<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 September 30, 1998
Commission File Number 0-11448
LSB BANCSHARES, INC.
One LSB Plaza
Lexington, North Carolina 27292
(336) 248-6500
Incorporated in the State of North Carolina
IRS Employer Identification No. 56-1348147
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Par Value $5.00 Per Share
LSB Bancshares, Inc., has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and has been subject to such filing requirements for the past 90
days.
The number of shares outstanding as of September 30, 1998 was
8,711,239.
<PAGE> 2
LSB BANCSHARES, INC.
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1998 and 1997, December 31, 1997
Consolidated Statements of Income
Three Months Ended September 30, 1998 and 1997
Nine Months Ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 1998 and 1997
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II. 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>
September 30 December 31 September 30
1998 1997 1997
--------- --------- ---------
<S> <C> <C> <C>
Assets
Cash and Due From Banks $ 31,184 $ 25,368 $ 25,321
Interest-Bearing Bank Balances 31,155 12,127 2,236
Federal Funds Sold 18,685 60,340 68,720
Investment Securities:
Held to Maturity, MV $42,021, $56,209 and $60,320 40,205 54,891 58,979
Available for Sale, at Market Value 92,126 50,725 47,681
Loans 426,183 396,991 389,225
Less, Reserve for Loan Losses (4,887) (4,601) (4,666)
--------- --------- ---------
Net Loans 421,296 392,390 384,559
Premises and Equipment 11,500 11,261 11,461
Other Assets 9,219 9,163 9,164
--------- --------- ---------
Total Assets $ 655,370 $ 616,265 $ 608,121
========= ========= =========
Liabilities
Deposits
Demand $ 68,580 $ 67,256 $ 61,913
Savings, NOW and Money Market Accounts 264,848 227,239 230,731
Certificates of Deposit of less than $100,000 161,863 154,566 157,286
Certificates of Deposit of $100,000 or more 49,698 53,964 50,439
--------- --------- ---------
Total Deposits 544,989 503,025 500,369
Securities Sold Under Agreements to Repurchase 4,925 8,263 6,422
Borrowings from the Federal Home Loan Bank 29,675 33,758 31,591
Other Liabilities 3,419 3,692 3,728
--------- --------- ---------
Total Liabilities 583,008 548,738 542,110
--------- --------- ---------
Shareholders' Equity
Capital Stock: Common, authorized 50,000,000
Shares, Par Value $5, issued 8,711,239 shares
in 1998 and 8,667,426 and 8,648,676 shares in 1997 43,556 34,665 34,571
Paid-In Capital 14,924 14,772 14,701
Retained Earnings 12,909 17,916 16,688
Accumulated Other Comprehensive Income 973 174 51
--------- --------- ---------
Total Shareholders' Equity 72,362 67,527 66,011
--------- --------- ---------
Total Liabilities and Shareholders' Equity $ 655,370 $ 616,265 $ 608,121
========= ========= =========
Memorandum: Standby Letters of Credit $ 2,946 $ 2,221 $ 2,380
</TABLE>
<PAGE> 4
LSB Bancshares, Inc.
Consolidated Statements of Income
(In Thousands except Share Data and Note)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- ------------------------------
1998 1997 1998 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Interest Income
Interest and Fees on Loans $ 10,111 $ 8,989 $ 29,108 $ 26,094
Interest on Investment Securities:
Taxable 1,409 1,264 4,125 3,956
Tax Exempt 458 427 1,379 1,346
Federal Home Loan Bank 433 36 917 156
Federal Funds Sold 321 729 1,471 1,781
---------- ---------- ---------- -----------
Total Interest Income 12,732 11,445 37,000 33,333
---------- ---------- ---------- -----------
Interest Expense
Deposits 4,956 4,625 14,647 13,217
Securities Sold Under Agreements to Repurchase 66 55 193 145
Borrowings from the Federal Home Loan Bank 419 404 1,317 1,071
---------- ---------- ---------- -----------
Total Interest Expense 5,441 5,084 16,157 14,433
---------- ---------- ---------- -----------
Net Interest Income 7,291 6,361 20,843 18,900
Provision for Loan Losses 180 159 520 467
---------- ---------- ---------- -----------
Net Interest Income After Provision
for Loan Losses 7,111 6,202 20,323 18,433
---------- ---------- ---------- -----------
Noninterest Income
Service Charges on Deposit Accounts 718 633 1,975 1,914
Gains (Losses) on Sales of Mortgages 87 36 217 113
Losses on Sales of Investment Securities 0 0 0 (32)
Other Operating Income 862 803 2,642 2,187
---------- ---------- ---------- -----------
Total Noninterest Income 1,667 1,472 4,834 4,182
---------- ---------- ---------- -----------
Noninterest Expense
Personnel Expense 2,799 2,549 8,494 7,664
Occupancy Expense 320 277 956 925
Equipment Depreciation and Maintenance 319 304 907 850
Other Operating Expense 1,830 1,529 5,513 4,461
Merger-Related Costs 0 1,416 160 1,416
---------- ---------- ---------- -----------
Total Noninterest Expense 5,268 6,075 16,030 15,316
---------- ---------- ---------- -----------
Income Before Income Taxes 3,510 1,599 9,127 7,299
Income Taxes 1,122 765 2,833 2,528
---------- ---------- ---------- -----------
Net Income $ 2,388 $ 834 $ 6,294 $ 4,771
========== ========== ========== ===========
Earnings Per Share:
Basic $ 0.27 $ 0.10 $ 0.72 $ 0.55
Diluted 0.27 0.09 0.71 0.54
Weighted Average Shares Outstanding
Basic 8,709,937 8,648,676 8,698,501 8,631,550
Diluted 8,867,669 8,818,988 8,892,634 8,790,624
</TABLE>
Note: On January 13, 1998, LSB Bancshares, Inc. declared a five-for-four
stock split to be paid on February 16, 1998 to shareholders of record
on February 2, 1998.
<PAGE> 5
LSB Bancshares, Inc.
Consolidated Statements of Cash Flow
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30
1998 1997
-------- --------
<S> <C> <C>
Cash Flow from Operating Activities
Net Income $ 6,294 $ 4,771
Adjustments to reconcile net income to net cash:
Depreciation and amortization 926 884
Securities premium amortization and
discount accretion, net (116) (16)
(Increase) decrease in loans held for sale (6,266) 1,433
Deferred income taxes 115 (31)
Income taxes payable (100) 35
(Increase) decrease in income earned but not received (720) (232)
Increase (decrease) in interest accrued but not paid 61 (408)
Provision for loan losses 520 467
Gain on sale of investment securities 116
Gain on sale of premise and equipment 3 18
-------- --------
Net Cash provided by operating activities 717 7,037
-------- --------
Cash Flow From Investing Activities
Purchases of securities held to maturity (3,284) (420)
Proceeds from maturities of securities held to maturity 18,005 11,454
Proceeds from sales of securities held to maturity 0 1,954
Purchases of securities available for sale (59,014) (12,411)
Proceeds from maturities of securities available for sale 19,004 11,697
Proceeds from sales of securities available for sale 0 9,291
Net (increase) decrease in loans made to customers (23,160) (34,633)
Purchases of premises and equipment (1,216) (1,319)
Proceeds from sale of premises and equipment 47 219
Net (increase) decrease in Fed Funds sold 41,655 (42,000)
(Increase) decrease in other assets 38 14
-------- --------
Net cash used by investing activities (7,925) (56,154)
-------- --------
Cash Flow from Financing Activities
Net increase (decrease) in demand deposits,
NOW, money market and savings accounts 38,933 35,182
Net increase (decrease) in time deposits 3,032 27
Net increase (decrease) in securities
sold under agreements to repurchase (3,338) 312
Proceeds from issuance of long term debt 0 22,200
Payments on long term debt (4,083) (4,683)
Dividends Paid (2,629) (1,955)
Net increase (decrease) in other liabilities (235) 227
Proceeds from issuance of common stock 371 168
-------- --------
Net cash provided by financing activities 32,051 51,478
-------- --------
Increase (decrease) in cash and cash equivalents 24,843 2,361
Cash and cash equivalents at the beginning of the period 37,495 25,196
-------- --------
Cash and cash equivalents at the end of the period $ 62,338 $ 27,557
-------- --------
Supplemental Disclosures of Cash Flow Information
Cash paid during the years for:
Interest $ 16,096 $ 11,573
Income Taxes 2,819 2,500
Supplemental Disclosures of Noncash Transactions
Transfer of loans to other real estate owned $ 63 $ 27
Unrealized losses on securities available for sale:
Change in securities available for sale (1,309) 246
Change in deferrred income taxes (510) 88
Change in shareholders' equity (799) 158
</TABLE>
<PAGE> 6
LSB Bancshares, Inc.
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 1998 and 1997
Note 1. Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month period ended
September 30, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998.
The accompanying unaudited Consolidated Financial Statements include
the accounts of LSB Bancshares, Inc., (the Corporation) and its
wholly-owned subsidiary, Lexington State Bank (the Bank) and the
Bank's wholly-owned subsidiaries, Peoples Finance Company of
Lexington, Inc. and LSB Financial Services, Inc.
For further information, refer to the Consolidated Financial
Statements and footnotes thereto included in the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1997.
Note 2. Investment Securities
The valuations of investment securities as of September 30, 1998 and
December 31, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
September 30, 1998
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 agency obligations $ 8,006 $ 71 $ 0 $ 8,077
State, county and municipal securities 32,199 1,745 0 33,944
------- ------- ------- -------
Total securities held to maturity $40,205 $ 1,816 $ 0 $42,021
======= ======= ======= =======
<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 agency obligations $87,508 $ 1,549 $ 4 $89,053
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 $90,532 $ 1,598 $ 4 $92,126
======= ======= ======= =======
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
December 31, 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 agency obligations $24,004 $ 0 $ 5 $23,999
State, county and municipal securities 30,887 1,323 0 32,210
------- ------- ------- -------
Total securities held to maturity $54,891 $ 1,323 $ 5 $56,209
======= ======= ======= =======
<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 agency obligations $47,172 $ 284 $ 26 $47,430
State, county and municipal securities 856 26 0 882
Federal Home Loan Bank stock 2,413 0 0 2,413
------- ------- ------- -------
Total securities available for sale $50,441 $ 310 $ 26 $50,725
======= ======= ======= =======
</TABLE>
No investment securities were sold for the period ended September 30,
1998. Securities with sales proceeds of $9,322,882 and amortized cost
of $9,398,958 resulted in a net, realized loss of $76,076 for the
period ended December 31, 1997.
Investment securities with amortized cost of $90,660,076 and
$83,028,436, as of September 30, 1998 and December 31, 1997,
respectively, were pledged to secure public deposits and for other
purposes.
Note 3. Loans (Table in thousands)
A summary of consolidated loans follows:
<TABLE>
<CAPTION>
September 30, 1998
1998 1997
-------- --------
<S> <C> <C>
Commercial, financial, & agricultural $137,894 $127,367
Real estate - construction 17,810 13,317
Real estate - mortgage 193,533 175,295
Installment loans to individuals 61,515 62,499
Lease financing 721 702
Other 14,710 10,045
-------- --------
Total loans, net of unearned income $426,183 $389,225
======== ========
</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
<PAGE> 8
generally considers loans to be impaired when future payments of
principal and interest are in doubt. Included in impaired loans are
loans that are consistently past due, loans 90 days or more past due
and all nonaccrual loans. Interest income on impaired loans is
recognized consistent with the Corporation's income recognition policy
of daily accrual of income until the loan is determined to be
uncollectible and placed in a nonaccrual status. For all impaired
loans other than nonaccrual loans, interest income totaling $251,606
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 $1,000.
Interest income for the period on nonaccrual loans that would have
been recorded in accordance with the original terms of the notes was
$2,000. The adoption of SFAS 114 and SFAS 118 did not have a material
effect on the Corporation's financial position or results of
operations and required no increase to the reserve for loan and lease
losses.
At September 30, 1998, the total investment in loans that are
considered impaired under SFAS 14 was $4,172,000. There were
nonaccrual loans of $15,000. A related valuation allowance of $523,000
was determined for the total amount of impaired loans. The average
recorded investment in impaired loans for the quarter ended September
30, 1998 was approximately $4,145,000.
At September 30, 1998, loans totaling $12,367,250 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:
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1998 1997
------- -------
<S> <C> <C>
Balances at beginning of periods $ 4,601 $ 4,075
Provision for loan losses 520 467
Recoveries of amounts previously
charged off 101 568
Loan losses (335) (444)
------- -------
Balances at end of periods $ 4,887 $ 4,666
======= =======
</TABLE>
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
As of January 1998, the Corporation adopted Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings per Share". SFAS 128
established standards for computing and presenting earnings per share
("EPS"). SFAS 128 requires a presentation of both basic earnings per
share and diluted earnings per share on the face of the income
statements. After the effective date of the Statement, all
prior-period EPS data presented must be restated to conform with the
provisions of SFAS 128. Adoption of SFAS 128 by the Corporation has no
material effect on its financial position and operating results.
As of January 1998, the Corporation adopted Financial Accounting
Standards No. 129("SFAS 129"), "Disclosure of Information about
Capital Structure".
<PAGE> 9
SFAS 129 requires that information about an entity's capital structure
be disclosed in three separate categories of securities, liquidation
preference of preferred stock and redeemable stock. Further, SFAS 129
specifies that the entity shall provide within its financial
statements a summary explanation of the pertinent rights and
privileges of the various securities that are outstanding. All shares
of the Corporation's capital stock represent voting shares, and
dividends on the capital stock are paid at the discretion of the Board
of Directors. At its Annual Meeting, shareholders of the Corporation
approved the issuance of up to ten million shares of preferred stock,
par value of $.01 per share, in one or more series, on terms and
conditions to be established by the Board of Directors from time to
time. None of these shares have been issued, nor have conditions been
established under which the shares would be issued.
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting of
Comprehensive Income", is effective for fiscal years beginning after
December 15, 1997. SFAS 130 requires entities to report comprehensive
income in their basic financial statements. SFAS 130 must be adopted
as of the beginning of the fiscal year, with any prior period
financial statements presented for comparative purposes to be
reclassified to reflect the provisions of the Statement. The
Corporation adopted SFAS 130 as of January 1, 1998 and presents it in
the financial statements. No material effect on the financial position
and operating results is anticipated.
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures
about Segments of an Enterprise and Related Information", was issued
in June 1997. SFAS 131 requires entities to report certain information
about their operating segments in a complete set of financial
statements to shareholders and further requires that certain
entity-wide information about products and services, activities in
different geographic areas, and reliance on major customers, to be
disclosed. The Corporation operates in a single-industry segment and
does not meet any of the threshold requirements of SFAS 131.
Financial Accounting Standards No. 132 ("SFAS 132"), "Employers'
Disclosures about Pensions and Other Postretirement Benefits", is
effective for fiscal years beginning after December 15, 1997, with
early adoption encouraged. This Statement supersedes the disclosure
requirements in SFAS Statements No. 87, "Employers' Accounting for
Pensions", No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination
Benefits" and No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions". SFAS 132 standardizes the disclosure
requirements and requires additional information about changes in the
benefit obligations and the fair value of plan assets. Bancshares will
present the disclosures required under SFAS 132 in its 1998 10-Q and
annual report to shareholders. No material effect on the financial
position and operating results is anticipated.
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. Adoption of SFAS 133 is required for
both years and quarters beginning after June 15, 1999. Bancshares does
not presently 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.
In May 1997, the Federal Financial Institutions Examination Council
(FFIEC) issued an Interagency Statement, "Year 2000 Project Management
Awareness", to emphasize the critical issues that need to be addressed
to implement an effective Year 2000 project management plan. The FFIEC
Statement identifies five phases of the Year 2000 project management
process. Bancshares has acknowledged the importance of this issue and
established a Year 2000 Project Team (Y2K) to ensure that it will be
Year 2000 compliant. The Y2K
<PAGE> 10
Team consists of senior officers within the company's operations area,
information systems area, audit department, corporate area and senior
management of Bancshares. Senior management, with Board of Directors'
approval and oversight, establishes the commitment of resources and
prioritization. Software programs from the National Software Testing
Laboratories (NSTL) are utilized to test all personal computers and
computer servers for compliance. Data processing of Bancshares is
through FiServ in an RJE environment. As such, the Bank will
participate with FiServ in Year 2000 testing. Third-party audits will
be requested from all major vendors and suppliers to assist in
determining their ability to be Year 2000 compliant. The Y2K Team will
also conduct due diligence inquiries concerning Y2K readiness and
implement appropriate internal testing and verification of vendors'
products and services. Effective with the second quarter of 1998,
management began implementing as part of its overall credit review
process assessments of Year 2000 compliance among borrowers.
Bancshares' Y2K Plan incorporates the development of contingency plans
for all mission-critical vendor applications should the vendor not
complete its conversion efforts on time. Bancshares is on schedule for
completing the Y2K project plan in the fourth quarter of 1998. As of
September 30, 1998, a cumulative total of $80,000 had been spent on
the assessment of and corrective efforts for the Year 2000 Project.
Bancshares estimates the total cost for 1998 related to Year 2000
issues to be $100,000 to $150,000; as such it will not have a material
effect on the financial position or operating results of the
Corporation. Through 1999, the Corporation will conduct testing of all
Y2K systems to ensure their readiness.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Net Interest Income
The primary source of earnings for the Corporation is net interest
income, which represents the dollar amount by which interest generated
by earning assets exceeds the cost of funds. Earning assets consist
primarily of loans and investment securities and cost of funds is the
interest paid on interest-bearing deposits and borrowed funds.
Total interest income of $12,732,000 for the third quarter of 1998 was
up $1,287,000 or 11.2% compared to $11,445,000 for the third quarter
of 1997. Total interest expense for the same period increased $357,000
or 7.0%. These results produced net interest income of $7,291,000 for
the third quarter of 1998, for a gain of $930,000 or 14.6% compared to
$6,361,000 for the third quarter of 1997. The gain in net interest
income during the third quarter of 1998 was due in part to a continued
strong loan demand. Loans constitute the largest group of earning
assets and therefore generate the majority of Bancshares' interest
income. With the increased volume in loans generated during the third
quarter of 1998, more loans were retained in Bancshares' portfolio.
For the period ended September 30, 1998, loans increased $36,958,000
or 9.5% over September 30, 1997 and $29,192,000 or 7.4% over December
31, 1997. Deposits for the same period were up $44,620,000 or 8.9%
compared to September 30, 1997 and $41,964,000 or 8.3% compared to
December 31, 1997.
Noninterest Income and Expense
Noninterest income for the third quarter of 1998 was up $195,000 or
13.2% compared to the third quarter of 1997. Fee income related to
service charges
<PAGE> 11
on deposit accounts for the third quarter of 1998 increased $85,000 or
13.4% compared to the third quarter of 1997. Gains on the sale of
mortgage loans for the third quarter of 1998 increased $51,000 or
141.7% compared to the third quarter of 1997. Other operating income
for the third quarter of 1998 was up $59,000 or 7.3% compared to the
third quarter of 1997. The increase is attributable to fee income from
Bancshares' financial services subsidiary and from the Bank's bankcard
division. Commissions generated by the financial services' subsidiary
from the sale of mutual funds, annuities and equities increased
$18,000 or 13.6% during the third quarter of 1998 compared to the
second quarter of 1997. Bankcard fee income increased $98,000 or 75.0%
during the same period.
Noninterest expense for the third quarter of 1998, excluding
merger-related costs, increased $609,000 or 13.1% compared to the
third quarter of 1997. Personnel expense for the third quarter of
1998, comprised of salaries and fringe benefits, was up $250,000 or
9.8% over the third quarter of 1997. Occupancy expense, which declined
$3,000 in the second quarter of 1998, increased $43,000 or 15.5% in
the third quarter of 1998 compared to the third quarter of 1997.
Equipment depreciation and maintenance expense for the third quarter
of 1998 increased $15,000 or 4.9% compared to the corresponding period
of 1997. Other operating expense for the third quarter of 1998
increased $301,000 or 19.7% compared to the third quarter of 1997.
Increases in other operating expense are attributable to increased
activity in bankcard operations and increased activity in Bancshares'
financial services subsidiary. Bankcard expense for the third quarter
of 1998 increased $63,000 or 49.6%. Other operating expenses related
to the financial services subsidiary were up $21,000 or 94.8% for the
third quarter of 1998.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Net Interest Income
Total interest income of $37,000,000 for the first nine months of 1998
was up $3,667,000 or 11.0% compared to $33,333,000 for the first nine
months of 1997. Total interest expense for the same period increased
$1,724,000 or 11.9%. Net interest income of $20,843,000 for the first
nine months of 1998 was up $1,943,000 or 10.3% compared to $18,900,000
for the first nine months of 1997. Stable interest rates during the
first nine months of the year along with strong loan growth were major
factors contributing to this increase.
Noninterest Income and Expense
Noninterest income for the first nine months of 1998 was up $652,000
or 15.6% compared to the first nine months of 1997. Fee income related
to service charges on deposit accounts for the first nine months of
1998 was up $61,000 or 3.2% compared to the first nine months of 1997.
Gains on the sale of mortgage loans for the first nine months of 1998
increased $104,000 or 92.0% compared to the first nine months of 1997.
Other operating income for the first nine months of 1998 was up
$455,000 or 20.8% compared to the first nine months of 1997. This
increase came primarily from fees generated by Bancshares' financial
services subsidiary through the sale of mutual funds, annuities and
equities and the Bank's bankcard division. For the first nine months
of 1998, fee income from Bancshares' financial services subsidiary
increased $326,000 or 106.4% compared to the first nine months of
1997. Fee income from the Bank's bankcard division for the first nine
months of 1998 increased $256,000 or 70.9% compared to the first nine
months of 1997.
Noninterest expense for the first nine months of 1998, excluding
merger-related costs of $160,000 incurred in 1998 and $1,416,000
incurred in 1997, increased $1,970,000 or 14.2% compared to the same
period of 1997. Personnel expense for the first nine months of 1998,
comprised of salaries and fringe benefits, increased $830,000 or 10.8%
compared to the first nine months of 1997. Occupancy expense for the
period being compared increased by a modest
<PAGE> 12
$31,000 or 3.4%. Equipment depreciation and maintenance expense for
the first nine months of 1998 increased $57,000 or 6.7%. Other
operating expense for the first nine months of 1998 increased
$1,052,000 or 23.6% compared to the first nine months of 1997.
Increases in other operating expense during this period are primarily
attributable to automated services expense, growth in bankcard
operations and growth in Bancshares' financial services subsidiary.
Automated services expense for the first nine months of 1998 increased
$142,000 or 14.6% compared to the first nine months of 1997. Expenses
related to bankcard operations during the same period increased
$189,000 or 64.0% while operating expenses related to the financial
services subsidiary were up $176,000. All increases in noninterest
expense were within the Bank's budgeted projections.
Asset Quality and Provision for Loan Losses
The reserve for loan losses was $4,887,000 or 1.15% of loans
outstanding at September 30, 1998 compared to $4,601,000 or 1.16% of
loans outstanding at December 31, 1997 and $4,666,000 or 1.20% at
September 30, 1997. Non-performing loans totaled $2,028,000 or .48% of
loans outstanding at September 30, 1998 compared to $2,155,000 or .54%
of loans outstanding at December 31, 1997, and $2,220,000 or .57% of
loans outstanding at September 30, 1997. 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, 1998, the Bank had $240,000 in restructured
loans, $921,000 in other real estate and $15,000 in nonaccrual loans.
Accruing loans past due 90 days or more were $852,000 at September 30,
1998 compared to $334,000 at December 31, 1997 and $534,000 at
September 30, 1997. The accrual of interest generally discontinues on
any loan that becomes 90 days past due as to principal or interest
unless collection of both principal and interest is assured by way of
collateralization, guarantees or other security and the loan is
considered to be in the process of collection. At September 30, 1998,
the reserve for loan losses was 2.41 times the nonperforming loans,
compared to 2.14 times at December 31, 1997 and 2.10 times
nonperforming loans at September 30, 1997.
In the opinion of management, all loans where serious doubts exist as
to the ability of borrowers to comply with the present repayment terms
have been included in the schedule presented.
Responsibility for market risk management resides with the
Asset/Liability Management Committee ("ALCO"). The ALCO Committee
monitors market conditions, interest rate trends and the economic
environment in its decision-making process. Based upon its view of
existing and expected market conditions, balance sheet strategies will
be adopted to optimize net interest income while minimizing the risk
associated with unanticipated changes in interest rates.
The provision for loan and lease losses at September 30, 1998 was
$520,000 compared to $467,000 in 1997. Net charge-offs amounted to
$234,000, or .08% of average loans outstanding, on an annualized
basis, during the first nine months of 1998. As the result of one
large recovery, related to a loan previously charged off, for the
first nine months of 1997 total recoveries exceeded charge-offs by
$124,000. The increase in the provision is more reflective of
increased loan volume rather than charge-off experience, which was
nearly the same for the periods being compared.
Loans classified for regulatory purposes as loss, doubtful,
substandard or special mention that have not been disclosed as
nonperforming do not represent or result from trends or uncertainties
which management reasonably expects will materially impact future
operating results, liquidity, or capital resources, or represent
material credits about which management is aware of any information
which causes management to have serious doubts as to the ability of
such borrowers to comply with the loan repayment terms.
<PAGE> 13
<TABLE>
<CAPTION>
9/30/98 12/31/97 9/30/97
<S> <C> <C> <C>
RESERVE FOR LOAN LOSSES
Beginning Balance $ 4,601 $ 4,075 $ 4,075
Provision for loan losses 520 785 467
Net (charge-off) recoveries (234) (259) 124
Ending balance 4,887 4,601 4,666
RISK ASSETS
Nonaccrual loans $ 15 $ 127 $ 591
Foreclosed real estate 921 1,192 928
Restructured loans 240 502 167
Loans 90 days or more past due
and still accruing 852 334 534
Total risk assets 2,028 2,155 2,220
ASSET QUALITY RATIOS
Nonaccrual loans as a percentage of total loans 0.00% 0.03% 0.15%
Nonperforming assets as a percentage of:
Total assets 0.31 0.35 0.37
Loans plus foreclosed property 0.48 0.54 0.57
Net charge-offs as a percentage of average loans 0.08X 0.07 N/M
Reserve for loan losses as a percentage of loans 1.15 1.16 1.20
Ratio of reserve for loan losses to:
Net charge-offs 15.66X 17.76 N/M
Nonaccrual loans 325.80 36.23 7.90
(*)N/M Denotes Non Meaningful
X Denotes Annualized
</TABLE>
Income Taxes
Accrued taxes applicable to income for the nine-month period ended
September 30, 1998 were significantly higher compared to the
nine-month period ended September 30, 1997. Pretax income for the
first nine months of 1998 of $9,127,000 was much higher than the
$7,299,000 for the first nine months of 1997. The change in accrued
taxes for the periods being compared is primarily attributable to the
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 September 30, 1998, based on
these measures, Bancshares' had a Tier 1 capital ratio of 16.95%
compared to the regulatory requirement of 4% and total capital ratio
of 18.13% compared to an 8% regulatory requirement.
Additional regulatory capital measures include the Tier 1 leverage
ratio. The Tier 1 leverage ratio is defined as Tier 1 capital divided
by average total assets less goodwill and certain other intangibles
and has a regulatory minimum of 3.0%, with most institutions required
to maintain a ratio of at least 4.0% to 5.0%, depending primarily upon
risk profiles. At September 30, 1998, Bancshares' Tier 1 leverage
ratio was 11.07%.
<PAGE> 14
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. On
September 30, 1998 the gap between interest-sensitive assets and
interest-sensitive liabilities was a negative $165,542,000 or .64.
Under current economic conditions, management believes that is an
acceptable level.
Asset/liability management also addresses liquidity positioning.
Liquidity management is required in order to fund current and future
extensions of credit, meet deposit withdrawals, maintain reserve
requirements and otherwise sustain operations. As such, it is related
to interest rate sensitivity management, in that each is affected by
maturing assets and liabilities. While interest sensitivity management
is concerned with repricing intervals of assets and liabilities,
liquidity management is concerned with the maturities of those
respective balances. An appropriate liquidity position is further
accomplished through deposit growth and access to sources of funds
other than deposits, such as the federal funds market. Traditionally,
LSB has been a seller of excess investable funds in the federal funds
market and uses these funds as a part of its liquidity management.
Details of cash flows for the nine-months ended September 30, 1998 and
1997 are provided in the Consolidated Statements of Cash Flows.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
During the third quarter of 1998, the Corporation filed the
following:
(3.1) Articles of Amendment of LSB Bancshares, Inc.
(27) Financial Data Schedule (for SEC use only)
<PAGE> 15
B. Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the three
months ended September 30, 1998.
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, 1998 LSB BANCSHARES., INC.
---------------------
(Registrant)
By: /s/ Monty J. Oliver
--------------------------------
Monty J. Oliver
Chief Financial Officer
Principal Accounting Officer
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF AMENDMENT
OF
LSB BANCSHARES, INC.
The undersigned corporation hereby submits these Articles of Amendment
for the purpose of amending its articles of incorporation:
1. The name of the corporation is LSB Bancshares, Inc.
2. The following amendment to the articles of incorporation of the
corporation was adopted by its shareholders on the 15th day of April, 1998, in
the manner as required by Chapter 55 of the General Statutes of North Carolina:
Article IV of the corporation's articles of incorporation is hereby
amended by deleting such Article IV in its entirety and by substituting in lieu
thereof the following:
ARTICLE IV
The corporation shall have authority to issue
fifty million (50,000,000) shares of common stock with a par
value of Five Dollars ($5.00) per share.
3. The following amendment to the articles of incorporation of the
corporation was adopted by its shareholders on the 15th day of April, 1998, in
the manner as required by Chapter 55 of the General Statutes of North Carolina:
Article IV of the corporation's articles of incorporation is hereby
further amended by adding to the following to the end of Article IV, as amended
above:
The corporation shall also have
authority to issue ten million (10,000,000) shares
of Preferred Stock, par value $.01 per share (the
"Preferred Stock").
The Preferred Stock may be issued from
time-to-time in one or more classes or series
pursuant to a resolution or resolutions adopted by
the Board of Directors. The Board of Directors of
the corporation shall have full and complete
authority by resolution, from time-to-time, to
establish one or more series and to fix, determine
and vary the voting rights, designations,
preferences, qualifications, privileges,
limitations, options, conversion rights and other
special rights of each series, including, but not
limited to, dividend rates and manner of payment,
preferential amounts payable upon voluntary or
involuntary liquidation, voting rights, conversion
rights, redemption prices, terms and conditions
and sinking fund and stock purchase prices, terms
and conditions.
4. These articles will be effective upon filing.
This the 6th day of August, 1998.
LSB BANCSHARES, INC.
By: /s/ Monty J. Oliver
-------------------------
Monty J. Oliver
Secretary and Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 31,184
<INT-BEARING-DEPOSITS> 31,155
<FED-FUNDS-SOLD> 18,685
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 92,126
<INVESTMENTS-CARRYING> 40,205
<INVESTMENTS-MARKET> 42,021
<LOANS> 426,183
<ALLOWANCE> 4,887
<TOTAL-ASSETS> 655,370
<DEPOSITS> 544,989
<SHORT-TERM> 4,525
<LIABILITIES-OTHER> 3,419
<LONG-TERM> 25,150
0
0
<COMMON> 43,556
<OTHER-SE> 27,833
<TOTAL-LIABILITIES-AND-EQUITY> 655,370
<INTEREST-LOAN> 29,108
<INTEREST-INVEST> 7,892
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 37,000
<INTEREST-DEPOSIT> 14,646
<INTEREST-EXPENSE> 16,157
<INTEREST-INCOME-NET> 20,843
<LOAN-LOSSES> 520
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 16,030
<INCOME-PRETAX> 9,127
<INCOME-PRE-EXTRAORDINARY> 9,127
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,294
<EPS-PRIMARY> .72
<EPS-DILUTED> .71
<YIELD-ACTUAL> 8.43
<LOANS-NON> 15
<LOANS-PAST> 852
<LOANS-TROUBLED> 240
<LOANS-PROBLEM> 2,029
<ALLOWANCE-OPEN> 4,601
<CHARGE-OFFS> 335
<RECOVERIES> 101
<ALLOWANCE-CLOSE> 4,887
<ALLOWANCE-DOMESTIC> 4,887
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
