1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1998
Commission File Number 0-11448
LSB BANCSHARES, INC.
One LSB Plaza
Lexington, North Carolina 27292
(336) 248-6500
Incorporated in the State of North Carolina
IRS Employer Identification No. 56-1348147
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Par Value $5.00 Per Share
LSB Bancshares, Inc., has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and has been subject to such filing requirements for the past 90
days.
The number of shares outstanding as of June 30, 1998 was 8,706,367.
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LSB BANCSHARES, INC.
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1998 and 1997, December 31, 1997
Consolidated Statements of Income
Three Months Ended June 30, 1998 and 1997
Six Months Ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements
Six Months Ended June 30, 1998 and 1997
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II. Other Information
Signatures
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LSB Bancshares, Inc.
Consolidated Balance Sheets
(In Thousands)
June 30 December 31 June 30
1998 1997 1997
--------- ----------- ---------
ASSETS
Cash and Due from Banks $ 23,811 $ 25,368 $ 25,803
Interest-Bearing Bank Balances 24,129 12,127 397
Federal Funds Sold 25,755 60,340 48,300
Investment Securities:
Held to Maturity, M/V $45,613, $56,209 and $63,754 44,248 54,891 62,843
Available for Sale, at M/V 90,363 50,725 56,505
Loans 414,783 396,991 380,332
Less, Reserve for Loan Losses (4,783) (4,601) (4,618)
--------- --------- ---------
Net Loans 410,000 392,390 375,714
Premises and Equipment 11,553 11,261 11,207
Other Assets 9,380 9,163 9,525
--------- --------- ---------
TOTAL ASSETS $ 639,239 $ 616,265 $ 590,294
========= ========= =========
LIABILITIES
Deposits:
Demand $ 67,796 $ 67,256 $ 66,293
Savings, NOW and Money Market Accounts 229,665 227,239 209,651
Certificates of Deposit of less than $100,000 162,533 154,566 156,841
Certificates of Deposit of $100,000 or more 64,536 53,964 56,336
--------- --------- ---------
Total Deposits 524,530 503,025 489,121
Securities Sold Under Agreements to Repurchase 10,564 8,263 4,784
Borrowings from the Federal Home Loan Bank 30,600 33,758 27,517
Other Liabilities 3,559 3,692 3,087
--------- --------- ---------
Total Liabilities 569,253 548,738 524,509
--------- --------- ---------
SHAREHOLDERS' EQUITY
Capital Stock: Common, authorized 50,000,000
Shares, Par Value $5, issued 8,706,367 shares
in 1998 and 8,667,426 and 8,624,119 shares
in 1997 43,532 34,665 34,451
Paid-In Capital 14,891 14,772 14,684
Retained Earnings 11,392 17,916 16,748
Accumulated Other Comprehensive Income 171 174 (98)
--------- --------- ---------
Total Shareholders' Equity 69,986 67,527 65,785
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 639,239 $ 616,265 $ 590,294
========= ========= =========
Memorandum: Standby Letters of Credit $ 2,931 $ 2,221 $ 2,442
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LSB Bancshares, Inc.
Consolidated Statements of Income
(In Thousands except Share Data and Note)
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- ---------------------------
1998 1997 1998 1997
---------- ---------- ---------- -----------
INTEREST INCOME
Interest and Fees on Loans $ 9,680 $ 8,795 $ 18,997 $ 17,201
Interest on Investment Securities:
Taxable 1,448 1,348 2,716 2,698
Tax Exempt 455 455 921 918
Federal Home Loan Bank 339 63 484 120
Federal Funds Sold 429 567 1,150 1,052
---------- ---------- ---------- -----------
Total Interest Income 12,351 11,228 24,268 21,989
---------- ---------- ---------- -----------
INTEREST EXPENSE
Deposits 4,925 4,381 9,691 8,593
Securities Sold Under Agreements to Repurchase 70 41 127 90
Borrowings from the Federal Home Loan Bank 431 385 898 667
---------- ---------- ---------- -----------
Total Interest Expense 5,426 4,807 10,716 9,350
---------- ---------- ---------- -----------
NET INTEREST INCOME 6,925 6,421 13,552 12,639
Provision for Loan Losses 175 190 340 308
---------- ---------- ---------- -----------
Net Interest Income After Provision
for Loan Losses 6,750 6,231 13,212 12,331
---------- ---------- ---------- -----------
NONINTEREST INCOME
Service Charges on Deposit Accounts 651 645 1,257 1,281
Gains (Losses) on Sales of Mortgages 78 33 130 77
Other Operating Income 942 645 1,780 1,300
Losses on Sales of Investment Securities 0 0 0 (29)
---------- ---------- ---------- -----------
Total Noninterest Income 1,671 1,323 3,167 2,629
---------- ---------- ---------- -----------
NONINTEREST EXPENSE
Personnel Expense 2,822 2,545 5,695 5,114
Occupancy Expense 315 318 636 647
Equipment Depreciation and Maintenance 291 281 588 546
Other Operating Expense 1,889 1,622 3,683 2,952
Merger-Related Costs 0 0 160 0
---------- ---------- ---------- -----------
Total Noninterest Expense 5,317 4,766 10,762 9,259
---------- ---------- ---------- -----------
Income Before Income Taxes 3,104 2,788 5,617 5,701
Income Taxes 935 862 1,711 1,763
---------- ---------- ---------- -----------
NET INCOME $ 2,169 $ 1,926 $ 3,906 $ 3,938
========== ========== ========== ===========
Earnings Per Share:
Basic $ .25 $ .22 $ .45 $ .46
Diluted $ .24 $ .22 $ .44 $ .45
Weighted Average Shares Outstanding:
Basic 8,704,103 8,623,494 8,692,782 8,622,987
Diluted 8,903,155 8,778,056 8,903,907 8,776,574
Note: On January 13, 1998, LSB Bancshares, Inc. declared a five-for-four
stock split to be paid on February 16,1998 to shareholders of record on
February 2, 1998.
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LSB Bancshares, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
Six Months Ended
June 30
1998 1997
-------- --------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 3,906 $ 3,938
Adjustments to reconcile net income to net cash:
Depreciation and amortization 609 573
Securities premium amortization and
discount accretion, net (103) (8)
(Increase) decrease in loans held for sale (4,105) 486
Deferred income taxes 115 (267)
Income taxes payable (199) 34
(Increase) decrease in income earned
but not received (481) (77)
Increase (decrease)in interest accrued
but not paid 337 66
Provision for loan losses 340 308
Loss on sale of investment securities 0 29
Gain on sale of premise and equipment 3 (6)
-------- --------
Net cash provided by operating activities 422 5,076
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (3,284) 0
Proceeds from maturities of securities held to maturity 13,955 8,303
Proceeds from sales of securities held to maturity 0 0
Purchases of securities available for sale (44,010) (6,385)
Proceeds from maturities of securities available for sale 4,445 4,909
Proceeds from sales of securities available for sale 0 1,891
Net (increase) decrease in loans made to customers (13,846) (24,942)
Purchases of premises and equipment (934) (546)
Proceeds from sale of premises and equipment 29 37
Net (increase)decrease in Federal Funds sold 34,585 (21,580)
(Increase) decrease in other assets 151 (359)
-------- --------
Net cash used by investing activities (8,909) (38,672)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW, money market and savings accounts 2,967 18,669
Net increase (decrease) in time deposits 18,539 5,531
Net increase (decrease) in securities 0 0
Sold under agreements to repurchase 2,300 (1,326)
Proceeds from issuance of long-term debt 0 17,200
Payments on long-term debt (3,158) (3,758)
Dividends paid (1,758) (1,189)
Net increase (decrease) in other liabilities (271) (447)
Proceeds from issuance of common stock 313 29
-------- --------
Net cash provided by financing activities 18,932 34,709
-------- --------
Increase (decrease) in cash and cash equivalents 10,445 1,113
Cash and cash equivalents at the beginning of the period 37,495 25,020
-------- --------
Cash and cash equivalents at the end of the period $ 47,940 $ 26,133
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for:
Interest $ 10,379 $ 9,284
Income Taxes 1,796 1,845
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS
Transfer of loans to other real estate owned $ 63 $ 56
Unrealized losses on securities available for sale:
Change in securities available for sale 3 9
Change in deferred income taxes 1 3
Change in shareholders' equity 2 6
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LSB Bancshares, Inc.
Notes to Consolidated Financial Statements
Six Months Ended June 30, 1998 and 1997
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 six-month period ended June 30,
1998 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1998.
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, 1997.
NOTE 2. INVESTMENT SECURITIES
The valuations of investment securities as of June 30, 1998 and
December 31, 1997 were as follows (in thousands):
June 30, 1998
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Securities held to maturity:
U.S. Treasury and other U.S. government
agency obligations $12,006 $ 35 $ 8 $12,033
State, county and municipal securities 32,242 1,371 33 33,580
------- ------ ------ -------
Total securities held to maturity $44,248 $1,406 $ 41 $45,613
======= ====== ====== =======
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Securities available for sale:
U.S. Treasury and other U.S. government
agency obligations $87,058 $ 418 $ 170 $87,306
State, county and municipal securities 855 33 0 888
Federal Home Loan Bank stock 2,169 0 0 2,169
------- ------ ------ -------
Total securities available for sale $90,082 $ 451 $ 170 $90,363
======= ====== ====== =======
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December 31, 1997
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Securities held to maturity:
U.S. Treasury and other U.S. government
agency obligations $24,004 $ 0 $ 5 $23,999
State, county and municipal securities 30,887 1,323 0 32,210
------- ------ ------- -------
Total securities held to maturity $54,891 $1,323 $ 5 $56,209
======= ====== ======= =======
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Securities available for sale:
U.S. Treasury and other U.S. government
agency obligations $47,172 $ 284 $ 26 $47,430
State, county and municipal securities 856 26 0 882
Federal Home Loan Bank stock 2,413 0 0 2,413
------- ------ ------- -------
Total securities available for sale $50,441 $ 310 $ 26 $50,725
======= ====== ======= =======
No investment securities were sold for the period ended June 30, 1998.
Securities with sales proceeds of $9,322,882 and amortized cost of
$9,398,958 resulted in a net, realized loss of $76,076 for the period
ended December 31, 1997.
Investment securities with amortized cost of $87,181,580 and
$83,028,436, as of June 30, 1998 and December 31, 1997, respectively,
were pledged to secure public deposits and for other purposes.
NOTE 3. LOANS (Table in thousands)
A summary of consolidated loans follows:
June 30
1998 1997
-------- --------
Commercial, financial, & agricultural $101,841 $ 97,652
Real estate - construction 16,011 12,238
Real estate - mortgage 219,602 196,582
Installment loans to individuals 61,972 61,338
Lease financing 757 657
Other 14,600 11,865
-------- --------
Total loans, net of unearned income $414,783 $380,332
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
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 $151,171 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
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for the period was $1,000. Interest income for the period on nonaccrual
loans that would have been recorded in accordance with the original
terms of the notes was $2,000. The adoption of SFAS 114 and SFAS 118
did not have a material effect on the Corporation's financial position
or results of operations and required no increase to the reserve for
loan and lease losses.
At June 30, 1998, the total investment in loans that are considered
impaired under SFAS 14 was $4,304,000. There were no nonaccrual loans.
A related valuation allowance of $449,000 was determined for the total
amount of impaired loans. The average recorded investment in impaired
loans for the quarter ended June 30, 1998 was approximately $3,699,000.
At June 30, 1998, loans totaling $11,206,647 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:
Six Months Ended
June 30
1998 1997
------- -------
Balances at beginning of periods $ 4,601 $ 4,075
Provision for loan losses 340 308
Recoveries of amounts previously
charged off 68 537
Loan losses (226) (302)
------- -------
Balances at end of periods $ 4,783 $ 4,618
NOTE 5. STOCK SPLIT
In January of 1998, the Board of Directors of the Corporation declared
a five-for-four stock split payable February 16, 1998. All previously
reported per share amounts have been restated to reflect this stock
split.
NOTE 6. OTHER ACCOUNTING CHANGES
As of January, 1998, the Corporation adopted Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings per Share". SFAS 128
established standards for computing and presenting earnings per share
("EPS"). SFAS 128 requires a presentation of both basic earnings per
share and diluted earnings per share on the face of the income
statements. After the effective date of the Statement, all prior-period
EPS data presented must be restated to conform with the provisions of
SFAS 128. Adoption of SFAS 128 by the Corporation has no material
effect on its financial position and operating results.
As of January, 1998, the Corporation adopted Financial Accounting
Standards No. 129 ("SFAS 129"), "Disclosure of Information about
Capital Structure". SFAS 129 requires that information about an
entity's capital structure be disclosed in three separate categories of
securities, liquidation preference of preferred stock and redeemable
stock. Further, SFAS 129 specifies that the entity shall provide within
its financial statements a summary explanation of the pertinent rights
and privileges of the various securities that are outstanding. All
shares of the Corporation's capital stock represent voting shares, and
dividends on the capital stock are paid at the discretion of the Board
of Directors. At its Annual Meeting, shareholders of the Corporation
approved the issuance of up to ten million shares of preferred stock,
par value of $.01 per share, in one or more series, on terms and
conditions to be established by the Board of Directors from time to
time.
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None of these shares have been issued, nor have conditions been
established under which the shares would be issued.
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting of
Comprehensive Income", is effective for fiscal years beginning after
December 15, 1997. SFAS 130 requires entities to report comprehensive
income in their basic financial statements. SFAS 130 must be adopted as
of the beginning of the fiscal year, with any prior period financial
statements presented for comparative purposes to be reclassified to
reflect the provisions of the Statement. The Corporation adopted SFAS
130 as of January 1, 1998 and presents it in the financial statements.
No material effect on the financial position and operating results is
anticipated.
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information" was issued in June
1997. SFAS 131 requires entities to report certain information about
their operating segments in a complete set of financial statements to
shareholders and further requires that certain entity-wide information
about products and services, activities in different geographic areas,
and reliance on major customers, to be disclosed. The Corporation
operates in a single-industry segment and does not meet any of the
threshold requirements of SFAS 131.
In May 1997, the Federal Financial Institutions Examination Council
(FFIEC) issued an Interagency Statement "Year 2000 Project Management
Awareness" to emphasize the critical issues that need to be addressed
to implement an effective Year 2000 project management plan. The FFIEC
Statement identifies five phases of the Year 2000 project management
process. Bancshares has acknowledged the importance of this issue and
established a Year 2000 Project Team (Y2K) to ensure that it will be
Year 2000 compliant. The Y2K Team consists of senior officers within
the company's operations area, information systems area, audit
department, corporate area and senior management of Bancshares. Senior
management, with Board of Directors' approval and oversight,
establishes the commitment of resources and prioritization. Software
programs from the National Software Testing Laboratories (NSTL) are
utilized to test all personal computers and computer servers for
compliance. Data processing of Bancshares is through FiServ in an RJE
environment. As such, the bank will participate with FiServ in Year
2000 testing. Third party audits will be requested from all major
vendors and suppliers to assist in determining their ability to be Year
2000 compliant. The Y2K Team will also conduct due diligence inquiries
concerning Y2K readiness and implement appropriate internal testing and
verification of vendor's products and services. Bancshares' Y2K Plan
incorporates the development of contingency plans for all mission-
critical vendor applications should the vendor not complete its
conversion efforts on time. The timetable for completing the Y2K
project plan is the fourth quarter of 1998. As of June 30, 1998, a
cumulative total of $57,700 had been spent on the assessment of and
corrective efforts for the Year 2000 Project. The Corporation estimates
the total cost to remedy its Year 2000 issues at $100,000 to $150,000
and that it will not have a material effect on its financial position
or operating results.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE
30, 1997
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 $12,351,000 for the second quarter of 1998 was
up $1,123,000 or 10.0% compared to $11,228,000 for the second quarter
of 1997. Total interest expense for the same period increased $619,000
or 12.9%. These results produced net interest income of $6,925,000 for
the second quarter of 1998, for a gain of $504,000 or 7.8% compared to
$6,421,000 for the second quarter of 1997. Gain in net interest income
during the second quarter of 1998 increased in part due to a stronger
loan-to-deposit ratio. Loans constitute the largest group of earning
assets and therefore generate the majority of Bancshares' interest
income. Loan demand remained strong during the second quarter of 1998
with more loans being retained in Bancshares' portfolio. For the period
ended June 30, 1998, loans increased $34,451,000 or 9.1% over June 30,
1997 and $17,792,000 or 4.5% over December 31, 1997. Deposits for the
same period were up $35,409,000 or 7.2% compared to June 30, 1997 and
$21,505,000 or 4.3% compared to December 31, 1997.
Noninterest Income and Expense
Noninterest income for the second quarter of 1998 was up $348,000 or
26.3% compared to the first quarter of 1997. Fee income related to
service charges on deposit accounts for the second quarter of 1998 was
relatively unchanged from the second quarter of 1997. This is primarily
due to lower fee income from return check charges in the first quarter
of 1998 and a loss of fee income following product consolidation
resulting from the recent merger of Old North State Bank. Gains on the
sale of mortgage loans for the second quarter of 1998 increased $45,000
or 136.4% compared to the second quarter of 1997. Other operating
income for the second quarter of 1998 was up $297,000 or 46.0% compared
to the second quarter of 1997. The increase is attributable to fee
income from Bancshares' financial services subsidiary and from the
Bank's bankcard division. Commissions generated by the financial
services' subsidiary from the sale of mutual funds, annuities and
equities increased $210,000 or 256.1% during the second quarter of 1998
compared to the second quarter of 1997. Bankcard fee income increased
$85,000 or 69.1% during the same period.
Noninterest expense for the second quarter of 1998 increased $551,000
or 11.6% compared to the second quarter of 1997. Personnel expense for
the second quarter of 1998, comprised of salaries and fringe benefits,
was up $277,000 or 10.9% over the second quarter of 1997. To a great
extent this is attributable to the consolidation of staff and benefits
resulting from the merger of Old North State Bank during the fourth
quarter of 1997. Occupancy expense for the second quarter of 1998
declined $3,000 compared to the second quarter of 1997, while equipment
depreciation and maintenance expense for the same period increased
$10,000. Other operating expense for the second quarter of 1998
increased $267,000 or 16.5% compared to the second quarter of 1997.
Increases in other operating expense are attributable to expansion of
the Bank's automation program, increased activity in its bankcard
operations and increased activity in Bancshares' financial services
subsidiary. Automated services expense for the second quarter of 1998
increased $72,000 or 22.4% compared to
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the second quarter of 1997. Bankcard expense during the same period
increased $73,000 or 84.9% and other operating expenses related to the
financial services subsidiary were up $106,000.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30,
1997
Net Interest Income
Total interest income of $24,268,000 for the first six months of 1998
was up $2,279,000 or 10.4% compared to $21,989,000 for the first six
months of 1997. Total interest expense for the same period increased
$1,366,000 or 14.6%. Net interest income of $13,552,000 for the first
six months of 1998 was up $913,000 or 7.2% compared to $12,639,000 for
the first six months of 1997. Stable interest rates during the first
six 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 six months of 1998 was up $538,000 or
20.5% compared to the first six months of 1997. Fee income related to
service charges on deposit accounts for the first six months of 1998
was down slightly compared to the first six months of 1997. This is
primarily due to lower fee income from return check charges in the
first quarter of 1998 and a loss of fee income following product
consolidation resulting from the recent merger of Old North State Bank.
Gains on the sale of mortgage loans for the first six months of 1998
increased $53,000 or 68.8% compared to the first six months of 1997.
Other operating income for the first six months of 1998 was up $480,000
or 36.9% compared to the first six months of 1997. This increase came
primarily from fees generated in the second quarter of 1998 by
Bancshares' financial services subsidiary through the sale of mutual
funds, annuities and equities. For the first six months of 1998, fee
income from this source increased $308,000 or 180.1% compared to the
first six months of 1997.
Noninterest expense for the first six months of 1998, excluding
one-time nonrecurring merger related costs of $160,000 incurred during
the first quarter of 1998, increased $1,343,000 or 14.5% compared to
the same period of 1997. Personnel expense for the first six months of
1998, comprised of salaries and fringe benefits, increased $581,000 or
11.4% compared to the first six months of 1997. To a great extent this
is attributable to the consolidation of staff and benefits resulting
from the merger of Old North State Bank during the fourth quarter of
1997. Occupancy expense for the period being compared decreased
slightly. Equipment depreciation and maintenance expense for the first
six months of 1998 increased a modest $42,000 or 7.7%. Other operating
expense for the first six months of 1998 increased $731,000 or 24.8%
compared to the first six months of 1997. Increases in other operating
expense during this period are primarily attributable to automated
services expense, growth in bankcard operations and growth in
Bancshares' financial services subsidiary. Automated services expense
for the first six months of 1998 increased $124,000 or 19.6% compared
to the first six months of 1997. Expenses related to bankcard
operations during the same period increased $126,000 or 75.0% while
operating expenses related to the financial services subsidiary were up
$156,000. 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 $4,783,000 or 1.15% of loans
outstanding at June 30, 1998 compared to $4,601,000 or 1.16% of loans
outstanding at December 31, 1997 and $4,618,000 or 1.21% at June 30,
1997. Non-performing loans totaled $1,748,000 or .42% of loans
outstanding at June 30, 1998 compared to $2,155,000 or .54% of loans
outstanding at December 31, 1997, and $2,732,000 or .72% of loans
outstanding at June 30, 1997. Nonperforming loans include nonaccrual
loans, restructured loans, other real estate acquired through
foreclosed
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properties and accruing loans ninety days or more past due. At June 30,
1998, the Bank had $223,000 in restructured loans, $921,000 in other
real estate and no nonaccrual loans. Accruing loans past due 90 days or
more were $604,000 at June 30, 1998 compared to $334,000 at December
31, 1997 and $1,068,000 at June 30, 1997. The accrual of interest
generally discontinues on any loan that becomes 90 days past due as to
principal or interest unless collection of both principal and interest
is assured by way of collateralization, guarantees or other security
and the loan is considered to be in the process of collection. At June
30, 1998, the reserve for loan losses was 2.74 times the nonperforming
loans, compared to 2.14 times at December 31, 1997 and 1.69 times
nonperforming loans at June 30, 1997.
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 second quarter of 1998
was $340,000 compared to $308,000 in 1997. Net charge-offs amounted to
$158,000, or .04% of average loans outstanding, on an annualized basis,
during the first six months of 1998. As the result of one large
recovery, related to a loan previously charged off, for the first six
months of 1997 total recoveries exceeded charge-offs by $235,000. The
increase in the provision is more reflective of increased loan volume
rather than charge-off experience, which was nearly the same for the
periods being compared.
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.
13
ASSET QUALITY ANALYSIS
6/30/98 12/31/97 6/30/97
RESERVE FOR LOAN LOSSES
Beginning balance $ 4,601 $ 4,075 $4,075
Provision for loan losses 340 785 308
Net (charge-offs) recoveries (158) (259) 235
Ending balance 4,783 4,601 4,618
RISK ASSETS
Nonaccrual loans $ 0 $ 127 $ 537
Foreclosed real estate 921 1,192 902
Restructured loans 223 502 226
Loans 90 days or more past due and still
Accruing 604 334 1,068
Total risk assets 1,748 2,155 2,733
ASSET QUALITY RATIOS
Nonaccrual loans as a percentage of total loans 0% .03% .14%
Nonperforming assets as a percentage of:
Total assets .27 .35 .46
Loans plus foreclosed property .42 .54 .72
Net charge-offs as a percentage of average loans .04 .07 N/M*
Reserve for loan losses as a percentage of loans 1.15 1.16 1.21
Ratio of reserve for loan losses to:
Net charge-offs 15.14X 17.76 N/M*
Nonaccrual loans 0 36.23 8.60
*N/M Denotes Non Meaningful
Income Taxes
Accrued taxes applicable to income for the six-month period ended June
30, 1998 were down slightly compared to the six-month period ended June
30, 1997. Pretax income for the first six months of 1998 of $3,906,000
was nearly the same as the $3,938,000 for the first six months of 1997.
The change in accrued taxes for the periods being compared is primarily
attributable to the modest difference in pretax income.
Capital Resources and Shareholders' Equity
Regulatory guidelines require minimum levels of capital based on a risk
weighting of each asset category and off-balance sheet contingencies.
Regulatory agencies divide capital into Tier 1 or core capital and
total capital. Tier 1 capital, as defined by regulatory agencies,
consists primarily of common shareholders' equity less goodwill and
certain other intangible assets. Total capital consists of Tier 1
capital plus the allowable portion of the reserve for loan losses and
certain long-term debt. At June 30, 1998, based on these measures,
Bancshares' had a Tier 1 capital ratio of 17.69% compared to the
regulatory requirement of 4% and total capital ratio of 18.92% compared
to an 8% regulatory requirement.
Additional regulatory capital measures include the Tier 1 leverage
ratio. The Tier 1 leverage ratio is defined as Tier 1 capital divided
by average total assets less goodwill and certain other intangibles and
has a regulatory minimum of 3.0%, with most institutions required to
maintain a ratio of at least 4.0% to 5.0%, depending primarily upon
risk profiles. At June 30, 1998, Bancshares' Tier 1 leverage ratio was
10.90%.
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
14
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. On June 30,
1998 the gap between interest-sensitive assets and interest-sensitive
liabilities was a negative $129,351,000 or .71. Under current economic
conditions, management believes that 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 June 30, 1998 and 1997
are provided in the Consolidated Statements of Cash Flows.
PART II. OTHER 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 August 10, 1998 LSB BANCSHARES., INC.
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(Registrant)
/s/ Monty J. Oliver
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Monty J. Oliver
Chief Financial Officer
Principal Accounting Officer