-offs as a percentage of average loans 0.30X 0.34 0.23X
Reserve for loan losses as a percentage of loans 1.10 1.09 1.04
Ratio of reserve for loan losses to:
Net charge-offs 3.67X 3.24 4.63X
Nonaccrual loans 9.66 104.54 22.24
*N/M Denotes Non Meaningful
X Denotes Annualized
Income Taxes
Accrued taxes applicable to income for the nine-month period ended
September 30, 2001 were $3.118 million compared to $2.984 for the
nine-month period ended September 30, 2000. Pretax income for the first
nine months of 2001 of $9.643 million was down $100,000 compared to
$9.743 million for the first nine months of 2000. The increase in
accrued taxes for the periods is primarily due to less tax-exempt
income in 2001 and the exercise of nonqualified stock options in 2000.
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, 2001, based on these measures,
Bancshares' had a Tier 1 capital ratio of 14.20% compared to the
regulatory requirement of 4% and total capital ratio of 15.34% 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,
2001, Bancshares' Tier 1 leverage ratio was 9.49%.
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 interest-sensitive
liabilities. The bank uses an asset/liability simulation model to
produce a gap analysis. The simulation model computes projected runoff
of deposits that do not have contractual maturity dates. On September
30, 2001 the gap between interest-sensitive assets and
interest-sensitive liabilities was a positive $69,076,000 or 1.23.
Under current economic conditions, management believes that is an
acceptable ratio.
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, 2001 and 2000 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
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
3 Articles of Incorporation of the Corporation, as
amended (incorporated herein by reference to the
Corporation's registration statement on Form S-8,
filed with the Commission on May 16, 2001 (Commission
File No. 333-61046)).
4.1 Amendment No. 1 to LSB Bancshares, Inc. 1996 Omnibus
Stock Incentive Plan (incorporated herein by
reference to the Corporation's registration statement
on Form S-8, filed with the Commission on May 16,
2001 (Commission File No. 333-61046)).
4.2 LSB Bancshares, Inc. Direct Stock Purchase Plan
(incorporated herein by reference to the
Corporation's registration statement on Form S-3,
filed with the Commission on April 24, 2001
(Commission File No. 333-59464)).
B. Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the nine
months ended September 30, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Date November 9, 2001 LSB BANCSHARES., INC.
(Registrant)
By: /s/ Monty J. Oliver
---------------------------------------
Name: Monty J. Oliver
Title: Secretary and Chief Financial Officer
(Authorized Officer and Chief
Accounting Officer)