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, 1997
Commission File Number 0-11448
LSB BANCSHARES, INC.
One LSB Plaza
Lexington, North Carolina 27292
(910) 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, 1997 was
6,914,285.
2
LSB BANCSHARES, INC.
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
Consolidated Statements of Income
Three Months Ended September 30,1997 and 1996
Nine Months Ended September 30, 1997 and 1996
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 1997 and 1996
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II. Other Information
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LSB Bancshares, Inc.
Consolidated Balance Sheets
(In Thousands)
September December
1997 1996
--------- ---------
ASSETS
Cash and Due from Banks $ 27,557 $ 25,196
--------- ---------
Federal Funds Sold 68,720 26,720
--------- ---------
Investment Securities:
Held to Maturity, Market Value $60,320 and $72,081 58,979 71,137
--------- ---------
Available for Sale, at Market Value 47,681 56,941
--------- ---------
Loans:
Commercial 179,391 166,682
Installment 63,416 59,977
Mortgage 146,418 129,242
--------- ---------
Total Loans 389,225 355,901
Less, Reserve for Loan Losses (4,666) (4,075)
--------- ---------
Net Loans 384,559 351,826
--------- ---------
Premises and Equipment 11,461 11,264
--------- ---------
Other Assets 9,164 9,002
--------- ---------
TOTAL ASSETS $ 608,121 $ 552,086
========= =========
LIABILITIES
Deposits:
Demand $ 61,913 $ 62,375
Savings, NOW and Money Market Accounts 230,731 195,086
Certificates of Deposit of less than $100,000 157,286 148,902
Certificates of Deposit of $100,000 or more 50,439 58,796
--------- ---------
Total Deposits 500,369 465,159
Securities Sold Under Agreements to Repurchase 6,422 5,985
Borrowings from the Federal Home Loan Bank 31,591 14,200
Other Liabilities 3,728 3,874
--------- ---------
Total Liabilities 542,110 489,218
--------- ---------
SHAREHOLDERS' EQUITY
Capital Stock: Common, authorized 10,000,000
Shares, Par Value $5, issued 6,914,285 shares
in 1997 and 6,884,292 shares in 1996 34,571 34,432
Paid-In Capital 14,701 14,671
Retained Earnings 16,688 13,872
Net Unrealized Gains (Losses) on Securities Available
for Sale, Net of taxes 51 (107)
--------- ---------
Total Shareholders' Equity 66,011 62,868
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 608,121 $ 552,086
========= =========
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LSB Bancshares, Inc.
Consolidated Statements of Income
(In Thousands except Share Data and Note)
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- -----------------------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
INTEREST INCOME
Interest and Fees on Loans $ 8,989 $ 7,752 $ 26,094 $ 22,041
Interest on Investment Securities:
Taxable 1,264 1,586 3,956 5,001
Tax Exempt 427 454 1,346 1,435
Federal Home Loan Bank 36 62 156 123
Federal Funds Sold 729 326 1,781 590
---------- ---------- ----------- -----------
Total Interest Income 11,445 10,180 33,333 29,190
---------- ---------- ----------- -----------
INTEREST EXPENSE
Deposits 4,625 4,065 13,217 11,701
Securities Sold Under Agreements to Repurchase 55 37 145 97
Borrowings from the Federal Home Loan Bank 404 191 1,071 314
---------- ---------- ----------- -----------
Total Interest Expense 5,084 4,293 14,433 12,112
---------- ---------- ----------- -----------
NET INTEREST INCOME 6,361 5,887 18,900 17,078
Provision for Loan Losses 159 163 467 499
---------- ---------- ----------- -----------
Net Interest Income After Provision
for Loan Losses 6,202 5,724 18,433 16,579
---------- ---------- ----------- -----------
NONINTEREST INCOME
Service Charges on Deposit Accounts 633 621 1,914 1,848
Gains (Losses) on Sales of Mortgages 36 25 113 95
Other Operating Income 803 580 2,187 1,825
Gains (Losses) on Sales of Investment Securities 0 5 (32) (18)
---------- ---------- ----------- -----------
Total Noninterest Income 1,472 1,231 4,182 3,750
---------- ---------- ----------- -----------
NONINTEREST EXPENSE
Personnel Expense 2,549 2,430 7,664 7,405
Occupancy Expense 277 315 925 943
Equipment Depreciation and Maintenance 304 250 850 708
Other Operating Expense 1,529 1,257 4,461 3,764
Restructuring Charges 0 5 0 522
Merger Related Costs 1,416 0 1,416 0
---------- ---------- ----------- -----------
Total Noninterest Expense 6,075 4,257 15,316 13,342
---------- ---------- ----------- -----------
Income Before Income Taxes 1,599 2,698 7,299 6,987
Income Taxes 765 811 2,528 1,930
---------- ---------- ----------- -----------
NET INCOME $ 834 $ 1,887 $ 4,771 $ 5,057
========== ========== =========== ===========
NET INCOME PER SHARE $ .12 $ .27 $ 0.69 $ 0.74
Weighted Average Shares Outstanding 6,914,285 6,884,292 6,897,159 6,869,306
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LSB Bancshares, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
Six Months Ended
September 30
1997 1996
-------- --------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 4,771 $ 5,057
Adjustments to reconcile net income to net cash:
Depreciation and amortization 884 755
Securities premium amortization and
Discount accretion, net (16) 31
(Increase) decrease in loans held for sale 1,433 (4,078)
Deferred income taxes (31) 349
Income taxes payable 35 (290)
(Increase) decrease in income earned
but not received (232) (302)
Increase (decrease)in interest accrued
but not paid (408) (25)
Provision for loan losses 467 499
Gain on sale of investment securities 116 18
Gain on sale of premise and equipment 18 (7)
-------- --------
Net cash provided by operating activities 7,037 2,007
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (420) (3,000)
Proceeds from maturities of securities held to maturity 11,454 13,927
Proceeds from sales of securities held to maturity 1,954 0
Purchases of securities available for sale (12,411) (25,733)
Proceeds from maturities of securities available for sale 11,697 17,359
Proceeds from sales of securities available for sale 9,291 4,029
Net (increase) decrease in loans made to customers (34,633) (39,505)
Purchases of premises and equipment (1,319) (963)
Proceeds from sale of premises and equipment 219 31
Net (increase)decrease in Federal Funds sold (42,000) (23,705)
(Increase) decrease in other assets 14 (72)
-------- --------
Net cash used by investing activities (56,154) (57,632)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW, money market and savings accounts 35,182 14,589
Net increase (decrease) in time deposits 27 26,586
Net increase (decrease) in securities
sold under agreements to repurchase 312 2,352
Proceeds from issuance of long-term debt 22,200 14,908
Payments on long-term debt (4,683)
Dividends paid (1,955) (1,629)
Net increase (decrease) in other liabilities 227 328
Common stock Issued 168 253
-------- --------
Net cash provided by financing activities 51,478 57,387
-------- --------
Increase (decrease) in cash 2,361 1,762
Cash at the beginning of the period 25,196 22,635
======== ========
Cash at end of period $ 27,557 $ 24,397
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for:
Interest $ 11,573 $ 12,075
Income Taxes 2,500 1,999
Noncash financing and investing activities:
Transfer of loans to other real estate owned $ 27 $ 277
Unrealized gains/losses on securities available
for sale:
Change in securities available for sale $ 246 $ 1,269
Change in deferred taxes 88 431
Change in shareholders' equity 158 838
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LSB Bancshares, Inc.
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 1997 and 1996
Note 1. Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the nine-month period ended September
30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
The accompanying unaudited Consolidated Financial Statements include
the accounts of LSB Bancshares, Inc., (the Corporation) and its
wholly-owned subsidiary Lexington State Bank (the Bank) and the Bank's
wholly-owned subsidiaries Peoples Finance Company of Lexington, Inc.
and LSB Financial Services, Inc.
For further information, refer to the Consolidated Financial Statements
and footnotes thereto included in the Corporation's annual report on
Form 10-K for the year ended December 31, 1996.
Note 2. Investment Securities
The valuations of investment securities as of September 30, 1997 and
December 31, 1996 were as follows (in thousands):
September 30, 1997
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Securities held to maturity:
U.S. Treasury and other U.S. government
Agency obligations $28,004 $ 46 $ 65 $27,985
State, county and municipal securities 30,975 1,368 8 32,335
------- ------ ---- -------
Total securities available for sale $58,979 $1,414 $ 73 $60,320
======= ====== ==== =======
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Securities available for sale:
U.S. Treasury and other U.S. government
Agency obligations $44,043 $ 220 $113 $44,150
Mortgage backed 1,141 0 22 1,110
State, county and municipal securities 0 0 0 0
Federal Home Loan Bank stock 2,412 0 0 2,412
======= ====== ==== =======
Total securities available for sale $47,596 $ 220 $135 $47,681
======= ====== ==== =======
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December 31, 1996
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Securities held to maturity:
U.S. Treasury and other U.S. government
Agency obligations $36,505 $ 0 $ 108 $31,397
State, county and municipal securities 30,486 1,098 0 31,584
------- ------ ----- -------
Total securities available for sale $66,991 $1,098 $ 108 $67,981
======= ====== ===== ========
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Securities available for sale:
U.S. Treasury and other U.S. government
Agency obligations $22,501 $ 47 $ 45 $22,503
State, county and municipal securities
Federal Home Loan Bank stock 1,123 0 0 1,123
------- ------ ----- -------
Total securities available for sale $23,624 $ 47 $ 45 $23,626
======= ====== ===== =======
Investment securities were sold for the periods ended September 30,
1997 and December 31, 1996 resulting in net realized losses of $115,776
and 0, respectively. Securities received during the merger that were
not in compliance with the investment policies of the bank were sold.
Investment securities with amortized cost of $81,793,000 and
$80,778,672 as of September 30, 1997 and December 31, 1996, were
pledged to secure public deposits and for other purposes.
Note 3. Loans (Table In Thousands)
A summary of consolidated loans follows:
September 30
1997 1996
-------- --------
Commercial $179,391 $159,014
Installment 59,914 56,077
Mortgage 146,418 122,623
Credit Cards 3,502 2,873
-------- --------
Total $389,225 $340,587
======== ========
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 all nonaccrual loans. Interest
income on impaired loans is recognized consistent with the
Corporation's income recognition policy of daily accrual of income
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until the loan is determined to be uncollectable and placed in a
nonaccrual status. For all impaired loans other than nonaccrual loans,
interest income totaling $135,388 for the period was recorded on an
accrual basis. Interest income on nonaccrual loans is recognized on a
cash basis. The actual amount of interest income received from the
loans for the period was 0. Interest income for the period on
nonaccrual loans that would have been recorded in accordance with the
original terms of the notes was $43,862. The adoption of SFAS 114 and
SFAS 118 did not have a material effect on Bancshares' financial
position or results of operations and required no increase to the
reserve for loan and lease losses.
At September 30, 1997, the total investment in loans that are
considered impaired under SFAS 114 was $3,074,283 of which $590,616
were nonaccrual loans. A related valuation allowance of $363,367 was
determined for the total amount of impaired loans. The average recorded
investment in impaired loans for the quarter ended September 30, 1997
was approximately $2,410,599.
At September 30, 1997 loans totaling $4,436,343 were held for sale
stated at the lower of cost of 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
1997 1996
------- -------
Balances at beginning of periods $ 4,075 $ 3,711
Provision for loan losses 467 499
Recoveries of amounts previously
charged off 568 108
Loan losses (444) (447)
------- -------
Balances at end of periods $ 4,666 $ 3,871
======= =======
Note 5. Restructuring Charges
In January 1996, the Board of Directors of the Corporation approved a
strategic plan to improve operating efficiencies. The major element of
the plan was the reduction in staff through an offer of early
retirement to all employees 55 years of age or older with ten years or
more of service. Of the employees offered this opportunity, 68% opted
for early retirement, which was effective March 31, 1996. The costs
associated with increases in the actuarially determined pension and
post retirement medical expenses totaled $490,000, severance costs
associated with the early retirement package totaled $27,000 and
professional fees for administration of the early retirement totaled
$5,000.
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Note 6. Stock Split
In January of 1996, the Board of Directors of Bancshares declared a
five-for-four stock split payable February 15, 1996. All previously
reported per share amounts have been restated to reflect this stock
split.
Note 7. Other Accounting Changes
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement No. 125 ("SFAS 125") "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" which became
effective January 1, 1997 and superseded SFAS 122. SFAS 125 applies an
accounting treatment similar to that outlined in SFAS 122 for mortgage
servicing rights and extends it to servicing assets on all financial
assets. In December of 1996, the FASB issued SFAS 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125", which
amends SFAS 125 by deferring the effective date of certain provisions
of the Statement by one year. This means that entities that are
applying SFAS 125 for the first time may phase in the pronouncement,
applying those parts of SFAS 125 that are not covered by SFAS 127 in
the current year and those covered by SFAS 127 in the following year.
The Corporation adopted SFAS 125, as amended by SFAS 127, on January 1,
1997. The implementation of the Statement and the related amendment did
not have a material impact on the consolidated financial position or
consolidated results of operations of the Corporation.
Disclosure requirements of Financial Accounting Standards No. 123 (SFAS
123) "Accounting for Stock-Based Compensation" are applicable for
financial statements for fiscal years beginning after December 15,
1995. SFAS 123 establishes a fair value based method of accounting for
stock options and other equity instruments used in employee
compensation plans. SFAS 123 also requires significantly expanded
disclosures, including disclosure of the pro forma amount of net income
and earnings per share as if the fair value based method were used to
account for stock-based compensation, if the intrinsic value method of
APB No.-25 is retained. The Corporation intends to retain APB No.-25 in
its pro forma disclosure.
In March 1997, the Financial Accounting Standards Board ("FSAB") issued
Statement of Accounting Standards ("SFAS") No. 128, "Earnings per
Share". SFAS 128 establishes standards for computing and presenting
earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock, such as options and warrants.
SFAS 128 simplifies the standards for computing EPS previously found in
Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per
Share". SFAS 128 replaces the presentation of "primary" EPS with a
presentation of "basic" EPS and requires dual presentation of "basic"
and "diluted" EPS on the face of the income statement for all entities
with complex capital structures. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares
10
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
company. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods.
Earlier application is not permitted. Restatement of all prior-period
earnings per share data presented is required. Assuming that SFAS 128
had been implemented, basic earnings per share would not have differed
materially from those disclosed in the accompanying consolidated
statements of income.
In March 1997, the FASB also issued SFAS 129, "Disclosure of
Information about Capital Structure". SFAS 129 establishes standards
for disclosing information about a company's capital structure. Under
SFAS 129, a company shall provide within its financial statements a
summary explanation of the pertinent rights and privileges of the
various securities that are outstanding. The Statement is effective for
financial statements for periods ending after December 15, 1997. The
Corporation does not anticipate that the implementation of this
Statement will have a material impact on the consolidated financial
position or results of operation.
Note 8. Merger
On January 21, 1997, LSB Bancshares, Inc. ("LSB") and Old North State
Bank ("ONSB") of Winston-Salem, North Carolina announced the signing of
a letter of intent under which the two banks would merge. A definitive
agreement was signed on March 14, 1997. Under the terms of the
definitive agreement LSB Bancshares, Inc. would acquire ONSB in a stock
transaction to be accounted for as a pooling of interests. The terms of
the agreement further stipulated that ONSB shareholders would receive
0.948 shares (subject to adjustment under certain conditions) of LSB
Bancshares, Inc. common stock in exchange for each share of ONSB common
stock held. The merger was approved by the shareholders each
institution on August 1, 1997 and regulatory approval was subsequently
received. On August 11, 1997 LSB issued 1,507,045 shares of common
stock, at an exchange rate of 0.938, to consummate the merger.
Completion of the merger increased LSB's branch system to 21 offices in
Davidson, Forsyth and Stokes Counties. LSB incurred approximately $1.4
million in nonrecurring merger-related costs associated with executing
the merger, which were charged against earnings in the third quarter of
1997.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30. 1996
Net Interest Income
The primary source of earnings for the Corporation is net interest
income, which represents the dollar amount by which interest generated
by earning assets exceeds the cost of funds. Earning assets consist
primarily of loans and investment securities and cost of funds is the
interest paid on interest-bearing deposits and borrowed funds.
Total interest income of $11,445,000 for the third quarter of 1997 was
up $1,265,000 or 12.4% compared to $10,180,000 for the third quarter of
1996. Total interest expense for the same period increased $791,000 or
18.4%. The prime interest rate, which made its first change in March of
this year since dropping to 8.25% in February of 1996, remained steady
during the third quarter of 1997. The prime interest rate is used as an
interest rate indicator by banks and has been at 8.50% since that March
27th increase. These results produced net interest income of $6,361,000
for the third quarter of 1997, for an increase of $474,000 or 8.1%
compared to $5,887,000 for the third quarter of 1996.
Noninterest Income and Expense
Noninterest income for the third quarter of 1997 was up $241,000 or
19.6% compared to the third quarter of 1996. Fee income related to
service charges on deposit accounts for the third quarter of 1997 was
up a marginal $12,000 or 1.9% compared to the third quarter of 1996.
Other operating income for the third quarter of 1997 was up $233,000 or
38.4% compared to the third quarter of 1996. This increase is
attributable to fee income generated from deposit and loan services
provided by the Bank.
Noninterest expense for the third quarter of 1997, excluding one-time
nonrecurring merger related costs of $1,416,000, increased $402,000 or
9.4% compared to the third quarter of 1996. Personnel expense for the
third quarter of 1997, comprised of salaries and fringe benefits,
increased $119,000 or 4.9% compared to the third quarter of 1996.
Occupancy expense for the same period decreased $38,000 or 12.1%.
Equipment depreciation and maintenance expense increased $54,000 or
21.6% the third quarter of 1997 compared to the same period last year,
while other operating expense increased $272,000 or 21.6% during the
same period. These increases are attributable to enhancements made to
the Bank's data processing systems. All increases in noninterest
expense were within the Bank's budgeted projections.
12
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Net Interest Income
Total interest income of $33,333,000 for the first nine months of 1997
was up $4,143,000 or 14.2% compared to $29,190,000 for the first nine
months of 1996. Total interest expense for the same period increased
$2,321,000 or 19.2. Net interest income of $18,900,000 for the first
nine months of 1997 was up $1,822,000 or 10.7% compared to $17,078,000
for the first nine months of 1996. Stable interest rates during the
first nine months of the year along with strong loan growth were major
factors contributing to this increase.
Noninterest Income and Expense
Noninterest income for the first nine months of 1997 was up $432,000 or
11.5% compared to the first nine months of 1996. Fee income related to
service charges on deposit accounts for the first nine months of 1997
was up $66,000 or 3.6% compared to the first nine months of 1996. Other
operating income for the first nine months of 1997 was up $362,000 or
19.8% compared to the first nine months of 1996. This increase is
attributable to greater activity in deposit and loan services provided
by the Bank and the resultant fee income generated.
Noninterest expense for the first nine months of 1997, excluding
one-time nonrecurring merger related costs of $1,416,000, increased
$558,000 or 4.2% compared to the same period of 1996. The contributing
factor to this small increase is the restructuring charge of $522,000
incurred in the first quarter of 1996. The restructuring plan
implemented by the Bank in 1996 included an offer for early retirement
to all employees 55 years of age with ten years of service. Of this
group, 68% opted for early retirement, which was effective March 31,
1996. Excluding the restructuring charges, noninterest expense for the
first nine months of 1997 increased $1,080,000 or 8.4% compared to the
same period of 1996. Personnel expense for the first nine months of
1997, comprised of salaries and fringe benefits, increased $259,000 or
3.5% compared to the first nine months of 1996. Occupancy expense for
the period being compared decreased slightly. Equipment depreciation
and maintenance expense for the first nine months of 1997 increased
$142,000 or 20.0%, while other operating expense increased $697,000 or
18.5% for the same period. These increases are attributable to
enhancements made to the Bank's data processing systems during this
period. All increases in noninterest expense were within the Bank's
budgeted projections.
Asset Quality and Provision for Loan Losses
The reserve for loan losses was $4,666,000 or 1.20% of loans
outstanding at September 30, 1997 compared to $4,075,000 or 1.14% of
loans outstanding at December 31, 1996 and $3,871,000 or 1.14% at
13
September 30, 1996. Nonperforming loans totaled $2,220,000 or .57% of
loans outstanding at September 30, 1997 compared to $2,597,000 or 1.00%
of loans outstanding at September 30, 1996. Nonperforming loans include
nonaccrual loans, restructured loans, other real estate acquired
through foreclosed properties and accruing loans ninety days or more
past due. At September 30, 1997 the Bank had $167,000 in restructured
loans, $591,000 in nonaccrual loans and $928,000 in other real estate.
Accruing loans past due 90 days or more were $534,000 at September 30,
1997 compared to $164,000 at September 30, 1996. 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, 1997, the reserve for loan losses was 2.10 times the
nonperforming loans, compared to 1.56 times at December 31, 1996 and
1.11 times nonperforming loans at September 30, 1996.
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.
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 will
be adopted to optimize net interest income while minimizing the risk
associated with unanticipated changes in interest rates.
The provision for loan and lease losses for the first nine months of
1997 was $467,000 compared to $499,000 for the first nine months of
1996. As the result of one large recovery in the second quarter of
1997, related to a loan previously charged off, total recoveries
exceeded charge-offs. The decrease in the 1997 provision for loan and
lease losses reflects this net increase in the loan loss reserve
resulting from the recovery.
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.
14
ASSET QUALITY ANALYSIS
9/30/97 9/30/96
RESERVE FOR LOAN LOSSES
Beginning balance $4,075 $3,711
Provision for loan losses 467 499
Net charge-offs -124 339
Ending balance 4,666 3,871
RISK ASSETS
Nonaccrual loans $ 591 $1,151
Foreclosed real estate 928 1,080
Restructured loans 167 260
Loans 90 days or more past due and
still accruing 534 241
ASSET QUALITY RATIOS
Nonaccrual loans as a percentage of total loans .15% .34%
Nonperforming assets as a percentage of:
Total assets .37 .49
Loans plus foreclosed property .57 .80
Net charge-offs as a percentage of average loans N/M .11
Reserve for loan losses as a percentage of loans 1.20 1.14
Ratio of reserve for loan losses to:
Net charge-offs N/M 11.42X
Nonaccrual loans 7.90 3.36
N/M Denotes Non Meaningful
Income Taxes
Accrued taxes applicable to income for the nine-month period ended
September 30, 1997 increased $598,000 compared to the nine-month period
ended September 30, 1996. Pretax income for the first nine months of
1997 was $7,299,000, an increase of $312,000 or 4.5% compared to
$6,987,000 for the first nine months of 1996. The increase in accrued
taxes for the first nine months of 1997 is attributable to the higher
operating income. The effective tax rate for the nine-month period
ended September 30, 1997 was 34.6% compared to 27.6% for the nine-month
period ended September 30, 1996.
Capital Resources and Shareholders' Equity
Regulatory guidelines require minimum levels of capital, based on a
risk weighting of each asset category and off-balance sheet
contingencies. At September 30, 1997, based on these measures, the
Bank's ratio for Tier 1 capital was 11.42% compared to the regulatory
minimum risk-based capital ratio requirement of 4%. The Bank's Tier 2
capital ratio at this date was 19.66% compared to the regulatory
requirement of 8%. Tier 1 or core capital, as defined by federal bank
regulators, equals common shareholders' equity capital less goodwill
and other disallowed intangible assets. Tier 2 capital is the allowable
portion, as defined by the federal regulators, of the allowance for
loan losses and 100% of Tier 1 capital. Federal banking guidelines for
risk-based capital limit the amount of the allowance for loan losses
allowable in Tier 2 or total capital to
15
1.25% of risk-weighted assets.
Interest Rate Sensitivity and Liquidity
Asset/liability management is the process used to monitor exposure to
interest rate risk, balance sheet trends and pricing policies. It also
addresses proper liquidity positioning and sound capital. The goals of
asset/liability management are to ensure profitability and performance,
minimize risk, adhere to proper liquidity and maintain sound capital.
Profitability and performance are affected by balance sheet composition
and interest rate movements. Management responsibility for both
liquidity and interest sensitivity reside with a designated
Asset/Liability Management Committee ("ALCO"). Market conditions,
interest rate trends and the economic environment are all evaluated by
the ALCO as a part of its asset/liability management decision-making
process. Based upon its view of existing and expected market
conditions, the 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.
To minimize risk of interest rate movements, the asset/liability
management process seeks to match maturities and repricing
opportunities of interest-sensitive assets and liabilities. As of
September 30, 1997, the gap between interest-sensitive assets and
interest-sensitive liabilities was a negative $90,798,000 or 0.78.
Under current economic conditions, management believes this is an
acceptable level.
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. Traditionally,
LSB has been a seller of excess investable funds in the federal funds
market and uses these funds as a part of its liquidity management.
Details of cash flows for the six months ended September 30, 1997 and
1996 are provided in the Consolidated Statements of Cash Flows.
16
PART II. OTHER INFORMATION
Item 5. Other Information
On January 21, 1997, Bancshares announced the signing of a Letter of
Intent under which LSB Bancshares, Inc. and Old North State Bank of
Winston-Salem, North Carolina would merge. Under the terms of the
Letter of Intent, Old North State Bank shareholders would receive LSB
Bancshares, Inc. common stock in exchange for their Old North State
Bank holdings. The value of the transaction would be $30 million based
on Bancshares recent trading price of $20.00 per share. The transaction
is anticipated to result in earnings per share dilution to the
Corporation in the year in which the transaction closes due to one-time
merger-related expenses, but become accretive in the following years.
In connection with the signing of the Letter of Intent, Old North State
granted the Corporation an option to purchase 265,675 shares of its
stock at the exercise price of $8.00 per share, exercisable in certain
events. LSB has a dominant position in Davidson County, while Old North
State has a strong and growing presence in Forsyth and Stokes Counties,
which are the contiguous counties north of Davidson County. A
Definitive Agreement between the two institutions was signed on March
14, 1997. The merger was approved by the shareholders of each
institution on August 1, 1997 and regulatory approval was subsequently
received. On August 11, 1997 the Corporation issued 1,507,045 shares of
common stock, at an exchange rate of 0.938 to consummate the merger.
The foregoing statements regarding the merger of LSB and Old North
State Bank, including the projected earnings per share dilution on
1997 and accretive effect of the merger in subsequent years, and the
expected timing of the consummation of the transaction are forward
looking statement" as defined in the Private Securities Litigation
Reform Act of 1995. As forward-looking statements, they are
necessarily based upon various uncertain factors, including, but not
limited to, the completion of the parties' due diligence reviews and
negotiations, projections of costs to be incurred in connection with
the merger and the parties' financial performance in the future.
Because of such uncertainties, the actual results of the merger may
differ significantly from the forward-looking statements contained
herein.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits.
27 Financial Data Schedule (for SEC use only)
B. Reports on Form 8-K
During the third quarter of 1997, the Company filed the
following reports on Form 8-K:
(1) Current Report on Form 8-K dated August 11, 1997
17
(filed August 25, 1997) reporting under Item 2, among
other things, the Company's acquisition of Old North
State Bank.
(2) Current Report on Form 8-K/A dated October 27, 1997
(filed October 27, 1997) reporting information
required to be reported under Item 7(a), Financial
Statements of businesses to be acquired, the
following financial statements of the Company:
(a) Financial statements of businesses acquired.
Consolidated Balance Sheets of on Old North
State Bank for the years ended December 31,
1996 and 1995.
Consolidated Statements of Income of Old
North State Bank for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Statements of Changes in
Stockholders' Equity of Old North State Bank
for the years ended December 31, 1996, 1995
and 1994.
Consolidated Statements of Cash Flows of Old
North State Bank for the years ended
December 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements
of Old North State Bank Independent
Auditor's Report of Larrowe, Cardwell &
Company, LC.
Consolidated Balance Sheets of Old North
State Bank for the six months ended June 30,
1997.
Consolidated Statements of Income of Old
North State Bank for the six months ended
June 30, 1997 and June 30, 1996.
Consolidated Statements of Cash Flows of Old
North State Bank for the six months ended
June 30, 1997 and June 30, 1996.
Consolidated Statements of Changes in
Stockholders' Equity of Old North State Bank
for the six months ended June 30, 1997 and
June 30, 1996.
Notes to Consolidated Financial Statements
of Old North State Bank.
(b) Pro forma financial information.
Pro Forma Condensed Balance Sheet June 30,
1997.
Pro Forma Condensed Balance Sheet December
31,
18
1996.
Pro Forma Condensed Income Statement for the
six months ended June 30, 1997.
Pro Forma Condensed Income Statement for the
six months ended June 30, 1996.
Pro Forma Condensed Income Statement for the
year ended December 31, 1996.
Pro Forma Condensed Income Statement for the
year ended December 31, 1995.
Pro Forma Condensed Income Statement for the
year ended December 31, 1994.
Notes to Pro Forma Condensed Financial
Information.
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 10, 1997 LSB BANCSHARES, INC.
--------------------
(Registrant)
/s/ Monty J. Oliver
-------------------
Monty J. Oliver
Chief Financial Officer
Principal Accounting Officer