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, 1999
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, 1999 was 8,511,720.
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LSB BANCSHARES, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1999 and 1998, December 31, 1998
Consolidated Statements of Income
Three Months Ended June 30, 1999 and 1998
Six Months Ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements
Six Months Ended June 30, 1999 and 1998
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 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LSB Bancshares, Inc.
Consolidated Balance Sheets
(In Thousands)
June 30 December 31 June 30
1999 1998 1998
--------- --------- ---------
Assets
Cash and Due From Banks $ 33,034 $ 33,292 $ 23,811
Interest-Bearing Bank Balances 11,966 9,862 24,129
Federal Funds Sold and Securities Purchased
Under Resale Agreements 30,460 40,595 25,755
Investment Securities:
Held to Maturity, MV $63,904, $61,386 and $45,613 64,584 59,907 44,248
Available for Sale, at Market Value 67,104 83,936 90,363
Loans 475,931 436,014 414,783
Less, Reserve for Loan Losses (5,277) (5,048) (4,783)
--------- --------- ---------
Net Loans 470,654 430,966 410,000
Premises and Equipment 11,370 11,528 11,553
Other Assets 9,932 8,920 9,380
--------- --------- ---------
Total Assets $ 699,104 $ 679,006 $ 639,239
========= ========= =========
Liabilities
Deposits
Demand $ 70,259 $ 71,867 $ 67,796
Savings, NOW and Money Market Accounts 292,873 287,315 229,665
Certificates of Deposit of less than $100,000 161,594 158,664 162,533
Certificates of Deposit of $100,000 or more 59,899 49,481 64,536
--------- --------- ---------
Total Deposits 584,625 567,327 524,530
Securities Sold Under Agreements to Repurchase 4,667 5,537 10,564
Borrowings from the Federal Home Loan Bank 36,033 28,842 30,600
Other Liabilities 3,478 3,870 3,559
--------- --------- ---------
Total Liabilities 628,803 605,576 569,253
--------- --------- ---------
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 8,511,720 Shares
in 1999 and 8,722,895 and 8,706,367 shares in 1998 42,559 43,614 43,532
Paid-In Capital 11,482 14,903 14,891
Retained Earnings 16,582 14,248 11,392
Accumulated Other Comprehensive Income (322) 665 171
--------- --------- ---------
Total Shareholders' Equity 70,301 73,430 69,986
--------- --------- ---------
Total Liabilities and Shareholders' Equity $ 699,104 $ 679,006 $ 639,239
========= ========= =========
Memorandum: Standby Letters of Credit $ 3,155 $ 2,896 $ 2,931
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LSB Bancshares, Inc.
Consolidated Statements of Income
(In Thousands except Share Data)
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Interest Income
Interest and Fees on Loans $ 10,547 $ 9,680 $ 20,498 $ 18,997
Interest on Investment Securities:
Taxable 1,328 1,448 2,742 2,716
Tax Exempt 471 455 951 921
Interest-Bearing Bank Balances 183 339 355 484
Federal Funds Sold and Securities
Purchased Under Resale Agreements 464 429 979 1,150
---------- ---------- ---------- ----------
Total Interest Income 12,993 12,351 25,525 24,268
---------- ---------- ---------- ----------
Interest Expense
Deposits 4,936 4,925 9,798 9,691
Securities Sold Under Agreements to Repurchase 41 70 86 127
Borrowings from the Federal Home Loan Bank 445 431 859 898
---------- ---------- ---------- ----------
Total Interest Expense 5,422 5,426 10,743 10,716
---------- ---------- ---------- ----------
Net Interest Income 7,571 6,925 14,782 13,552
Provision for Loan Losses 235 175 400 340
---------- ---------- ---------- ----------
Net Interest Income After Provision
for Loan Losses 7,336 6,750 14,382 13,212
---------- ---------- ---------- ----------
Noninterest Income
Service Charges on Deposit Accounts 766 651 1,507 1,257
Gains on Sales of Mortgages 96 78 206 130
Other Operating Income 1,000 942 1,880 1,780
---------- ---------- ---------- ----------
Total Noninterest Income 1,862 1,671 3,593 3,167
---------- ---------- ---------- ----------
Noninterest Expense
Personnel Expense 3,062 2,822 6,104 5,695
Occupancy Expense 324 315 642 636
Equipment Depreciation and Maintenance 322 291 627 588
Other Operating Expense 2,065 1,889 3,907 3,683
Merger-Related Costs 0 0 0 160
---------- ---------- ---------- ----------
Total Noninterest Expense 5,773 5,317 11,280 10,762
---------- ---------- ---------- ----------
Income Before Income Taxes 3,425 3,104 6,695 5,617
Income Taxes 951 935 1,963 1,711
---------- ---------- ---------- ----------
Net Income $ 2,474 $ 2,169 $ 4,732 $ 3,906
========== ========== ========== ==========
Earnings Per Share:
Basic $ 0.29 $ 0.25 $ 0.55 $ 0.45
Diluted 0.28 0.24 0.54 0.44
Weighted Average Shares Outstanding
Basic 8,549,955 8,704,103 8,597,099 8,692,782
Diluted 8,713,007 8,902,422 8,760,629 8,903,453
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LSB Bancshares, Inc.
Consolidated Statements of Cash Flow
(In Thousands)
Six Months Ended June 30
---------------------------
1999 1998
-------- --------
Cash Flow from Operating Activities
Net Income $ 4,732 $ 3,906
Adjustments to reconcile net income to net cash:
Depreciation and amortization 649 609
Securities premium amortization and
discount accretion, net 25 (103)
(Increase) decrease in loans held for sale 3,784 (4,105)
Deferred income taxes 583 115
Income taxes payable (268) (199)
(Increase) decrease in income earned but not received 70 (481)
Increase (decrease) in interest accrued but not paid 63 337
Provision for loan losses 400 340
Gain on sale of premise and equipment (18) 3
-------- --------
Net Cash provided by operating activities 10,020 422
-------- --------
Cash Flow From Investing Activities
Purchases of securities held to maturity (10,550) (3,284)
Proceeds from maturities of securities held to maturity 5,869 13,955
Proceeds from sales of securities held to maturity 0 0
Purchases of securities available for sale 0 (44,010)
Proceeds from maturities of securities available for sale 15,194 4,445
Proceeds from sales of securities available for sale 0 0
Net (increase) decrease in loans made to customers (43,871) (13,846)
Purchases of premises and equipment (516) (934)
Proceeds from sale of premises and equipment 42 29
Net (increase) decrease in federal funds sold
and securities purchased under resale agreements 10,135 34,585
(Increase) decrease in other assets (1,035) 151
-------- --------
Net cash used by investing activities (24,732) (8,909)
-------- --------
Cash Flow from Financing Activities
Net increase (decrease) in demand deposits,
NOW, money market and savings accounts 3,949 2,967
Net increase (decrease) in time deposits 13,348 18,539
Net increase (decrease) in securities
sold under agreements to repurchase (869) 2,300
Proceeds from issuance of long term debt 20,000 0
Payments on long term debt (12,808) (3,158)
Dividends Paid (2,398) (1,758)
Net increase (decrease) in other liabilities (187) (271)
Proceeds from issuance of common stock 315 313
Common stock repurchased (4,792)
-------- --------
Net cash provided by financing activities 16,558 18,932
-------- --------
Increase (decrease) in cash and cash equivalents 1,846 10,445
Cash and cash equivalents at the beginning of the period 43,154 37,495
-------- --------
Cash and cash equivalents at the end of the period $ 45,000 $ 47,940
-------- --------
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Supplemental Disclosures of Cash Flow Information
Cash paid during the years for:
Interest $ 10,680 $ 10,379
Income Taxes 2,383 1,796
Supplemental Disclosures of Noncash Transactions
Transfer of loans to other real estate owned $ 239 $ 63
Unrealized losses on securities available for sale:
Change in securities available for sale (1,616) (3)
Change in deferrred income taxes 630 1
Change in shareholders' equity (987) (2)
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LSB Bancshares, Inc.
Notes to Consolidated Financial Statements
Six Months Ended June 30, 1999 and 1998
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,
1999 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1999.
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, 1998.
NOTE 2. INVESTMENT SECURITIES
The valuations of investment securities as of June 30, 1999 and
December 31, 1998 were as follows (in thousands):
June 30, 1999
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------- ------- ------- -------
Securities held to maturity:
U.S. Treasury and other U.S.
government agency obligations $30,603 $ 16 $ 884 $29,735
State, county and municipal securities 33,981 726 538 34,169
------- ------- ------- -------
Total securities held to maturity $64,584 $ 742 $ 1,422 $63,904
======= ======= ======= =======
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------- ------- ------- -------
Securities available for sale:
U.S. Treasury and other U.S.
government agency obligations $64,742 $ 139 $ 678 $64,203
State, county and municipal securities 854 12 0 866
Federal Home Loan Bank stock 2,035 0 0 2,035
------- ------- ------- -------
Total securities available for sale $67,631 $ 151 $ 678 $67,104
======= ======= ======= =======
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December 31, 1998
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------- ------- ------- -------
Securities held to maturity:
U.S. Treasury and other U.S.
government agency obligations $24,120 $ 55 $ 133 $24,042
State, county and municipal securities 35,787 1,663 106 37,344
------- ------- ------- -------
Total securities held to maturity $59,907 $ 1,718 $ 239 $61,386
======= ======= ======= =======
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------- ------- ------- -------
Securities available for sale:
U.S. Treasury and other U.S.
government agency obligations $79,822 $ 1,095 $ 54 $80,863
State, county and municipal securities 855 49 0 904
Federal Home Loan Bank stock 2,169 0 0 2,169
------- ------- ------- -------
Total securities available for sale $82,846 $ 1,144 $ 54 $83,936
======= ======= ======= =======
No investment securities were sold for the period ended June 30, 1999.
Investment securities with amortized cost of $104,348,817 and
$93,681,039, as of June 30, 1999 and December 31, 1998, 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
1999 1998
-------- --------
Commercial, financial, & agricultural $153,418 $101,841
Real estate - construction 23,554 16,011
Real estate - mortgage 220,252 219,602
Installment loans to individuals 64,784 61,972
Lease financing 860 757
Other 13,063 14,600
-------- --------
Total loans, net of unearned income $475,931 $414,783
======== ========
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
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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 $193,843 for the period was recorded on an
accrual basis. Interest income on nonaccrual loans is recognized on a
cash basis. No interest was recognized for nonaccrual loans through
June 30, 1999 as the bank had no nonaccrual loans for the second
quarter of 1999. 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, 1999, the total investment in loans that are considered
impaired under SFAS 14 was $3,855,000. As previously stated there were
no nonaccrual loans for the period. A related valuation allowance of
$505,000 was determined for the total amount of impaired loans. The
average recorded investment in impaired loans for the quarter ended
June 30, 1999 was approximately $3,972,000.
At June 30, 1999, loans totaling $9,598,000 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:
Six Months Ended
June 30
1999 1998
------- -------
Balances at beginning of periods $ 5,048 $ 4,601
Provision for loan losses 400 340
Recoveries of amounts previously
charged off 110 68
Loan losses (281) (226)
------- -------
Balances at end of periods $ 5,277 $ 4,783
======= =======
NOTE 5. STOCK SPLIT
In January 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
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 hedging activities. SFAS 133
requires the recognition of all derivatives in the statement of
financial position at fair value. If certain conditions are met, a
derivative may be designated as a hedge, in which case the accounting
for changes in fair value will depend on the specific exposure being
hedged. Adoption of SFAS 133 was originally to become effective for
fiscal years beginning after June 15, 1999. In an Exposure Draft
published on May 20, 1999, the FASB requested comments on a one-year
delay, making SFAS 133 effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. Bancshares does not presently have
any derivative instruments that fit the definition under SFAS 133, and
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as such, adoption of the standard would not result in a material
financial impact.
Statement No. 134 ("SFAS 134"), "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise" was issued by FASB effective for
the first fiscal quarter beginning after December 15, 1998. SFAS 134
amends SFAS 65 by allowing retained securitized mortgage loans to be
classified as either held-to-maturity, available-for-sale or trading in
accordance with the provisions of SFAS 115. Bancshares does not
currently securitize mortgage loans and does not anticipate any
material effect on its financial position or operating results.
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 identified five phases of the Year 2000 project management
process. In the awareness phase, the corporation defines the issues and
potential challenges associated with the Year 2000 problem. In the
assessment phase, an evaluation is conducted to determine the size and
complexity of ensuring Year 2000 readiness. During the renovation
phase, required system upgrades would be made. In the validation phase,
testing of all computer systems and software would be done to meet the
corporation's Y2K compatibility standards. The final step is the
implementation phase, which incorporates Year 2000 ready systems into
day-to-day operations.
The "Year 2000 problem" stems from the inability of computer systems to
identify the change from the years of the 1900's to the year 2000. This
comes about because most computer hardware and software systems have
historically used only two digits to identify the applicable year.
Hence, as the turn of the century approaches, these systems could be
unable to distinguish between 1900 and 2000 resulting in possible
errors and system failures causing wide spread disruption to business
operations.
Bancshares has acknowledged the importance of this issue and
established a Year 2000 Project Team (Y2K) to ensure Year 2000
compliance. Bancshares' Year 2000 Plan follows the guidelines outlined
by the Federal Financial Institutions Examination Council. The Y2K Team
consists of senior officers within the company's operations area,
information systems area, audit department, corporate area and senior
management. Senior management, with Board of Directors' approval and
oversight, establishes the commitment of resources and prioritization.
Bancshares has completed the awareness phase and the assessment phase
of both its information technology (computer systems) and
non-information technology systems (heating, air condition systems,
elevator systems, calculators, etc.). Testing strategies and plans have
been completed and put in place. These first two phases were completed
on schedule in April of 1998.
Bancshares is presently on schedule with the renovation phase,
validation phase and implementation phase of its internal software with
completion projected for mid 1999. Software programs from the National
Software Testing Laboratories (NSTL) are being 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 is participating with Fiserv's Testing Acceptance Group and the
Client Advisory Board in Year 2000 testing. All phases of the Fiserv
core application systems have been completed. Bancshares has completed
the interface testing and implementation process with Fiserv.
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Third party audits have been requested from all major vendors and
suppliers to assist in determining their ability to be Year 2000
compliant. Bancshares has also conducted due diligence inquiries
concerning vendors' Y2K readiness and implemented appropriate internal
testing and verification of vendors' products and services. Major loan
and deposit customers have also been identified to assess the extent to
which Bancshares is vulnerable to those third parties should they fail
to be Year 2000 ready. During 1998 Bancshares conducted a loan
portfolio analysis to identify the larger commercial borrowers using a
cutoff of $400,000 in total debt exposure. A risk grade assessment plan
and a Y2K questionnaire was distributed to these borrowers, as well as
to all new commercial borrowers. The outstanding debt represented by
the questionnaires represented 61% of the outstanding commercial loan
portfolio. Based on the results of the questionnaires borrowers were
assigned a Y2K risk grade that was considered in calculation of
Bancshares' loan loss reserve. Among these lending relationships,
Bancshares rated approximately 2.1% of the commercial loan portfolio as
representing a high risk. The remainder was determined to represent
medium and low risk. For borrowers that are determined to represent
significant risk the allowance for loan losses has been evaluated for
adequacy. However, there can be no guarantee that the systems of other
organizations on which Bancshares operations rely will be converted
timely, or that a failure to convert by another organization, or a
conversion that is incompatible with Bancshares' systems, will not have
an adverse effect on Bancshares.
The estimated cost of Bancshares' Year 2000 project is currently in the
range of $350,000 to $400,000 and is being funded through operating
cash flows. As of June 30, 1999, a cumulative total of $148,000 has
been expensed, with $54,000 being expensed in the first half of 1999.
The costs of the Year 2000 project and the date on which Bancshares
plans to complete Year 2000 modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of
future events including the continued availability of certain
resources, third-party modification plans and other factors. However,
there can be no assurance that these estimates will be achieved and
actual results could differ materially from those plans.
Bancshares is continuing with the development of contingency plans that
outline emergency response procedures that adhere to regulatory
guidelines. The contingency plans represent an enhancement of
Bancshares' business resumption plans and have as their goal the
resumption of business in the event there is a disruption of critical
systems necessary to operate. The contingency plans include the use of
alternative processing sites, off-site processing, consolidation of
customer services, alternative communications support and other
contingency service suppliers. In addition, Bancshares retained the
services of MTS/People Source, Inc., an independent consulting firm, to
evaluate its Y2K readiness. Upon completion of its review, MTS/People
Source assigned a low risk assessment to Bancshares Y2K readiness.
Federal regulatory agencies periodically review Bancshares' Year 2000
conversion efforts and have had no adverse criticism on the progress to
date or its schedule to complete the Year 2000 project.
Although the Year 2000 project has been given management's top
priority, there have been no serious delays to other information
technology projects. To a great extent this is due to Bancshares third
party processing by Fiserv, which has provided added support in meeting
Year 2000 project goals as well as ongoing information technology
projects. As such, there are no anticipated delays in information
technology projects that would have an adverse effect on Bancshares'
financial condition and results of operations.
Bancshares presently believes that with its Year 2000 project schedule
and contingency plan development, the Year 2000 issue can be mitigated.
However, if its Year 2000 project goals are not met or completed on a
timely basis, or if mission critical third-parties do not met their own
Year 2000 issues, disruptions in operations could occur and could have
a material adverse impact on the financial position of Bancshares.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The discussion presented herein is intended to provide an overview of
the changes in financial condition and results of operations for LSB
Bancshares, Inc, ("Bancshares") and its wholly-owned subsidiary,
Lexington State Bank ("LSB") for the three and six months ended June
30, 1999 and 1998. The consolidated financial statements also include
the accounts and results of operations of LSB's wholly owned
subsidiaries, Peoples Financial Company of Lexington, Inc. ("Peoples
Finance") and LSB Financial Services, Inc. ("LSB Financial 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, Year 2000
compliance and other similar statements of expectations. These
forward-looking statements are based on estimates, beliefs and
assumptions made by management and are not guarantees of future
performance. Actual results may differ from those expressed or implied
as the result of various factors, among which are movements in interest
rates, competitive product or pricing pressures, changes in economic
conditions, and changes in regulatory policies.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
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 $12,993,000 for the second quarter of 1999 was
up $642,000 or 5.2% compared to $12,351,000 for the second quarter of
1998. Total interest expense for the same period decreased $4,000 or
0.1%. These results produced net interest income of $7,571,000 for the
second quarter of 1999, for a gain of $646,000 or 9.3% compared to
$6,925,000 for the second quarter of 1998. The gain in net interest
income for the second quarter of 1999 was the result of strong loan
demand and contained interest expense. Loans constitute the largest
group of earning assets and therefore generate the majority of
Bancshares' interest income. For the period ended June 30, 1999, loans
increased $39,917,000 or 9.2% over December 31, 1998 and $61,148,000 or
14.7% over June 30, 1998. Deposits for the same period were up
$17,298,000 or 3.0% compared to June 30, 1998 and $60,095,000 or 11.5%
compared to December 31, 1998.
Noninterest Income and Expense
Noninterest income for the second quarter of 1999 was up $191,000 or
11.4% compared to the second quarter of 1998. Fee income related to
service charges on deposit accounts for the second quarter of 1999
increased $115,000 or 17.7% compared to the second quarter of 1998.
Gains on the sale of mortgage loans for the second quarter of 1999
increased $18,000 or 23.1% compared to the second quarter of 1998.
Other operating income for the second quarter of 1999 was up $58,000 or
6.2% compared to the second quarter of 1998. The increase is primarily
attributable to fee income from the Bank's bankcard division, which
produced an increase of $74,000 or 35.7% for the second quarter of 1999
compared to the second quarter of 1998. Commissions generated by the
financial services' subsidiary decreased $87,000 or 29.7% the second
quarter of 1999 compared to the second quarter of 1998 as
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the result of staff turnover. Management anticipates improvements
following staff adjustments. The bank's financial services subsidiary
generates commission income from the sale of mutual funds, annuities
and equities.
Noninterest expense for the second quarter of 1999 increased $456,000
or 8.6% compared to the second quarter of 1998. Personnel expense for
the second quarter of 1999, comprised of salaries and fringe benefits,
was up $240,000 or 8.5% over the second quarter of 1998. Occupancy
expense increased $9,000 or 2.9% in the second quarter of 1999 compared
to the second quarter of 1998. Equipment depreciation and maintenance
expense for the second quarter of 1999 increased $31,000 or 10.7%
compared to the corresponding period of 1998. Other operating expense
for the second quarter of 1999 increased $176,000 or 9.3% compared to
the second quarter of 1998. One factor contributing to the small
increase in other operating expense was a decrease in automated
processing expense in the second quarter of 1999 of $63,000 or 15.9%
compared to the second quarter of 1998. Additionally, expenses for the
financial services' subsidiary decreased the second quarter of 1999
$95,000 or 85.6% compared to the second quarter of 1998. Legal and
professional expense increased $65,000 or 23.2% in the second quarter
of 1999 compared to the same period a year ago. Bankcard expense for
the second quarter of 1999 increased $72,000 or 45.2% compared to the
second quarter of 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Net Interest Income
Total interest income of $25,525,000 for the first six months of 1999
was up $1,257,000 or 5.2% compared to $24,268,000 for the first six
months of 1998. Total interest expense for the same period increased
only $27,000 or 0.3%. Net interest income of $14,782,000 for the first
six months of 1999 was up $1,230,000 or 9.1% compared to $13,552,000
for the first six months of 1998. Stable interest rates during the
first half of the year along with strong loan growth were major factors
contributing to this increase.
Noninterest Income and Expense
Noninterest income for the first half of 1999 was up $426,000 or 13.5%
compared to the first half of 1998. Fee income related to service
charges on deposit accounts for the first half of 1999 was up $250,000
or 19.9% compared to the first half of 1998. Gains on the sale of
mortgage loans for the first six months of 1999 increased $276,000 or
58.5% compared to the first six months of 1998. Other operating income
for the first six months of 1999 was up $100,000 or 5.6% compared to
the first six months of 1998. This increase came primarily from fees
generated by the Bank's bankcard division, which was up $155,000 or
40.2% the first six months of 1999 compared to the first six months of
1998. Fee income from Bancshares' financial services subsidiary for the
first six months of 1999 decreased $168,000 or 34.9% compared to the
first six months of 1998. As previously stated, the financial services
subsidiary generates fees through the sale of mutual funds, annuities
and equities.
Noninterest expense for the first six months of 1999, excluding
merger-related costs of $160,000 incurred in 1998, increased $678,000
or 6.4% compared to the same period of 1998. Personnel expense for the
first six months of 1999, comprised of salaries and fringe benefits,
increased $409,000 or 7.2% compared to the first six months of 1998.
Occupancy expense for the period being compared increased by a modest
$6,000 or 0.9%. Equipment depreciation and maintenance expense for the
first six months of 1999 increased $39,000 or 6.6%. Other operating
expense for the first six months of 1999 increased $224,000 or 6.08%
compared to the first six months of 1998. Increases in other operating
expense during this period are primarily attributable to increased
legal and professional expense, growth in bankcard operations and
general operating expenses. Automated services expense for the first
six months of 1999 decreased $84,000 or 11.1% compared to the first six
months of 1998. Expenses that related to bankcard operations during the
14
same period increased $152,000 or 51.7%. Legal and professional expense
for the first six months of 1999 increased $102,000 or 18.3% compared
to the first six months of 1998. 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 $5,277,000 or 1.11% of loans
outstanding at June 30, 1999 compared to $5,048,000 or 1.16% of loans
outstanding at December 31, 1998 and $4,783,000 or 1.15% at June 30,
1998. Non-performing loans totaled $2,247,000 or .47% of loans
outstanding at June 30, 1999 compared to $1,912,000 or .44% of loans
outstanding at December 31, 1998, and $1,748,000 or .42% of loans
outstanding at June 30, 1998. Nonperforming loans include nonaccrual
loans, restructured loans, other real estate acquired through
foreclosed properties and accruing loans ninety days or more past due.
At June 30, 1999, Bancshares had $151,000 in restructured loans and
$1,100,000 in other real estate. As of June 30, 1999 Bancshares did not
have any nonaccrual loans. Accruing loans past due 90 days or more were
$996,000 at June 30, 1999 compared to $759,000 at December 31, 1998 and
$604,000 at June 30, 1998. 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, 1999, the
reserve for loan losses was 2.35 times the nonperforming loans,
compared to 2.64 times at December 31, 1998 and 2.74 times
nonperforming loans at June 30, 1998.
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 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 June 30, 1999 was $400,000
compared to $340,000 in 1998. Net charge-offs amounted to $171,000, or
.08% of average loans outstanding, on an annualized basis, during the
first six months of 1999. The quality of the loan portfolio continues
to be of the highest level, which is reflected in the loan loss
provision expensed.
Loans classified for regulatory purposes as loss, doubtful, substandard
or special mention that have not been disclosed as nonperforming do not
represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results,
liquidity, or capital resources, or represent material credits about
which management is aware of any information which causes management to
have serious doubts as to the ability of such borrowers to comply with
the loan repayment terms.
15
ASSET QUALITY ANALYSIS
6/30/99 12/31/98 6/30/98
------- ------- -------
RESERVE FOR LOAN LOSSES
Beginning Balance $ 5,048 $ 4,601 $ 4,601
Provision for loan losses 400 770 340
Net (charge-off) recoveries (171) (323) (158)
------- ------- -------
Ending balance 5,277 5,048 4,783
RISK ASSETS
Nonaccrual loans $ 0 $ 0 $ 0
Foreclosed real estate 1,100 921 921
Restructured loans 151 232 223
Loans 90 days or more past due
and still accruing 996 759 604
------- ------- -------
Total risk assets 2,247 1,912 1,748
ASSET QUALITY RATIOS
Nonaccrual loans as a percentage of total loans 0.00% 0.00% 0.00%
Nonperforming assets as a percentage of:
Total assets 0.32 0.28 0.27
Loans plus foreclosed property 0.47 0.44 0.42
Net charge-offs as a percentage of average loans 0.08 X 0.08 0.08 X
Reserve for loan losses as a percentage of loans 1.11 1.16 1.15
Ratio of reserve for loan losses to:
Net charge-offs 15.43 X 15.61 13.45 X
Nonaccrual loans N/M N/M N/M
*N/M Denotes Non Meaningful
X Denotes Annualized
Income Taxes
Accrued taxes applicable to income for the six-month period ended June
30, 1999 were $1,963,000 compared to $1,711,000 for the six-month
period ended June 30, 1998. Pretax income for the first six months of
1999 of $6,695,000 was $1,078,000 above the $5,617,000 for the first
six months of 1998. The change in accrued taxes for the periods being
compared is primarily attributable to this difference in pretax income.
Capital Resources and Shareholders' Equity
Regulatory guidelines require minimum levels of capital based on a risk
weighting of each asset category and off-balance sheet contingencies.
Regulatory agencies divide capital into Tier 1 or core capital and
total capital. Tier 1 capital, as defined by regulatory agencies,
consists primarily of common shareholders' equity less goodwill and
certain other intangible assets. Total capital consists of Tier 1
capital plus the allowable portion of the reserve for loan losses and
certain long-term debt. At June 30, 1999, based on these measures,
Bancshares' had a Tier 1 capital ratio of 15.32% compared to the
regulatory requirement of 4% and total capital ratio of 16.48% 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
16
least 4.0% to 5.0%, depending primarily upon risk profiles. At June 30,
1999, Bancshares' Tier 1 leverage ratio was 10.19%.
In November of 1998, the Board of Directors of Bancshares ("Board")
approved a stock repurchase program for up to 300,000 shares of its
common stock, or approximately 3.4% of its outstanding shares. The
Board authorized the repurchase of shares of common stock in the open
market or privately negotiated transactions on a time-to-time and
ongoing basis, depending upon market conditions and subject to
compliance with all applicable securities laws and regulations. The
repurchase plan is intended to help Bancshares achieve its goal of
building shareholder value and maintaining appropriate capital levels.
Through June 30, 1999, 246,779 shares had been repurchased and retired
at an average cost of $19.81 per share.
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.
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,
1999 the gap between interest-sensitive assets and interest-sensitive
liabilities was a negative $221,124,000 or .55. 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. Details of cash
flows for the six-months ended June 30, 1999 and 1998 are provided in
the Consolidated Statements of Cash Flow.
17
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk reflects the risk of economic loss resulting from adverse
changes in market price and interest rates. This risk of loss can be
reflected in diminished current market values and/or reduced potential
net interest income in future periods.
Bancshares' market risk arises primarily from the interest rate risk
inherent in its lending and deposit-taking activities. The structure of
Bancshares' loan and deposit portfolios is such that a significant
decline in interest rates may adversely impact net market values and
net interest income. Bancshares' does not maintain a trading account
nor is it subject to currency exchange risk or commodity price risk.
Responsibility for monitoring interest rate risk rests with the
Asset/Liability Management Committee ("ALCO") which is appointed by the
Board of Directors. ALCO meets on a regular basis to review interest
rate risk exposure and liquidity positions. Balance sheet management
and funding strategies are reviewed to ensure that any potential impact
on earnings and liquidity, resulting from a fluctuation in interest
rates is within acceptable standards.
Management believes that there have been no significant changes in
market risk as disclosed in Bancshares' quarterly report on Form 10-Q
for the period ended June 30, 1999. Management believes that the goal
of avoiding material negative changes in net income as a result of
changing interest rates has been accomplished.
PART II. OTHER INFORMATION
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
During the second quarter of 1999, the Corporation filed the
following:
(27) Financial Data Schedule (for SEC use only)
B. Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during
the six months ended June 30, 1999.
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 4, 1999 LSB BANCSHARES, INC.
---------------------
(Registrant)
By: /s/ Monty J. Oliver
----------------------------------------
Monty J. Oliver
Chief Financial Officer
Principal Accounting Officer