<PAGE> 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, 1997
Commission File Number 0-11448
LSB BANCSHARES, INC.
One LSB Plaza
Lexington, North Carolina 27292
(910) 248-6500
Incorporated in the State of North Carolina
IRS Employer Identification No. 56-1348147
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Par Value $5.00 Per Share
LSB Bancshares, Inc., has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and has been subject to such filing requirements for the past 90
days.
The number of shares outstanding as of June 30, 1997 was 5,405,177.
<PAGE> 2
LSB BANCSHARES, INC.
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996
Consolidated Statements of Income
Three Months Ended June 30,1997 and 1996
Six Months Ended June 30,1997 and 1996
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements
Six Months Ended June 30, 1997 and 1996
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II. Other Information
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LSB Bancshares, Inc.
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 18,847 $ 20,611
--------- ---------
Federal Funds Sold 47,625 26,720
--------- ---------
Investment Securities:
Held to Maturity, Market Value $59,612 and $67,981 58,697 66,991
--------- ---------
Available for Sale, at Market Value 23,452 23,626
--------- ---------
Loans:
Commercial 106,363 97,431
Installment 55,765 53,525
Mortgage 131,134 121,088
--------- ---------
Total Loans 293,262 272,044
Less, Reserve for Loan Losses (3,542) (3,075)
--------- ---------
Net Loans 289,720 268,969
--------- ---------
Premises and Equipment 9,105 8,840
--------- ---------
Other Assets 6,425 5,843
--------- ---------
TOTAL ASSETS $ 453,871 $ 421,600
========= =========
LIABILITIES
Deposits:
Demand $ 51,887 $ 43,987
Savings, NOW and Money Market Accounts 177,097 166,077
Certificates of Deposit of less than $100,000 108,307 101,018
Certificates of Deposit of $100,000 or more 37,766 43,738
--------- ---------
Total Deposits 375,057 354,820
Securities Sold Under Agreements to Repurchase 3,015 3,285
Borrowings from the Federal Home Loan Bank 19,500 9,167
Other Liabilities 2,469 2,642
--------- ---------
Total Liabilities 400,041 369,914
--------- ---------
SHAREHOLDERS' EQUITY
Capital Stock: Common, authorized 10,000,000
shares, Par Value $5, issued 5,405,177 shares
in 1997 and 5,390,727 shares in 1996 27,026 27,018
Paid-In Capital 11,342 11,331
Retained Earnings 15,502 13,336
Net Unrealized Gains (Losses) on Securities Available
for Sale, Net of taxes (40) 1
--------- ---------
Total Shareholders' Equity 53,830 51,686
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 453,871 $ 421,600
========= =========
</TABLE>
<PAGE> 4
LSB Bancshares, Inc.
Consolidated Statements of Income
(In Thousands Except Share Data and Note)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 6,698 $ 5,464 $ 13,101 $ 10,809
Interest on Investment Securities:
Taxable 795 1,118 1,608 2,280
Tax Exempt 420 485 857 971
Federal Home Loan Bank 31 59
Federal Funds Sold 538 74 1,001 222
---------- ---------- ---------- ----------
Total Interest Income 8,482 7,141 16,626 14,282
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 3,274 2,770 6,442 5,605
Securities Sold Under Agreements to Repurchase 20 20 45 36
Borrowings from the Federal Home Loan Bank 251 404
---------- ---------- ---------- ----------
Total Interest Expense 3,545 2,790 6,891 5,641
---------- ---------- ---------- ----------
NET INTEREST INCOME 4,937 4,351 9,735 8,641
Provision for Loan Losses 95 143 188 216
---------- ---------- ---------- ----------
Net Interest Income After Provision 4,842 4,208
for Loan Losses 9,547 8,425
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service Charges on Deposit Accounts 512 506 1,017 999
Gains (Losses) on Sales of Mortgages 33 77 77 70
Other Operating Income 656 545 1,280 1,014
---------- ---------- ---------- ----------
Total Noninterest Income 1,201 1,128 2,374 2,083
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Personnel Expense 2,037 1,930 4,040 3,872
Occupancy Expense 190 199 397 391
Equipment Depreciation and Maintenance 212 168 405 335
Other Operating Expense 1,172 982 2,198 1,917
Restructuring Charges 0 517
---------- ---------- ---------- ----------
Total Noninterest Expense 3,611 3,279 7,040 7,032
---------- ---------- ---------- ----------
Income Before Income Taxes 2,432 2,057 4,881 3,476
Income Taxes 764 555 1,527 900
---------- ---------- ---------- ----------
NET INCOME $ 1,668 $ 1,502 $ 3,354 $ 2,576
========== ========== ========== ==========
NET INCOME PER SHARE $ .31 $ .28 $ 0.62 $ 0.48
Weighted Average Shares Outstanding 5,404,552 5,385,416 5,404,045 5,384,088
</TABLE>
<PAGE> 5
LSB Bancshares, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30
1997 1996
-------- --------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 3,354 $ 2,576
Adjustments to reconcile net income to net cash:
Depreciation and amortization 418 351
Securities premium amortization and
discount accretion, net (11) 20
(Increase) decrease in loans held for sale 486 (2,575)
Deferred income taxes (246) 132
Income taxes payable 34 (301)
(Increase) decrease in income earned
but not received 24 79
Increase (decrease)in interest accrued
but not paid 89 (62)
Provision for loan losses 188 216
Gain on sale of investment securities 0 0
Gain on sale of premise and equipment (6) 0
-------- --------
Net cash provided by operating activities 4,330 436
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of securities held to maturity 0 (3,000)
Proceeds from maturities of securities held to maturity 8,302 10,422
Proceeds from sales of securities held to maturity 0 0
Purchases of securities available for sale (2,391) (6,038)
Proceeds from maturities of securities available for sale 2,500 6,001
Proceeds from sales of securities available for sale 0 0
Net (increase) decrease in loans made to customers (21,425) (17,422)
Purchases of premises and equipment (714) (378)
Proceeds from sale of premises and equipment 36 0
Net (increase)decrease in Federal Funds sold (20,905) 7,900
(Increase) decrease in other assets (333) (156)
-------- --------
Net cash used by investing activities (34,930) 2,671
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW, money market and savings accounts 18,919 (3,393)
Net increase (decrease) in time deposits 1,317 7,593
Net increase (decrease) in securities
sold under agreements to repurchase (269) (1,840)
Proceeds from issuance of long-term debt 12,000
Payments on long-term debt (1,667)
Dividends paid (1,189) (1,089)
Net increase (decrease) in other liabilities (295) 493
Common stock Issued 20 126
-------- --------
Net cash provided by financing activities 28,836 5,570
-------- --------
Increase (decrease) in cash (1,764) 3,335
Cash at the beginning of the period 20,611 17,581
-------- --------
Cash at end of period $ 18,847 $ 20,916
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for:
Interest $ 6,803 $ 5,703
Income Taxes 1,740 1,179
Noncash financing and investing activities:
Transfer of loans to other real estate owned $ 0 $ 277
</TABLE>
<PAGE> 6
LSB Bancshares, Inc.
Notes to Consolidated Financial Statements
Six Months Ended June 30, 1997 and 1996
Note 1. Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the six-month period ended June 30,
1997 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1997.
The accompanying unaudited Consolidated Financial Statements include
the accounts of LSB Bancshares, Inc., (the Corporation) and its
wholly-owned subsidiary Lexington State Bank (the Bank) and the Bank's
wholly-owned subsidiaries Peoples Finance Company of Lexington, Inc.
and LSB Financial Services, Inc.
For further information, refer to the Consolidated Financial Statements
and footnotes thereto included in the Corporation's annual report on
Form 10-K for the year ended December 31, 1996.
Note 2. Investment Securities
The valuations of investment securities as of June 30, 1997 and
December 31, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
June 30, 1997
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. Treasury and other U.S. government $30,003 $ 27 $132 $29,898
agency obligations
State, county and municipal securities 28,694 1,087 67 29,714
------- ------ ---- -------
Total securities available for sale $58,697 $1,114 $199 $59,612
======= ====== ==== =======
<CAPTION>
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury and other U.S. government $21,997 $ 100 $166 $21,931
agency obligations
State, county and municipal securities 0 0 0 0
Federal Home Loan Bank stock 1,521 0 0 1,521
------- ------ ---- -------
Total securities available for sale $23,518 $ 100 166 23,452
======= ====== ==== =======
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
December 31, 1996
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. Treasury and other U.S. govern $36,505 $ 0 $108 $31,397
agency obligations
State, county and municipal securities 30,486 1,098 0 31,584
------- ------ ---- -------
Total securities available for sale $66,991 $1,098 $108 $67,981
======= ====== ==== =======
<CAPTION>
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury and other U.S. govern $22,501 $ 47 $ 45 $22,503
agency obligations
State, county and municipal securities
Federal Home Loan Bank stock 1,123 0 0 1,123
------- ------ ---- -------
Total securities available for sale $23,624 $ 47 $ 45 $23,626
======= ====== ==== =======
</TABLE>
No investment securities were sold for the periods ended June 30, 1997
or December 31, 1996. Accordingly, there were no realized gain or
losses for the periods.
Investment securities with amortized cost of $64,420,441 and
$66,358,672 as of June 30, 1997 and December 31, 1996, were pledged to
secure public deposits and for other purposes.
Note 3. Loans (Table In Thousands)
A summary of consolidated loans follows:
<TABLE>
<CAPTION>
June 30
1997 1996
-------- --------
<S> <C> <C>
Commercial $106,363 $ 83,640
Installment 52,515 48,512
Mortgage 131,134 111,625
Credit Cards 3,250 2,740
-------- --------
Total $293,262 $246,517
======== ========
</TABLE>
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
<PAGE> 8
uncollectable and placed in a nonaccrual status. For all impaired loans
other than nonaccrual loans, interest income totaling $86,808 for the
period was recorded on an accrual basis. Interest income on nonaccrual
loans is recognized on a cash basis. The actual amount of interest
income received from the loans for the period was 0. Interest income
for the period on nonaccrual loans that would have been recorded in
accordance with the original terms of the notes was $17, 805. The
adoption of SFAS 114 and SFAS 118 did not have a material effect on
Bancshares' financial position or results of operations and required no
increase to the reserve for loan and lease losses.
At June 30, 1997, the total investment in loans that are considered
impaired under SFAS 114 was $2,092,270 of which $352,926 were
nonaccrual loans. A related valuation allowance of $329,924 was
determined for the total amount of impaired loans. The average recorded
investment in impaired loans for the quarter ended June 30, 1997 was
approximately $2,106,418.
At June 30, 1997 loans totaling $5,382,837 were held for sale stated at
the lower of cost of market on an individual loan basis.
Note 4. Reserve for Loan Losses
(In Thousands)
The following sets forth the analysis of the consolidated reserve for
loan losses:
<TABLE>
<CAPTION>
Six Months Ended
June 30
1997 1996
------- -------
<S> <C> <C>
Balances at beginning of periods $ 3,075 $ 2,730
Provision for loan losses 188 216
Recoveries of amounts previously
charged off 496 55
Loan losses (217) (203)
------- -------
Balances at end of periods $ 3,542 $ 2,798
======= =======
</TABLE>
Note 5. Restructuring Charges
In January 1996, the Board of Directors of the Corporation approved a
strategic plan to improve operating efficiencies. The major element of
the plan was the reduction in staff through an offer of early
retirement to all employees 55 years of age or older with ten years or
more of service. Of the employees offered this opportunity, 68% opted
for early retirement, which was effective March 31, 1996. The costs
associated with increases in the actuarially determined pension and
post retirement medical expenses totaled $490,000, severance costs
associated with the early retirement package totaled $27,000 and
professional fees for administration of the early retirement totaled
$5,000.
<PAGE> 9
Note 6. Stock Split
In January of 1996, the Board of Directors of Bancshares declared a
five-for-four stock split payable February 15, 1996. All previously
reported per share amounts have been restated to reflect this stock
split.
Note 7. Other Accounting Changes
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement No. 125 ("SFAS 125") "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" which became
effective January 1, 1997 and superseded SFAS 122. SFAS 125 applies an
accounting treatment similar to that outlined in SFAS 122 for mortgage
servicing rights and extends it to servicing assets on all financial
assets. In December of 1996, the FASB issued SFAS 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125", which
amends SFAS 125 by deferring the effective date of certain provisions
of the Statement by one year. This means that entities that are
applying SFAS 125 for the first time may phase in the pronouncement,
applying those parts of SFAS 125 that are not covered by SFAS 127 in
the current year and those covered by SFAS 127 in the following year.
The Corporation adopted SFAS 125, as amended by SFAS 127, on January 1,
1997. The implementation of the Statement and the related amendment did
not have a material impact on the consolidated financial position or
consolidated results of operations of the Corporation.
Disclosure requirements of Financial Accounting Standards No. 123 (SFAS
123) "Accounting for Stock-Based Compensation" are applicable for
financial statements for fiscal years beginning after December 15,
1995. SFAS 123 establishes a fair value based method of accounting for
stock options and other equity instruments used in employee
compensation plans. SFAS 123 also requires significantly expanded
disclosures, including disclosure of the pro forma amount of net income
and earnings per share as if the fair value based method were used to
account for stock-based compensation, if the intrinsic value method of
APB No.-25 is retained. The Corporation intends to retain APB No.-25 in
its pro forma disclosure.
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("SFAS") No. 128, "Earnings per
Share". SFAS 128 establishes standards for computing and presenting
earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock, such as options and warrants.
SFAS 128 simplifies the standards for computing EPS previously found in
Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per
Share". SFAS 128 replaces the presentation of "primary" EPS with a
presentation of "basic" EPS and requires dual presentation of "basic"
and "diluted" EPS on the face of the income statement for all entities
with complex capital structures. Basic EPS excludes dilution and is
computed by dividing income available to common
<PAGE> 10
stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
company. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods.
Earlier application is not permitted. Restatement of all prior-period
earnings per share data presented is required. Assuming that SFAS 128
had been implemented, basic earnings per share would not have differed
materially from those disclosed in the accompanying consolidated
statements of income.
In March 1997, the FASB also issued SFAS 129, "Disclosure of
Information about Capital Structure". SFAS 129 establishes standards
for disclosing information about a company's capital structure. Under
SFAS 129, a company shall provide within its financial statements a
summary explanation of the pertinent rights and privileges of the
various securities that are outstanding. The Statement is effective for
financial statements for periods ending after December 15, 1997. The
Corporation does not anticipate that the implementation of this
Statement will have a material impact on the consolidated financial
position or results of operation.
Note 8. Merger
On January 21, 1997, LSB Bancshares, Inc. ("LSB") and Old North State
Bank ("ONSB") of Winston-Salem, North Carolina announced the signing of
a letter of intent under which the two banks would merge. A definitive
agreement was signed on March 14, 1997. Under the terms of the
definitive agreement LSB Bancshares, Inc. will acquire ONSB in a stock
transaction to be accounted for as a pooling of interests. The terms of
the agreement further stipulate that ONSB shareholders will receive
0.948 shares, subject to adjustment under certain conditions, of LSB
Bancshares, Inc. common stock in exchange for each share of ONSB common
stock held. The merger, which is subject to shareholder and regulatory
approval, is expected to be completed on August 11, 1997. It is
currently anticipated that LSB will incur approximately $1.4 million in
nonrecurring merger-related costs associated with executing the merger
with ONSB. As of June 30, 1997, merger related expenses totaling
$393,000 have been capitalized in Other Assets. LSB has 14 branch
offices in Davidson County, while ONSB has 7 branch offices in Forsyth
and Stokes Counties, which are the contiguous counties north of
Davidson County.
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Three Months Ended June 30, 1997 Compared to Three Months
Ended June 30. 1996
Net Interest Income
The primary source of earnings for the Corporation is net interest
income, which represents the dollar amount by which interest generated
by earning assets exceeds the cost of funds. Earning assets consist
primarily of loans and investment securities and cost of funds is the
interest paid on interest-bearing deposits and borrowed funds.
Total interest income of $8,482,000 for the second quarter of 1997 was
up $1,341,000 or 18.8% compared to $7,141,000 for the second quarter of
1996. Total interest expense for the same period increased $755,000 or
27.1%. The prime interest rate, which made its first change in March of
this year since dropping to 8.25% in February of 1996, remained steady
during the second quarter of 1997. The prime interest rate is used as
an interest rate indicator by banks and has been at 8.50% since that
March 27th increase. These results produced net interest income of
$4,937,000 for the second quarter of 1997, for an increase of $586,000
or 13.5% compared to $4,351,000 for the second quarter of 1996.
Noninterest Income and Expense
Noninterest income for the second quarter of 1997 was up $73,000 or
6.5% compared to the second quarter of 1996. Fee income related to
service charges on deposit accounts for the second quarter of 1997 was
up a marginal $6,000 or 1.2% compared to the second quarter of 1996.
Other operating income for the second quarter of 1997 was up $111,000
or 20.4% compared to the second quarter of 1996. This increase is
attributable to fee income generated from deposit and loan services
provided by the Bank.
Noninterest expense for the second quarter of 1997 increased $332,000
or 10.1% compared to the second quarter of 1996. Personnel expense for
the second quarter of 1997, comprised of salaries and fringe benefits,
increased $107,000 or 5.5% compared to the second quarter of 1996.
Occupancy expense for the same period decreased $9,000 or 4.5%.
Equipment depreciation and maintenance expense increased $44,000 or
26.2% the second quarter of 1997 compared to the same period last year,
while other operating expense increased $190,000 or 19.3% during the
same period. These increases are attributable to enhancements made to
the Bank's data processing systems. All increases in noninterest
expense were within the Bank's budgeted projections.
<PAGE> 12
Six Months Ended June 30, 1997 Compared to Six Months Ended
June 30, 1996
Net Interest Income
Net interest income of $9,735,000 for the first six months of 1997 was
up $1,094,000 or 12.7% compared to $8,641,000 for the first six months
of 1996. Stable interest rates for the first half of the year along
with strong loan growth were major factors contributing to this
increase. Total interest income of $16,626,000 for the first six months
of 1997 was up $2,344,000 or 16.4% compared to $14,282,000 for the
first six months of 1996. Total interest expense for the same period
increased $1,250,000 or 22.2%. Deposit growth gained some strength
during the second quarter of 1997 contributing to the increased
interest expense.
Noninterest Income and Expense
Noninterest income for the first six months of 1997 was up $291,000 or
14.0% compared to the first six months of 1996. Fee income related to
service charges on deposit accounts for the first half of 1997 was up a
marginal $18,000 or 1.8% compared to the first half of 1996. Other
operating income for the first six months of 1997 was up $266,000 or
26.2% compared to the first six months of 1996. This increase is
attributable to greater activity in deposit and loan services provided
by the Bank and the resultant fee income generated.
Noninterest expense for the first six months of 1997 increased $8,000
or .1% compared to the same period of 1996. The contributing factor to
this small increase is the restructuring charge of $517,000 incurred in
the first quarter of 1996. The restructuring plan implemented by the
Bank in 1996 included an offer for early retirement to all employees 55
years of age with ten years of service. Of this group, 68% opted for
early retirement, which was effective March 31, 1996. Excluding the
restructuring charges, noninterest expense for the first half of 1997
increased $525,000 or 8.1% compared to the same period of 1996.
Personnel expense for the first half of 1997, comprised of salaries and
fringe benefits, increased $168,000 or 4.3% compared to the first half
of 1996. Occupancy expense for the period being compared remained
virtually unchanged. Equipment depreciation and maintenance expense for
the first half of 1997 increased $70,000 or 20.9%, while other
operating expense increased $281,000 or 14.7% for the dame period.
These increases are attributable to enhancements made to the Bank's
data processing systems during this period. All increases in
noninterest expense were within the Bank's budgeted projections.
<PAGE> 13
Asset Quality and Provision for Loan Losses
The reserve for loan losses was $3,542,000 or 1.21% of loans
outstanding at June 30, 1997 compared to $3,075,000 or 1.13% of loans
outstanding at December 31, 1996 and $2,798,000 or 1.14% at June 30,
1996. Nonperforming loans totaled $1,782,000 or .61% of loans
outstanding at June 30, 1997 compared to $2,848,000 or 1.16% of loans
outstanding at June 30, 1996. Nonperforming loans include nonaccrual
loans, restructured loans, other real estate acquired through
foreclosed properties and accruing loans ninety days or more past due.
At June 30, 1997 the Bank had $226,000 in restructured loans, $400,000
in nonaccrual loans and $902,000 in other real estate. Accruing loans
past due 90 days or more were $255,000 at June 30, 1997 compared to
$257,000 at June 30, 1996. The accrual of interest generally
discontinues on any loan that becomes 90 days past due as to principal
or interest unless collection of both principal and interest is assured
by way of collateralization, guarantees or other security and the loan
is considered to be in the process of collection. At June 30, 1997, the
reserve for loan losses was 1.99 times the nonperforming loans,
compared to 1.56 times at December 31, 1996 and .98 times nonperforming
loans at June 30, 1996.
In the opinion of management, all loans where serious doubts exist as
to the ability of borrowers to comply with the present repayment terms
have been included in the schedule presented.
Responsibility for market risk management resides with the
Asset/Liability Management Committee ("ALCO"). The ALCO Committee
monitors market conditions, interest rate trends and the economic
environment in its decision making process. Based upon its view of
existing and expected market conditions, balance sheet strategies will
be adopted to optimize net interest income while minimizing the risk
associated with unanticipated changes in interest rates.
The provision for loan and lease losses for the first six months of
1997 was $188,000 compared to $216,000 for the first six months of
1996. As the result of one large recovery, related to a loan previously
charged off, total recoveries exceeded charge-offs by $279,000. The
decrease in the 1997 provision for loan and lease losses reflects this
net increase in the loan loss reserve resulting from the recovery.
Loans classified for regulatory purposes as loss, doubtful, substandard
or special mention that have not been disclosed as nonperforming do not
represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results,
liquidity, or capital resources, or represent material credits about
which management is aware of any information which causes management to
have serious doubts as to the ability of such borrowers to comply with
the loan repayment terms.
<PAGE> 14
ASSET QUALITY ANALYSIS
<TABLE>
<CAPTION>
6/30/97 6/30/96
<S> <C> <C>
RESERVE FOR LOAN LOSSES
Beginning balance $ 3,075 $ 2,730
Provision for loan losses 188 216
Net charge-offs -279 148
Ending balance 3,542 2,798
RISK ASSETS
Nonaccrual loans $ 399 $ 1,155
Foreclosed real estate 902 1,174
Restructured loans 226 262
Loans 90 days or more past due and
still accruing 255 257
ASSET QUALITY RATIOS
Nonaccrual loans as a percentage of total loans .14% .47%
Nonperforming assets as a percentage of:
Total assets .39 .74
Loans plus foreclosed property .61 1.15
Net charge-offs as a percentage of average loans N/M .06
Reserve for loan losses as a percentage of loans 1.21 1.14
Ratio of reserve for loan losses to:
Net charge-offs N/M 9.45X
Nonaccrual loans 8.86 2.42
N/M Denotes Non Meaningful
</TABLE>
Income Taxes
Accrued taxes applicable to income for the six-month period ended June
30, 1997 increased $627,000 compared to the six-month period ended June
30, 1996. Pretax income for the first six months of 1997 was
$4,881,000, an increase of $1,405,000 or 40.4% compared to $3,476,000
for the first six months of 1996. The increase in accrued taxes for the
first half of 1997 is attributable to the higher operating income. The
effective tax rate for the six- month period ended June 30, 1997 was
31.3% compared to 25.9% for the six-month period ended June 30, 1996.
Capital Resources and Shareholders' Equity
Regulatory guidelines require minimum levels of capital, based on a
risk weighting of each asset category and off-balance sheet
contingencies. At June 30, 1997, based on these measures, the Bank's
ratio for Tier 1 capital was 19.99% compared to the regulatory minimum
risk-based capital ratio requirement of 4%. The Bank's Tier 2 capital
ratio at this date was 21.24% compared to the regulatory requirement of
8%. Tier 1 or core capital, as defined by federal bank regulators,
equals common shareholders' equity capital less goodwill and other
disallowed intangible assets. Tier 2 capital is the allowable portion,
as defined by the federal regulators, of the allowance for loan losses
and 100% of Tier 1 capital. Federal banking guidelines for risk-based
capital limit the amount of the allowance for loan losses allowable in
Tier 2 or total capital to 1.25% of risk-weighted assets.
<PAGE> 15
Interest Rate Sensitivity and Liquidity
Asset/liability management is the process used to monitor exposure to
interest rate risk, balance sheet trends and pricing policies. It also
addresses proper liquidity positioning and sound capital. The goals of
asset/liability management are to ensure profitability and performance,
minimize risk, adhere to proper liquidity and maintain sound capital.
Profitability and performance are affected by balance sheet composition
and interest rate movements. Management responsibility for both
liquidity and interest sensitivity reside with a designated
Asset/Liability Management Committee ("ALCO"). Market conditions,
interest rate trends and the economic environment are all evaluated by
the ALCO as a part of its asset/liability management decision-making
process. Based upon its view of existing and expected market
conditions, the ALCO adopts balance sheet strategies intended to
optimize net interest income to the extent possible while minimizing
the risk associated with unanticipated changes in interest rates. Core
deposits have historically been the primary funding sources for asset
growth. Correspondent relationships have also been maintained with
several large banks in order to have access to federal funds purchases
when needed. The Bank also has available lines of credit maintained
with the Federal Home Loan Bank (the "FHLB") which can be used for
funding and/or liquidity needs.
To minimize risk of interest rate movements, the asset/liability
management process seeks to match maturities and repricing
opportunities of interest-sensitive assets and liabilities. As of June
30, 1997, the gap between interest-sensitive assets and
interest-sensitive liabilities was a negative $84,093 or 0.73. Under
current economic conditions, management believes this is an acceptable
level.
Asset/liability management also addresses liquidity positioning.
Liquidity management is required in order to fund current and future
extensions of credit, meet deposit withdrawals, maintain reserve
requirements and otherwise sustain operations. As such, it is related
to interest rate sensitivity management, in that each is affected by
maturing assets and liabilities. While interest sensitivity management
is concerned with repricing intervals of assets and liabilities,
liquidity management is concerned with the maturities of those
respective balances. An appropriate liquidity position is further
accomplished through deposit growth and access to sources of funds
other than deposits, such as the federal funds market. Traditionally,
LSB has been a seller of excess investable funds in the federal funds
market and uses these funds as a part of its liquidity management.
Details of cash flows for the six months ended June 30, 1997 and 1996
are provided in the Consolidated Statements of Cash Flows.
<PAGE> 16
PART II. OTHER INFORMATION
Item 5. Other Information
On January 21, 1997, Bancshares announced the signing of a Letter of
Intent under which LSB Bancshares, Inc. and Old North State Bank of
Winston-Salem, North Carolina would merge. Under the terms of the
Letter of Intent, Old North State Bank shareholders would receive LSB
Bancshares, Inc. common stock in exchange for their Old North State
Bank holdings. The value of the transaction would be $30 million based
on Bancshares recent trading price of $20.00 per share at the time of
the announcement. The transaction is anticipated to result in earnings
per share dilution to the Corporation in the year in which the
transaction closes due to one-time merger-related expenses, but become
accretive in the following years. In connection with the signing of the
Letter of Intent, Old North State granted the Corporation an option to
purchase 265,675 shares of its stock at the exercise price of $8.00 per
share, exercisable in certain events. LSB has a dominant position in
Davidson County, while Old North State has a strong and growing
presence in Forsyth and Stokes Counties, which are the contiguous
counties north of Davidson County. A Definitive Agreement between the
two institutions was signed on March 14, 1997. The merger is subject to
regulatory and shareholder approvals and is expected to be completed by
August 11, 1997. The foregoing statements regarding the merger of LSB
and Old North State Bank, including the projected earnings per share
dilution on 1997 and accretive effect of the merger in subsequent
years, and the expected timing of the consummation of the transaction
are "forward looking statement" as defined in the Private Securities
Litigation Reform Act of 1995. As forward-looking statements, they are
necessarily based upon various uncertain factors, including, but not
limited to, the completion of the parties' due diligence reviews and
negotiations, projections of costs to be incurred in connection with
the merger and the parties' financial performance in the future.
Because of such uncertainties, the actual timing and results of the
merger may differ significantly from the forward-looking statements
contained herein.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule (for SEC use only).
<PAGE> 17
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 7, 1997 LSB BANCSHARES, INC.
-------------------------------
(Registrant)
/s/ Monty J. Oliver
--------------------------------
Monty J. Oliver
Chief Financial Officer
Principal Accounting Officer
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
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0
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