<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 March 31, 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 March 31, 1999 was 8,618,374.
<PAGE> 2
LSB BANCSHARES, INC.
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1999 and 1998, December 31, 1998
Consolidated Statements of Income
Three Months Ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements
Three Months Ended March 31, 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 4. Submission of Matters to a Vote of Security Holders
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>
March 31 December 31 March 31
1999 1998 1998
--------- ---------- ---------
<S> <C> <C> <C>
Assets
Cash and Due From Banks $ 27,470 $ 33,292 $ 26,782
Interest-Bearing Bank Balances 12,820 9,862 13,053
Federal Funds Sold and Securities Purchased
Under Resale Agreements 49,730 40,595 48,905
Investment Securities:
Held to Maturity, MV $59,782, $61,386 and $53,104 58,937 59,907 51,717
Available for Sale, at Market Value 70,825 83,936 81,291
Loans 451,411 436,014 401,639
Less, Reserve for Loan Losses (5,174) (5,048) (4,679)
--------- --------- ---------
Net Loans 446,237 430,966 396,960
Premises and Equipment 11,494 11,528 11,269
Other Assets 9,680 8,920 9,650
--------- --------- ---------
Total Assets $ 687,193 $ 679,006 $ 639,627
========= ========= =========
Liabilities
Deposits
Demand $ 68,961 $ 71,867 $ 64,448
Savings, NOW and Money Market Accounts 287,091 287,315 235,346
Certificates of Deposit of less than $100,000 162,421 158,664 160,630
Certificates of Deposit of $100,000 or more 59,771 49,481 65,221
--------- --------- ---------
Total Deposits 578,244 567,327 525,645
Securities Sold Under Agreements to Repurchase 5,293 5,537 6,307
Borrowings from the Federal Home Loan Bank 26,867 28,842 32,633
Other Liabilities 4,804 3,870 6,598
--------- --------- ---------
Total Liabilities 615,208 605,576 571,183
--------- --------- ---------
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 8,618,374 Shares
in 1999 and 8,722,895 and 8,692,580 shares in 1998 43,092 43,614 43,463
Paid-In Capital 13,318 14,903 14,840
Retained Earnings 15,298 14,248 10,097
Accumulated Other Comprehensive Income 277 665 44
--------- --------- ---------
Total Shareholders' Equity 71,985 73,430 68,444
--------- --------- ---------
Total Liabilities and Shareholders' Equity $ 687,193 $ 679,006 $ 639,627
========= ========= =========
Memorandum: Standby Letters of Credit $ 3,140 $ 2,896 $ 2,221
</TABLE>
<PAGE> 4
LSB Bancshares, Inc.
Consolidated Statements of Income
(In Thousands except Share Data)
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Interest Income
Interest and Fees on Loans $ 9,951 $ 9,317
Interest on Investment Securities:
Taxable 1,414 1,268
Tax Exempt 480 466
Interest-Bearing Bank Balances 172 145
Federal Funds Sold and Securities
Purchased Under Resale Agreements 515 721
---------- ----------
Total Interest Income 12,532 11,917
---------- ----------
Interest Expense
Deposits 4,862 4,766
Securities Sold Under Agreements to Repurchase 45 57
Borrowings from the Federal Home Loan Bank 414 467
---------- ----------
Total Interest Expense 5,321 5,290
---------- ----------
Net Interest Income 7,211 6,627
Provision for Loan Losses 165 165
---------- ----------
Net Interest Income After Provision
for Loan Losses 7,046 6,462
---------- ----------
Noninterest Income
Service Charges on Deposit Accounts 741 606
Gains (Losses) on Sales of Mortgages 110 52
Other Operating Income 880 838
---------- ----------
Total Noninterest Income 1,731 1,496
---------- ----------
Noninterest Expense
Personnel Expense 3,042 2,873
Occupancy Expense 318 321
Equipment Depreciation and Maintenance 305 297
Other Operating Expense 1,842 1,794
Merger-Related Costs 0 160
---------- ----------
Total Noninterest Expense 5,507 5,445
---------- ----------
Income Before Income Taxes 3,270 2,513
Income Taxes 1,012 776
---------- ----------
Net Income $ 2,258 $ 1,737
========== ==========
Earnings Per Share:
Basic $ 0.26 $ 0.20
Diluted 0.26 0.20
Weighted Average Shares Outstanding
Basic 8,644,244 8,681,462
Diluted 8,808,468 8,904,431
</TABLE>
<PAGE> 5
LSB Bancshares, Inc.
Consolidated Statements of Cash Flow
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash Flow from Operating Activities
Net Income $ 2,258 $ 1,737
Adjustments to reconcile net income to net cash:
Depreciation and amortization 321 304
Securities premium amortization and
discount accretion, net 9 (48)
(Increase) decrease in loans held for sale (283) (1,322)
Deferred income taxes 172 83
Income taxes payable 845 661
(Increase) decrease in income earned but not received (238) (485)
Increase (decrease) in interest accrued but not paid (7) 245
Provision for loan losses 165 165
Gain on sale of premise and equipment (16) (8)
-------- --------
Net Cash provided by operating activities 3,226 1,332
-------- --------
Cash Flow From Investing Activities
Purchases of securities held to maturity (3,595) (1,911)
Proceeds from maturities of securities held to maturity 4,563 5,102
Proceeds from sales of securities held to maturity 0 0
Purchases of securities available for sale 0 (32,028)
Proceeds from maturities of securities available for sale 12,467 1,280
Proceeds from sales of securities available for sale 0 0
Net (increase) decrease in loans made to customers (15,153) (3,414)
Purchases of premises and equipment (308) (325)
Proceeds from sale of premises and equipment 36 22
Net (increase) decrease in federal funds sold
and securities purchased under resale agreements (9,135) 11,435
(Increase) decrease in other assets (446) (3)
-------- --------
Net cash used by investing activities (11,571) (19,842)
-------- --------
Cash Flow from Financing Activities
Net increase (decrease) in demand deposits,
NOW, money market and savings accounts (3,130) 5,300
Net increase (decrease) in time deposits 14,048 17,321
Net increase (decrease) in securities
sold under agreements to repurchase (244) (1,956)
Proceeds from issuance of long term debt 10,000 0
Payments on long term debt (11,975) (1,125)
Dividends Paid (1,207) (884)
Net increase (decrease) in other liabilities 96 2,000
Proceeds from issuance of common stock 101 193
Common stock repurchased (2,208)
-------- --------
Net cash provided by financing activities 5,481 20,849
-------- --------
Increase (decrease) in cash and cash equivalents (2,864) 2,339
Cash and cash equivalents at the beginning of the period 43,154 37,496
-------- --------
Cash and cash equivalents at the end of the period $ 40,290 $ 39,835
-------- --------
</TABLE>
<PAGE> 6
<TABLE>
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash paid during the years for:
Interest $ 5,328 $ 5,048
Income Taxes (2) 1
Supplemental Disclosures of Noncash Transactions
Transfer of loans to other real estate owned $ 160 $ 63
Unrealized losses on securities available for sale:
Change in securities available for sale (637) (213)
Change in deferred income taxes 248 83
Change in shareholders' equity (389) (130)
</TABLE>
<PAGE> 7
LSB Bancshares, Inc.
Notes to Consolidated Financial Statements
Three Months Ended March 31, 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 three-month period ended March 31,
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 March 31, 1999 and
December 31, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1999
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 $ 24,111 $ 33 $ 371 $ 23,773
State, county and municipal securities 34,826 1,365 182 36,009
-------- -------- -------- --------
Total securities held to maturity $ 58,937 $ 1,398 $ 553 $ 59,782
======== ======== ======== ========
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
Securities available for sale:
U.S. Treasury and other U.S.
government agency obligations $ 67,349 $ 547 $ 136 $ 67,760
State, county and municipal securities 854 42 0 896
Federal Home Loan Bank stock 2,169 0 0 2,169
-------- -------- -------- --------
Total securities available for sale $ 70,372 $ 589 $ 136 $ 70,825
======== ======== ======== ========
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
December 31, 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 $ 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
======== ======== ======== ========
</TABLE>
No investment securities were sold for the period ended March 31, 1999.
Investment securities with amortized cost of $93,496,879 and
$93,681,039, as of March 31, 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:
<TABLE>
<CAPTION>
March 31
1999 1998
-------- --------
<S> <C> <C>
Commercial, financial, & agricultural $144,846 $123,786
Real estate - construction 20,133 13,624
Real estate - mortgage 210,260 187,854
Installment loans to individuals 61,642 61,600
Lease financing 932 767
Other 13,598 14,008
-------- --------
Total loans, net of unearned income $451,411 $401,639
======== ========
</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
<PAGE> 9
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 $65,399 for the period was recorded on an
accrual basis. Interest income on nonaccrual loans is recognized on a
cash basis. No interest was recognized for nonaccrual loans through
March 31, 1999 as the bank had no nonaccrual loans for the first
quarter of 1999. The adoption of SFAS 114 and SFAS 118 did not have a
material effect on the Corporation's financial position or results of
operations and required no increase to the reserve for loan and lease
losses.
At March 31, 1999, the total investment in loans that are considered
impaired under SFAS 14 was $4,165,000. As previously stated there were
no nonaccrual loans for the period. A related valuation allowance of
$640,000 was determined for the total amount of impaired loans. The
average recorded investment in impaired loans for the quarter ended
March 31, 1999 was approximately $4,205,000.
At March 31, 1999, loans totaling $13,664,000 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:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
------- -------
<S> <C> <C>
Balances at beginning of periods $ 5,048 $ 4,601
Provision for loan losses 165 165
Recoveries of amounts previously
charged off 80 44
Loan losses (119) (131)
------- -------
Balances at end of periods $ 5,174 $ 4,679
======= =======
</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
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.
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
<PAGE> 10
fiscal quarter beginning after December 15, 1998. SFAS 134 amends SFAS
65 by allowing retained securitized mortgage loans to be classified as
either held-to-maturity, available-for-sale or trading in accordance
with the provisions of SFAS 115. Bancshares does not currently
securitize mortgage loans and does not anticipate any material effect
on its financial position or operating results.
In May 1997, the Federal Financial Institutions Examination Council
(FFIEC) issued an Interagency Statement "Year 2000 Project Management
Awareness" to emphasize the critical issues that need to be addressed
to implement an effective Year 2000 project management plan. The FFIEC
Statement identified five phases of the Year 2000 project management
process. In the awareness phase, the corporation defines the issues and
potential challenges associated with the Year 2000 problem. In the
assessment phase, an evaluation is conducted to determine the size and
complexity of ensuring Year 2000 readiness. During the renovation
phase, required system upgrades would be made. In the validation phase,
testing of all computer systems and software would be done to meet the
corporation's Y2K compatibility standards. The final step is the
implementation phase, which incorporates Year 2000 ready systems into
day-to-day operations.
The "Year 2000 problem" stems from the inability of computer systems to
identify the change from the years of the 1900's to the years 2000.
This comes about because most computer hardware and software systems
have historically used only two digits to identify the applicable year.
Hence, as the turn of the century approaches, these systems could be
unable to distinguish between 1900 and 2000 resulting in possible
errors and system failures causing wide spread disruption to business
operations.
Bancshares has acknowledged the importance of this issue and
established a Year 2000 Project Team (Y2K) to ensure Year 2000
compliance. Bancshares' Year 2000 Plan follows the guidelines outlined
by the Federal Financial Institutions Examination Council. The Y2K Team
consists of senior officers within the company's operations area,
information systems area, audit department, corporate area and senior
management. Senior management, with Board of Directors' approval and
oversight, establishes the commitment of resources and prioritization.
Bancshares has completed the awareness phase and the assessment phase
of both its information technology (computer systems) and
non-information technology systems (heating, air condition systems,
elevator systems, calculators, etc.). Testing strategies and plans have
been completed and put in place. These first two phases were completed
on schedule in April of 1998.
Bancshares is presently on schedule with the renovation phase and
validation phase of its internal software with completion projected for
mid 1999. Software programs from the National Software Testing
Laboratories (NSTL) are being utilized to test all personal computers
and computer servers for compliance. Data processing of Bancshares is
through Fiserv in an RJE environment. As such, the bank is
participating with Fiserv's Testing Acceptance Group and the Client
Advisory Board in Year 2000 testing. The renovation phase, validation
phase and implementation phase of the Fiserv core application systems
has been completed. Interfaces within the Fiserv application systems
are in the validation and implementation phase.
Third party audits have been requested from all major vendors and
suppliers to assist in determining their ability to be Year 2000
compliant. Bancshares has also conducted due diligence inquiries
concerning vendors' Y2K readiness and implemented appropriate internal
testing and verification of vendors' products and services. Major loan
and deposit customers have also been identified to assess the extent to
which Bancshares is vulnerable to those third parties should they fail
to be Year 2000 ready. 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
<PAGE> 11
convert by another organization, or a conversion that is incompatible
with Bancshares' systems, will not have an adverse effect on
Bancshares.
The estimated cost of Bancshares' Year 2000 project is currently
$400,000 and is being funded through operating cash flows. As of March
31, 1999, a cumulative total of $103,000 has been expensed, with $9,000
being expensed in the first quarter of 1999. The costs of the Year 2000
project and the date on which Bancshares plans to complete Year 2000
modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third-party modification
plans and other factors. However, there can be no assurance that these
estimates will be achieved and actual results could differ materially
from those plans.
Bancshares is continuing with the development of contingency plans that
outline emergency response procedures that adhere to regulatory
guidelines. The contingency plans represent an enhancement of
Bancshares' business resumption plans and have as their goal the
resumption of business in the event there is a disruption of critical
systems necessary to operate. The contingency plans include the use of
alternative processing sites, off-site processing, consolidation of
customer services, alternative communications support and other
contingency service suppliers. Federal regulatory agencies periodically
review Bancshares' Year 2000 conversion efforts and have had no adverse
criticism on the progress to date or its schedule to complete the Year
2000 project.
Although the Year 2000 project has been given management's top
priority, there have been no serious delays to other information
technology projects. To a great extent this is due to Bancshares third
party processing by Fiserv, which has provided added support in meeting
Year 2000 project goals as well as ongoing information technology
projects. As such, there are no anticipated delays in information
technology projects that would have an adverse effect on Bancshares'
financial condition and results of operations.
Bancshares presently believes that with its Year 2000 project schedule
and contingency plan development, the Year 2000 issue can be mitigated.
However, if its Year 2000 project goals are not met or completed on a
timely basis, or if mission critical third-parties do not met their own
Year 2000 issues, disruptions in operations could occur and could have
a material adverse impact on the financial position of Bancshares.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Three Months Ended March 31, 1999 Compared to Three Months Ended
March 31, 1998
Net Interest Income
The primary source of earnings for the Corporation is net interest
income, which represents the dollar amount by which interest generated
from earning assets exceeds the cost of funds. Earning assets consist
primarily of loans and investment securities and cost of funds is the
interest paid on interest-bearing deposits and borrowed funds.
Total interest income of $12,532,000 for the first quarter of 1999 was
up $615,000 or 5.2% compared to $11,917,000 for the first quarter of
1998. Total interest expense for the same period increased only $31,000
or 0.6%. These results produced net interest income of $7,211,000 for
the first quarter of 1999, for a gain of $584,000 or 8.8% compared to
$6,627,000 for
<PAGE> 12
the first quarter of 1998. The gain in net interest income for the
first quarter of 1999 was the result of strong loan demand and
contained interest expense. Loans constitute the largest group of
earning assets and therefore generate the majority of Bancshares'
interest income. For the period ended March 31, 1999, loans increased
$49,772,000 or 12.4% over March 31, 1998 and $15,397,000 or 3.5% over
December 31, 1998. Deposits for the same period were up $52,599,000 or
10.0% compared to March 31, 1998 and $10,917,000 or 1.9% compared to
December 31, 1998.
Noninterest Income and Expense
Noninterest income for the first quarter of 1999 was up $235,000 or
15.7% compared to the first quarter of 1998. Fee income related to
service charges on deposit accounts for the first quarter of 1999
increased $135,000 or 22.3% compared to the first quarter of 1998.
Gains on the sale of mortgage loans for the first quarter of 1999
increased $58,000 or 111.5% compared to the first quarter of 1998.
Other operating income for the first quarter of 1999 was up $42,000 or
5.0% compared to the first quarter of 1998. The increase is primarily
attributable to fee income from the Bank's bankcard division, which
produced an increase of $81,000 or 45.4% for the first quarter of 1999
compared to the first quarter of 1998. Commissions generated by the
financial services' subsidiary decreased $81,000 or 43.1% the first
quarter of 1999 compared to the first quarter of 1998 as the result of
staff turnover. Management anticipates improvements following staff
adjustments. The bank's financial services subsidiary generates
commission income from the sale of mutual funds, annuities and
equities.
Noninterest expense for the first quarter of 1999 increased $62,000 or
1.1% compared to the first quarter of 1998. Personnel expense for the
first quarter of 1999, comprised of salaries and fringe benefits, was
up $169,000 or 5.9% over the first quarter of 1998. Occupancy expense
declined $3,000 in the first quarter of 1999 compared to the first
quarter of 1998. Equipment depreciation and maintenance expense for the
first quarter of 1999 increased $8,000 or 2.7% compared to the
corresponding period of 1998. Other operating expense for the first
quarter of 1999 increased $48,000 or 2.7% compared to the first quarter
of 1998. One factor contributing to this small increase in other
operating expense was a decrease in automated processing expense in the
first quarter of 1999 of $21,000 or 5.8% compared to the first quarter
of 1998. Additionally, expenses for the financial services' subsidiary
decreased the first quarter of 1999 $48,000 or 76.1% compared to the
first quarter of 1998. Advertising expense also decreased $60,000 or
44.6% in the first quarter of 1999 compared to the same period a year
ago. Bankcard expense for the first quarter of 1999 increased $80,000
or 59.4.
Asset Quality and Provision for Loan Losses
The reserve for loan losses was $5,174,000 or 1.15% of loans
outstanding at March 31, 1999 compared to $5,048,000 or 1.16% of loans
outstanding at December 31, 1998 and $4,679,000 or 1.16% at March 31,
1998. Non-performing loans totaled $2,045,000 or .45% of loans
outstanding at March 31, 1999 compared to $1,912,000 or .44% of loans
outstanding at December 31, 1998, and $1,689,000 or .42% of loans
outstanding at March 31, 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 March 31, 1999, Bancshares had $158,000 in restructured loans and
$1,026,000 in other real estate. As of March 31, 1999 Bancshares did
not have any nonaccrual loans. Accruing loans past due 90 days or more
were $861,000 at March 31, 1999 compared to $759,000 at December 31,
1998 and $334,000 at March 31, 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 March 31, 1999,
the reserve for loan losses was 2.53 times the nonperforming loans,
compared to 2.64 times at December 31, 1998 and 2.77 times
nonperforming loans at March 31, 1998.
<PAGE> 13
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 March 31, 1999 was $165,000
compared to $165,000 in 1998. Net charge-offs amounted to $39,000, or
.08% of average loans outstanding, on an annualized basis, during the
first quarter of 1999. The quality of the loan portfolio continues to
be of the highest level, which is reflected in the loan loss provision
expensed.
Loans classified for regulatory purposes as loss, doubtful, substandard
or special mention that have not been disclosed as nonperforming do not
represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results,
liquidity, or capital resources, or represent material credits about
which management is aware of any information which causes management to
have serious doubts as to the ability of such borrowers to comply with
the loan repayment terms.
ASSET QUALITY ANALYSIS
<TABLE>
<CAPTION>
3/31/99 12/31/98 3/31/98
-------- -------- --------
<S> <C> <C> <C>
RESERVE FOR LOAN LOSSES
Beginning Balance $ 5,048 $ 4,601 $ 4,601
Provision for loan losses 165 770 165
Net (charge-off) recoveries (39) (323) (87)
-------- -------- --------
Ending balance 5,174 5,048 4,679
RISK ASSETS
Nonaccrual loans $ 0 $ 0 $ 0
Foreclosed real estate 1,026 921 1,129
Restructured loans 158 232 226
Loans 90 days or more past due
and still accruing 861 759 334
-------- -------- --------
Total risk assets 2,045 1,912 1,689
ASSET QUALITY RATIOS
Nonaccrual loans as a percentage of total loans 0.00% 0.00% 0.00%
Nonperforming assets as a percentage of:
Total assets 0.30 0.28 0.26
Loans plus foreclosed property 0.45 0.44 0.42
Net charge-offs as a percentage of average loans 0.08 X 0.08 0.08 X
Reserve for loan losses as a percentage of loans 1.15 1.16 1.16
Ratio of reserve for loan losses to:
Net charge-offs 33.00 X 15.61 13.45 X
Nonaccrual loans N/M N/M N/M
</TABLE>
*N/M Denotes Non Meaningful
X Denotes Annualized
<PAGE> 14
Income Taxes
Accrued taxes applicable to income for the three-month period ended
March 31, 1999 were $1,012,000 compared to $776,000 for the three-month
period ended March 31, 1998. Pretax income for the first three months
of 1999 of $3,270,000 was $757,000 above the $2,513,000 for the first
three months of 1998. The change in accrued taxes for the periods being
compared is primarily attributable to this difference in pretax income.
Capital Resources and Shareholders' Equity
Regulatory guidelines require minimum levels of capital based on a risk
weighting of each asset category and off-balance sheet contingencies.
Regulatory agencies divide capital into Tier 1 or core capital and
total capital. Tier 1 capital, as defined by regulatory agencies,
consists primarily of common shareholders' equity less goodwill and
certain other intangible assets. Total capital consists of Tier 1
capital plus the allowable portion of the reserve for loan losses and
certain long-term debt. At March 31, 1999, based on these measures,
Bancshares' had a Tier 1 capital ratio of 16.18% compared to the
regulatory requirement of 4% and total capital ratio of 17.37% 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 March 31, 1999, Bancshares' Tier 1 leverage ratio was
10.42%.
Market Risk Management
Bancshares' market risk arises primarily from 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 process of asset/liability
management monitors the exposure to interest rate risk, balance sheet
trends, pricing policies and liquidity position.
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
ALCO as a part of its asset/liability management decision-making
process. Based upon its view of existing and expected market
conditions, ALCO adopts balance sheet strategies intended to optimize
net interest income to the extent possible while minimizing the risk
associated with unanticipated changes in interest rates. Core deposits
have historically been the primary funding sources for asset growth.
Correspondent relationships have also been maintained with several
large banks in order to have access to federal funds purchases when
needed. The Bank also has available lines of credit maintained with the
Federal Home Loan Bank (the "FHLB") which can be used for funding
and/or liquidity needs.
To minimize risk of interest rate movements, the asset/liability
management process seeks to match maturities and repricing
opportunities of interest-sensitive assets and liabilities. On March
31, 1999 the gap between interest-sensitive assets and
interest-sensitive liabilities was a negative $190,177,000 or .61.
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
<PAGE> 15
credit, meet deposit withdrawals, maintain reserve requirements and
otherwise sustain operations. As such, it is related to interest rate
sensitivity management, in that each is affected by maturing assets and
liabilities. While interest sensitivity management is concerned with
repricing intervals of assets and liabilities, liquidity management is
concerned with the maturities of those respective balances. An
appropriate liquidity position is further accomplished through deposit
growth and access to sources of funds other than deposits, such as the
federal funds market. Details of cash flows for the three-months ended
March 31, 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 regularly reviews Bancshares' interest rate
risk position and adopts balance sheet strategies that are intended to
optimize net interest income while maintaining market risk within an
acceptable tolerance.
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 March 31, 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 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on April 21, 1999.
Proxies were solicited in connection with the Annual Meeting in
accordance with Regulation 14 under the Securities Exchange Act of
1934, as amended, pursuant to a Proxy Statement dated March 22, 1999,
in the form as filed by the Company with the Securities and Exchange
Commission on March 22, 1999.
At the Annual Meeting, the shareholders of the Company (i) elected six
members to the Company's Board of Directors, (ii) ratified the
appointment of Turlington and Company LLP to conduct the independent
audit for the year 1999 and (iii) voted against a shareholder proposal
relating to minimum share ownership requirements for members of the
Board of Directors of the Company, each as more fully described in the
Proxy Statement. Of the 8,642,988 shares of the Company's common stock
represented and entitled to vote at the Annual Meeting, the number of
shares cast for, against and withheld, and the number of abstentions
and broker non-votes, as to each proposal are set forth below:
<PAGE> 16
1. Elections of Directors.
For (Proxy) Withheld
----------- --------
Leonard H. Beck 6,082,868 96,343
Marvin D. Gentry 6,108,899 70,312
Samuel R. Harris 6,053,156 126,055
Sue H. Hunter 6,001,409 177,802
David A. Smith 6,079,743 99,468
Burr W. Sullivan 6,069,831 109,380
2. Ratification of appointment of Turlington and Company LLP,
CPA's, to conduct the independent audit for the year 1999.
For Against Abstaining
--- ------- ----------
6,104,229 48,248 26,734
3. Shareholder proposal by W. Robert Koontz relating to minimum
share ownership requirements for Directors.
For Against Abstaining Non-Vote
--- ------- ---------- --------
1,078,594 3,666,167 360,028 1,074,422
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
During the first 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 three
months ended March 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date May 10, 1999 LSB BANCSHARES., INC.
---------------------
(Registrant)
By: /s/ Monty J. Oliver
----------------------------------------
Monty J. Oliver
Chief Financial Officer
Principal Accounting Officer
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