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, 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 September 30, 1999 was
8,524,347.
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LSB BANCSHARES, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1999 and 1998, December 31, 1998
Consolidated Statements of Income
Three Months Ended September 30, 1999 and 1998
Nine Months Ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998
Notes to Consolidated Financial Statements
Nine Months Ended September 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)
September 30 December 31 September 30
1999 1998 1998
--------- --------- ---------
ASSETS
Cash and Due From Banks $ 38,888 $ 33,292 $ 31,184
Interest-Bearing Bank Balances 4,904 9,862 31,155
Federal Funds Sold and Securities Purchased
Under Resale Agreements 36,140 40,595 18,685
Investment Securities:
Held to Maturity, MV $67,708, $61,386 and $42,021 68,552 59,907 40,205
Available for Sale, at Market Value 64,654 83,936 92,126
Loans 489,640 436,014 426,183
Less, Reserve for Loan Losses (5,240) (5,048) (4,887)
--------- --------- ---------
Net Loans 484,400 430,966 421,296
Premises and Equipment 11,324 11,528 11,500
Other Assets 10,559 8,920 9,219
--------- --------- ---------
TOTAL ASSETS $ 719,421 $ 679,006 $ 655,370
========= ========= =========
LIABILITIES
Deposits
Demand $ 75,084 $ 71,867 $ 68,580
Savings, NOW and Money Market Accounts 309,130 287,315 264,848
Certificates of Deposit of less than $100,000 164,857 158,664 161,863
Certificates of Deposit of $100,000 or more 55,122 49,481 49,698
--------- --------- ---------
Total Deposits 604,193 567,327 544,989
Securities Sold Under Agreements to Repurchase 4,848 5,537 4,925
Borrowings from the Federal Home Loan Bank 35,150 28,842 29,675
Other Liabilities 3,807 3,870 3,419
--------- --------- ---------
TOTAL LIABILITIES 647,998 605,576 583,008
--------- --------- ---------
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 8,524,347 Shares
in 1999 and 8,722,895 and 8,711,239 shares in 1998 42,622 43,614 43,556
Paid-In Capital 11,267 14,903 14,924
Retained Earnings 17,788 14,248 12,909
Accumulated Other Comprehensive Income (254) 665 973
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 71,423 73,430 72,362
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 719,421 $ 679,006 $ 655,370
========= ========= =========
Memorandum: Standby Letters of Credit $ 3,142 $ 2,896 $ 2,946
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LSB Bancshares, Inc.
Consolidated Statements of Income
(In Thousands except Share Data)
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
INTEREST INCOME
Interest and Fees on Loans $ 10,851 $ 10,111 $ 31,349 $ 29,108
Interest on Investment Securities:
Taxable 1,350 1,409 4,092 4,125
Tax Exempt 462 458 1,413 1,379
Interest-Bearing Bank Balances 114 433 469 917
Federal Funds Sold and Securities
Purchased Under Resale Agreements 561 321 1,540 1,471
---------- ---------- ---------- ----------
Total Interest Income 13,338 12,732 38,863 37,000
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 5,142 4,956 14,940 14,647
Securities Sold Under Agreements to Repurchase 37 66 123 193
Borrowings from the Federal Home Loan Bank 489 419 1,348 1,317
---------- ---------- ---------- ----------
Total Interest Expense 5,668 5,441 16,411 16,157
---------- ---------- ---------- ----------
NET INTEREST INCOME 7,670 7,291 22,452 20,843
Provision for Loan Losses 215 180 615 520
---------- ---------- ---------- ----------
Net Interest Income After Provision
for Loan Losses 7,455 7,111 21,837 20,323
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service Charges on Deposit Accounts 808 718 2,315 1,975
Gains on Sales of Mortgages 31 87 237 217
Other Operating Income 865 862 2,745 2,642
---------- ---------- ---------- ----------
Total Noninterest Income 1,704 1,667 5,297 4,834
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Personnel Expense 3,094 2,799 9,198 8,494
Occupancy Expense 329 320 971 956
Equipment Depreciation and Maintenance 322 319 949 907
Other Operating Expense 2,129 1,830 6,036 5,513
Merger-Related Costs 0 0 0 160
---------- ---------- ---------- ----------
Total Noninterest Expense 5,874 5,268 17,154 16,030
---------- ---------- ---------- ----------
Income Before Income Taxes 3,285 3,510 9,980 9,127
Income Taxes 884 1,122 2,847 2,833
---------- ---------- ---------- ----------
NET INCOME $ 2,401 $ 2,388 $ 7,133 $ 6,294
========== ========== ========== ==========
Earnings Per Share:
Basic $ 0.28 $ 0.27 $ 0.83 $ 0.72
Diluted 0.28 0.27 0.82 0.71
Weighted Average Shares Outstanding
Basic 8,527,663 8,709,937 8,573,954 8,698,501
Diluted 8,663,910 8,867,669 8,728,192 8,892,656
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LSB Bancshares, Inc.
Consolidated Statements of Cash Flow
(In Thousands)
Nine Months Ended September 30
------------------------------
1999 1998
-------- --------
CASH FLOW FROM OPERATING ACTIVITIES
Net Income $ 7,133 $ 6,294
Adjustments to reconcile net income to net cash:
Depreciation and amortization 976 926
Securities premium amortization and
discount accretion, net 42 (116)
(Increase) decrease in loans held for sale 1,655 (6,266)
Deferred income taxes 497 115
Income taxes payable (129) (100)
(Increase) decrease in income earned but not received (613) (720)
Increase (decrease) in interest accrued but not paid 98 61
Provision for loan losses 615 520
Gain on sale of premise and equipment (26) 3
-------- --------
Net Cash provided by operating activities 10,248 717
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (15,520) (3,284)
Proceeds from maturities of securities held to maturity 17,741 18,005
Proceeds from sales of securities held to maturity 0 0
Purchases of securities available for sale 0 (59,014)
Proceeds from maturities of securities available for sale 6,869 19,004
Proceeds from sales of securities available for sale 0 0
Net (increase) decrease in loans made to customers (55,705) (23,160)
Purchases of premises and equipment (800) (1,216)
Proceeds from sale of premises and equipment 54 47
Net (increase) decrease in federal funds sold
and securities purchased under resale agreements 4,455 41,655
(Increase) decrease in other assets (935) 38
-------- --------
Net cash used by investing activities (43,841) (7,925)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW, money market and savings accounts 25,032 38,933
Net increase (decrease) in time deposits 11,835 3,032
Net increase (decrease) in securities
sold under agreements to repurchase (689) (3,338)
Proceeds from issuance of long term debt 20,000 0
Payments on long term debt (13,691) (4,083)
Dividends Paid (3,593) (2,629)
Net increase (decrease) in other liabilities (34) (235)
Proceeds from issuance of common stock 630 371
Common stock repurchased (5,259)
-------- --------
Net cash provided by financing activities 34,231 32,051
-------- --------
Increase (decrease) in cash and cash equivalents 638 24,843
Cash and cash equivalents at the beginning of the period 43,154 37,495
-------- --------
Cash and cash equivalents at the end of the period $ 43,792 $ 62,338
-------- --------
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for:
Interest $ 16,337 $ 16,096
Income Taxes 2,806 2,819
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS
Transfer of loans to other real estate owned $ 296 $ 63
Unrealized losses on securities available for sale:
Change in securities available for sale (1,505) (1,309)
Change in deferred income taxes 586 510
Change in shareholders' equity (919) (799)
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LSB Bancshares, Inc.
Notes to Consolidated Financial Statements
Nine Months Ended September 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 nine-month period ended September
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 September 30, 1999 and
December 31, 1998 were as follows (in thousands):
September 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 $34,564 $ 11 $ 807 $33,768
State, county and municipal securities 33,988 614 662 33,940
------- ------- ------- -------
Total securities held to maturity $68,552 $ 625 $ 1,469 $67,708
======= ======= ======= =======
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Securities available for sale:
U.S. Treasury and other U.S.
government agency obligations $62,181 $ 147 $ 571 $61,757
State, county and municipal securities 854 8 0 862
Federal Home Loan Bank stock 2,035 0 0 2,035
------- ------- ------- -------
Total securities available for sale $65,070 $ 155 $ 571 $64,654
======= ======= ======= =======
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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 September 30,
1999.
Investment securities with amortized cost of $122,955,767 and
$93,681,039, as of September 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:
September 30
1999 1998
-------- --------
Commercial, financial, & agricultural $154,554 $137,894
Real estate - construction 27,070 17,810
Real estate - mortgage 229,020 193,533
Installment loans to individuals 66,286 61,515
Lease financing 837 721
Other 11,873 14,710
-------- --------
Total loans, net of unearned income $489,640 $426,183
======== ========
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
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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 $270,491 for the period was
recorded on an accrual basis. Interest income on nonaccrual loans is
recognized on a cash basis. No cash has been collected on these loans
since being placed in a nonaccrual status. Interest income on
nonaccrual loans that would have been recorded in accordance with the
original terms of the notes was $14,277. The adoption of SFAS 114 and
SFAS 118 did not have a material effect on the Corporation's financial
position or results of operations and required no increase to the
reserve for loan and lease losses.
At September 30, 1999, the total investment in loans that are
considered impaired under SFAS 14 was $3,133,000, including nonaccrual
loans of $116,000. A related valuation allowance of $512,000 was
determined for the total amount of impaired loans. The average recorded
investment in impaired loans for the quarter ended September 30, 1999
was approximately $3,491,000.
At September 30, 1999, loans totaling $11,725,000 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:
September 30
1999 1998
------- -------
Balances at beginning of periods $ 5,048 $ 4,601
Provision for loan losses 615 520
Recoveries of amounts previously
charged off 127 101
Loan losses (550) (335)
------- -------
Balances at end of periods $ 5,240 $ 4,887
======= =======
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
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have any derivative instruments that fit the definition under SFAS 133,
and 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.
Year 2000 Issue
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 "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.
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.
Bancshares acknowledged the importance of this issue early on 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.
As of September 30, 1999, Bancshares has completed its assessment of
the Year 2000 issue and taken the necessary corrective actions to be
Y2K Ready. Bancshares is now in the Clean Management Phase to ensure
Year 2000 ready systems remain ready.
The awareness phase and the assessment phase of both information
technology (computer systems) and non-information technology systems
(heating, air condition systems, elevator systems, calculators, etc.)
has been completed. Testing strategies and plans have been completed
and put in place. These first two phases were completed on schedule in
April of 1998.
The renovation phase, validation phase and implementation phase of
Bancshares internal software was completed in July 1999. Software
programs from the National Software Testing Laboratories (NSTL) have
been 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 participated with Fiserv's Testing
Acceptance Group and the Client
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Advisory Board in Year 2000 testing. All phases of the Fiserv core
application systems testing have been completed. Bancshares has also
completed the interface testing and implementation process with Fiserv.
During the fourth quarter of 1999, Bancshares' Year 2000 project team
will continue to monitor Year 2000-ready tested systems and ensure year
2000-readiness is maintained. During the period from October 1999
through January 2000, only production critical or regulatory required
changes will be allowed by management. Any changes made will be tested
for Year 2000 compliance before being put into production.
Bancshares has also completed due diligence inquiries of all of its
major vendors and suppliers concerning their Y2K readiness. In
addition, Bancshares has completed appropriate internal testing and
verification of the major 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. In addition, Bancshares has proactively
conducted seminars, made presentations to civic clubs and citizens
groups and addressed "community conversation" functions to heighten
customer awareness and knowledge.
In 1998, Bancshares identified its larger commercial borrowers using a
cutoff of $400,000 in total debt exposure. A risk grade assessment plan
and a Y2K questionnaire were distributed to those borrowers, and have
since been a requirement of 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.
As of September 30, 1999, a cumulative total of $161,000 has been
expensed, with $67,000 being expensed during the first nine months of
1999. Originally the estimated cost of Bancshares' Year 2000 project
was placed in the range of $350,000 to $400,000. Due to the progress
made on the Year 2000 project and the actual expenditure thus far, the
projected cost has been revised to be in the range of $250,000 to
$300,000. This cost is being funded through operating cash flows. 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 has completed the development of contingency plans outlining
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. Presently, Bancshares is conducting walk through
reviews on a department by department basis with all employees to
assess the plan's validity.
In addition, Bancshares retained the services of MTS/People Source,
Inc., an independent consulting firm, to evaluate its Y2K readiness.
Upon completion
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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 operation. 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 meet their own Year 2000 issues,
disruptions in operations could occur and could have a material adverse
impact on the financial position of Bancshares.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The discussion presented herein is intended to provide an overview of
the changes in financial condition and results of operations for LSB
Bancshares, Inc, ("Bancshares") and its wholly-owned subsidiary,
Lexington State Bank ("LSB") for the three and nine months ended
September 30, 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 SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
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 $13,338,000 for the third quarter of 1999 was
up $606,000 or 4.8% compared to $12,732,000 for the third quarter of
1998. Total interest expense for the same period increased $227,000 or
4.2%. These results produced net interest income of $7,670,000 for the
third quarter of 1999, for a gain of $379,000 or 5.2% compared to
$7,291,000 for the third quarter of 1998. The gain in net interest
income for the third quarter of 1999 was primarily the result of strong
loan demand. Loans constitute the largest group of earning assets and
therefore generate the majority of
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Bancshares' interest income. For the period ended September 30, 1999,
loans increased $53,626,000 or 12.3% over December 31, 1998 and
$63,457,000 or 14.9% over September 30, 1998. For the period ended
September 30, 1999, deposits increased $36,866,000 or 6.5% over
December 31, 1998 and $59,204,000 or 10.9% over September 30, 1998.
Noninterest Income and Expense
Noninterest income for the third quarter of 1999 was up $37,000 or 2.2%
compared to the third quarter of 1998. Fee income related to service
charges on deposit accounts for the third quarter of 1999 increased
$90,000 or 12.5% compared to the third quarter of 1998. Gains on the
sale of mortgage loans for the third quarter of 1999 decreased $56,000
or 64.4% compared to the third quarter of 1998. Other operating income
for the third quarter of 1999 was up slightly compared to the third
quarter of 1998. Fee income from the Bank's bankcard division, produced
an increase of $74,000 or 32.2% for the third quarter of 1999 compared
to the third quarter of 1998. Commissions generated by the financial
services' subsidiary decreased $27,000 or 17.2% the third quarter of
1999 compared to the third quarter of 1998 as the result of staff
turnover. The bank's financial services subsidiary generates commission
income from the sale of mutual funds, annuities and equities.
Noninterest expense for the third quarter of 1999 increased $606,000 or
11.5% compared to the third quarter of 1998. Personnel expense for the
third quarter of 1999, comprised of salaries and fringe benefits, was
up $295,000 or 10.5% over the third quarter of 1998. Occupancy expense
increased $9,000 or 2.8% in the third quarter of 1999 compared to the
third quarter of 1998. Equipment depreciation and maintenance expense
for the third quarter of 1999 was nearly the same as the corresponding
period of 1998. Other operating expense for the third quarter of 1999
increased $299,000 or 16.3% compared to the third quarter of 1998.
Expenses for the financial services' subsidiary decreased the third
quarter of 1999 $37,000 or 71.50% compared to the third quarter of
1998. Legal and professional expense increased $12,000 or 4.5% in the
third quarter of 1999 compared to the same period a year ago. Bankcard
expense for the third quarter of 1999 increased $48,000 or 25.2%
compared to the third quarter of 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Net Interest Income
Total interest income of $38,863,000 for the first nine months of 1999
was up $1,863,000 or 5.0% compared to $37,000,000 for the first nine
months of 1998. Total interest expense for the same period increased
only $254,000 or 1.6%. Net interest income of $22,452,000 for the first
nine months of 1999 was up $1,609,000 or 7.7% compared to $20,843,000
for the first nine months of 1998. Strong loan growth was the major
factor contributing to this increase.
Noninterest Income and Expense
Noninterest income for the first nine months of 1999 was up $463,000 or
9.6% compared to the first nine months of 1998. Fee income related to
service charges on deposit accounts for the first nine months of 1999
was up $340,000 or 17.2% compared to the first nine months of 1998.
Gains on the sale of mortgage loans for the first nine months of 1999
increased $20,000 or 9.2% compared to the first nine months of 1998.
Other operating income for the first nine months of 1999 was up
$103,000 or 3.9% compared to the first nine months of 1998. This
increase came primarily from fees generated by the Bank's bankcard
division, which was up $229,000 or 37.2% the first nine months of 1999
compared to the first nine months of 1998. Fee income from Bancshares'
financial services subsidiary for the first nine months of 1999
decreased $195,000 or 30.6% compared to the first nine months of 1998.
As
14
previously stated, the financial services subsidiary generates fees
through the sale of mutual funds, annuities and equities.
Noninterest expense for the first nine months of 1999, excluding
merger-related costs of $160,000 incurred in 1998, increased $1,284,000
or 8.1% compared to the same period of 1998. Personnel expense for the
first nine months of 1999, comprised of salaries and fringe benefits,
increased $704,000 or 8.3% compared to the first nine months of 1998.
Occupancy expense for the period being compared increased by a modest
$15,000 or 1.6%. Equipment depreciation and maintenance expense for the
first nine months of 1999 increased $42,000 or 4.6%. Other operating
expense for the first nine months of 1999 increased $523,000 or 9.5%
compared to the first nine 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
nine months of 1999 decreased $41,000 or 3.6% compared to the first
nine months of 1998. Expenses that related to bankcard operations
during the same period increased $200,000 or 41.3%. Legal and
professional expense for the first nine months of 1999 increased
$113,000 or 13.9% compared to the first nine months of 1998.
Asset Quality and Provision for Loan Losses
The reserve for loan losses was $5,240,000 or 1.07% of loans
outstanding at September 30, 1999 compared to $5,048,000 or 1.16% of
loans outstanding at December 31, 1998 and $4,887,000 or 1.15% at
September 30, 1998. Non-performing loans totaled $1,862,000 or .38% of
loans outstanding at September 30, 1999 compared to $1,912,000 or .44%
of loans outstanding at December 31, 1998, and $2,028,000 or .48% of
loans outstanding at September 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 September 30, 1999, Bancshares had $144,000 in
restructured loans and $1,036,000 in other real estate. As of September
30, 1999 Bancshares had $116,000 in nonaccrual loans. Accruing loans
past due 90 days or more were $566,000 at September 30, 1999 compared
to $759,000 at December 31, 1998 and $852,000 at September 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 September 30, 1999, the reserve for loan
losses was 2.81 times non-performing loans, compared to 2.64 times at
December 31, 1998 and 2.41 times non-performing loans at September 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 September 30, 1999 was
$615,000 compared to $520,000 in 1998. Net charge-offs amounted to
$423,000, or .12% of average loans outstanding, on an annualized basis,
during the first nine 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
15
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.
9/30/99 12/31/98 9/30/98
--------- --------- ---------
RESERVE FOR LOAN LOSSES
Beginning Balance $ 5,048 $ 4,601 $ 4,601
Provision for loan losses 615 770 520
Net (charge-off) recoveries (423) (323) (234)
--------- --------- ---------
Ending balance 5,240 5,048 4,887
RISK ASSETS
Nonaccrual loans $ 116 $ 0 $ 15
Foreclosed real estate 1,036 921 921
Restructured loans 144 232 240
Loans 90 days or more past due
and still accruing 566 759 852
--------- --------- ---------
Total risk assets 1,862 1,912 2,028
ASSET QUALITY RATIOS
Nonaccrual loans as a percentage of total loans 0.02% 0.00% 0.00%
Nonperforming assets as a percentage of:
Total assets 0.26 0.28 0.31
Loans plus foreclosed property 0.38 0.44 0.48
Net charge-offs as a percentage of average loans 0.12 X 0.08 0.08 X
Reserve for loan losses as a percentage of loans 1.07 1.16 1.15
Ratio of reserve for loan losses to:
Net charge-offs 16.52 X 15.63 27.84 X
Nonaccrual loans 45.17 N/M 325.80
* N/M Denotes Non Meaningful
X Denotes Annualized
Income Taxes
Accrued taxes applicable to income for the nine-month period ended
September 30, 1999 were $2,847,000 compared to $2,833,000 for the
nine-month period ended September 30, 1998. Pretax income for the first
nine months of 1999 of $9,980,000 was $853,000 above the $9,127,000 for
the first nine months of 1998.
Capital Resources and Shareholders' Equity
Regulatory guidelines require minimum levels of capital based on a risk
weighting of each asset category and off-balance sheet contingencies.
Regulatory agencies divide capital into Tier 1 or core capital and
total capital. Tier 1 capital, as defined by regulatory agencies,
consists primarily of common shareholders' equity less goodwill and
certain other intangible assets. Total capital consists of Tier 1
capital plus the allowable portion of the reserve for loan losses and
certain long-term debt. At September 30, 1999, based on these measures,
Bancshares' had a Tier 1 capital ratio of 15.11% compared to the
regulatory requirement of 4% and total capital ratio of 16.23% compared
to an 8% regulatory requirement.
16
Additional regulatory capital measures include the Tier 1 leverage
ratio. The Tier 1 leverage ratio is defined as Tier 1 capital divided
by average total assets less goodwill and certain other intangibles and
has a regulatory minimum of 3.0%, with most institutions required to
maintain a ratio of at least 4.0% to 5.0%, depending primarily upon
risk profiles. At September 30, 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 September 30, 1999, 277,182 shares had been repurchased and
retired at an average cost of $19.32 per share.
On August 11, 1999, Bancshares approved an extension of its stock
repurchase program for up to an additional 300,000 shares of its common
stock, or approximately 3.5% of its outstanding shares.
Market Risk Management
Bancshares' market risk arises primarily from the interest rate risk
inherent in its lending and deposit-taking activities. The objectives
of market risk management are to ensure long-range profitability
performance and minimize risk, adhere to proper liquidity and maintain
sound capital. To meet these goals, the Asset/Liability Management
Committee ("ALCO") monitors the exposure to interest rate risk, balance
sheet trends, pricing policies and liquidity position. The objectives
are to achieve relatively stable net interest margins and assure
liquidity through coordinating the volumes, maturities or repricing
opportunities of earning assets, deposits and borrowed funds. This is
accomplished through strategic pricing of asset and liability accounts.
As a result of this management, appropriate maturities and/or repricing
opportunities are developed to produce consistent earnings during
changing interest rate environments.
Based upon its view of existing and expected market conditions, ALCO
adopts balance sheet strategies intended to optimize net interest
income to the extent possible while minimizing the risk associated with
unanticipated changes in interest rates. Core deposits have
historically been the primary funding sources for asset growth.
Correspondent relationships have also been maintained with several
large banks in order to have access to federal funds purchases when
needed. The Bank also has available lines of credit maintained with the
Federal Home Loan Bank (the "FHLB") which can be used for funding
and/or liquidity needs. The Bank has also executed a retail CD
brokerage agreement, which provides an additional source for liquidity
or funding needs.
To minimize risk of interest rate movements, the asset/liability
management process seeks to match maturities and repricing
opportunities of interest-sensitive assets and liabilities. On
September 30, 1999 the gap between interest-sensitive assets and
interest-sensitive liabilities was a negative $211,899,000 or .57.
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
17
concerned with the maturities of those respective balances. An
appropriate liquidity position is further accomplished through deposit
growth and access to sources of funds other than deposits, such as the
federal funds market. Details of cash flows for the nine-months ended
September 30, 1999 and 1998 are provided in the Consolidated Statements
of Cash Flow.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk reflects the risk of economic loss resulting from adverse
changes in market price and interest rates. This risk of loss can be
reflected in diminished current market values and/or reduced potential
net interest income in future periods.
Bancshares' market risk arises primarily from the interest rate risk
inherent in its lending and deposit-taking activities. The structure of
Bancshares' loan and deposit portfolios is such that a significant
decline in interest rates may adversely impact net market values and
net interest income. Bancshares' does not maintain a trading account
nor is it subject to currency exchange risk or commodity price risk.
Responsibility for monitoring interest rate risk rests with the
Asset/Liability Management Committee ("ALCO") which is appointed by the
Board of Directors. ALCO meets on a regular basis to review interest
rate risk exposure and liquidity positions. Balance sheet management
and funding strategies are reviewed to ensure that any potential impact
on earnings and liquidity, resulting from a fluctuation in interest
rates is within acceptable standards.
Management believes that there have been no significant changes in
market risk as disclosed in Bancshares' quarterly report on Form 10-Q
for the period ended September 30, 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 third 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 nine
months ended September 30, 1999.
18
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 4, 1999 LSB BANCSHARES., INC.
---------------------
(Registrant)
By: /s/ Monty J. Oliver
---------------------------------------
Monty J. Oliver
Chief Financial Officer
Principal Accounting Officer