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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 0-11448
LSB BANCSHARES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
North Carolina 56-1348147
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
LSB BANCSHARES, INC.
ONE LSB PLAZA
LEXINGTON, NORTH CAROLINA 27292
-------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(336) 248-6500
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(Registrant's Telephone Number, Including Area Code)
Indicate by check [X] whether the registrant: (1) 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 (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
LSB Bancshares, Inc. has 8,465,048 shares of common stock outstanding as of
July 31, 2002.
LSB BANCSHARES, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2002 and 2001, December 31, 2001
Consolidated Statements of Income
Three Months Ended June 30, 2002 and 2001
Six Months Ended June 30, 2002 and 2001
Consolidated Statements of Changes in Shareholders' Equity
Six Months Ended June 30, 2002 and 2001
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2002 and 2001
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 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
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
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LSB Bancshares, Inc.
Consolidated Balance Sheets
(In Thousands)
(Unaudited) (Unaudited)
June 30 December 31 June 30
2002 2001 2001
--------- --------- ---------
ASSETS
Cash and Due From Banks $ 41,510 $ 33,150 $ 33,200
Interest-Bearing Bank Balances 4,046 2,768 4,481
Federal Funds Sold and Securities Purchased
Under Resale Agreements 11,735 37,710 56,665
Investment Securities:
Held to Maturity, MV $48,660, $59,742 and $59,161 47,041 58,635 57,768
Available for Sale, at Market Value 99,803 96,702 67,384
Loans 605,264 588,364 562,045
Less, Reserve for Loan Losses (6,948) (6,440) (6,058)
--------- --------- ---------
Net Loans 598,316 581,924 555,987
Premises and Equipment 13,178 12,041 12,186
Other Assets 11,708 10,397 10,491
--------- --------- ---------
TOTAL ASSETS $ 827,337 $ 833,327 $ 798,162
========= ========= =========
LIABILITIES
Deposits
Demand $ 83,802 $ 82,193 $ 81,930
Savings, NOW and Money Market Accounts 365,493 351,811 322,337
Certificates of Deposit of less than $100,000 169,227 172,808 183,672
Certificates of Deposit of $100,000 or more 56,551 75,352 71,553
--------- --------- ---------
Total Deposits 675,073 682,164 659,492
Securities Sold Under Agreements to Repurchase 1,342 3,177 3,507
Borrowings from the Federal Home Loan Bank 63,000 63,300 48,300
Other Liabilities 5,318 5,343 10,245
--------- --------- ---------
TOTAL LIABILITIES 744,733 753,984 721,544
--------- --------- ---------
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 8,483,095 Shares
in 2002 and 8,441,846 and 8,439,446, shares in 2001 42,415 42,209 42,197
Paid-In Capital 9,983 9,860 9,855
Common Stock Acquired for
Directors' Deferred Plan (968) (878) (864)
Retained Earnings 30,075 27,444 25,003
Accumulated Other Comprehensive Income 1,099 708 427
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 82,604 79,343 76,618
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 827,337 $ 833,327 $ 798,162
========= ========= =========
Memorandum: Standby Letters of Credit $ 5,839 $ 4,818 $ 3,696
Notes to consolidated financial statements are an integral part hereof.
LSB Bancshares, Inc.
Consolidated Statements of Income
(In Thousands except Share Data)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
INTEREST INCOME
Interest and Fees on Loans $ 10,927 $ 12,495 $ 22,155 $ 24,960
Interest on Investment Securities:
Taxable 1,439 1,272 2,942 2,582
Tax Exempt 404 408 837 834
Interest-Bearing Bank Balances 74 96 152 226
Federal Funds Sold and Securities
Purchased Under Resale Agreements 107 680 283 1,641
---------- ---------- ---------- ----------
Total Interest Income 12,951 14,951 26,369 30,243
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 2,995 6,208 6,356 13,209
Securities Sold Under Agreements to Repurchase 5 43 33 86
Borrowings from the Federal Home Loan Bank 788 623 1,566 1,198
---------- ---------- ---------- ----------
Total Interest Expense 3,788 6,874 7,955 14,493
---------- ---------- ---------- ----------
NET INTEREST INCOME 9,163 8,077 18,414 15,750
Provision for Loan Losses 682 489 1,062 771
---------- ---------- ---------- ----------
Net Interest Income After Provision
for Loan Losses 8,481 7,588 17,352 14,979
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service Charges on Deposit Accounts 1,646 1,020 3,069 1,965
Gains on Sales of Mortgages 145 72 329 109
Gains on Sales of Investment Securities 0 541 0 541
Other Operating Income 1,332 1,131 2,393 2,215
---------- ---------- ---------- ----------
Total Noninterest Income 3,123 2,764 5,791 4,830
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Personnel Expense 4,347 3,994 8,529 7,406
Occupancy Expense 354 339 710 673
Equipment Depreciation and Maintenance 446 397 876 762
Other Operating Expense 2,615 2,404 5,317 4,550
---------- ---------- ---------- ----------
Total Noninterest Expense 7,762 7,134 15,432 13,391
---------- ---------- ---------- ----------
Income Before Income Taxes 3,842 3,218 7,711 6,418
Income Taxes 1,273 1,044 2,542 2,071
---------- ---------- ---------- ----------
NET INCOME $ 2,569 $ 2,174 $ 5,169 $ 4,347
========== ========== ========== ==========
Earnings Per Share:
Basic $ 0.30 $ 0.26 $ 0.61 $ 0.52
Diluted 0.30 0.26 0.61 0.51
Weighted Average Shares Outstanding:
Basic 8,471,507 8,439,446 8,456,677 8,436,916
Diluted 8,565,030 8,478,306 8,530,247 8,473,205
Cash Dividends Declared per Share $ 0.15 $ 0.14 $ 0.30 $ 0.28
Notes to consolidated financial statements are an integral part hereof.
LSB Bancshares, Inc.
Consolidated Statements of
Changes in Shareholders' Equity
(In Thousands)
(Unaudited)
Accumulated
Directors' Other Total
Common Paid-In Deferred Retained Comprehensive Shareholders'
Stock Capital Plan Earnings Income Equity
----------------------------------------------------------------------------------------
Balances at December 31, 2000 $ 42,164 $ 9,837 $ (797) $ 23,019 $ 20 $ 74,243
Net Income 4,347 4,347
Change in unrealized loss on
securities available for sale,
net of deferred income taxes 407 407
-----------------
Comprehensive income 4,754
Cash dividends declared on
common stock (2,363) (2,363)
Common stock issued for stock
options exercised 33 18 51
Common stock acquired (67) (67)
----------------------------------------------------------------------------------------
Balances at June 30, 2001 $ 42,197 $ 9,855 $ (864) $ 25,003 $ 427 $ 76,618
========================================================================================
Balances at December 31, 2001 $ 42,209 $ 9,860 $ (878) $ 27,444 $ 708 $ 79,343
Net Income 5,169 5,169
Change in unrealized gain on
securities available for sale,
net of deferred income taxes 391 391
-----------------
Comprehensive income 5,560
Cash dividends declared on
common stock (2,538) (2,538)
Common stock issued for stock
options exercised 206 123 329
Common stock acquired (90) (90)
----------------------------------------------------------------------------------------
Balances at June 30, 2002 $ 42,415 $ 9,983 $ (968) $ 30,075 $ 1,099 $ 82,604
========================================================================================
Notes to consolidated financial statements are an integral part hereof.
LSB Bancshares, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
Six Months Ended June 30
------------------------
2002 2001
-------- --------
CASH FLOW FROM OPERATING ACTIVITIES
Net Income $ 5,169 $ 4,347
Adjustments to reconcile net income to net cash:
Depreciation and amortization 820 712
Securities premium amortization and
discount accretion, net 38 17
(Increase) decrease in loans held for sale 5,921 (5,800)
Deferred income taxes (353) (790)
Income taxes payable 124 500
(Increase) decrease in income earned but not received 284 407
Increase (decrease) in interest accrued but not paid (467) (811)
Net (increase) decrease in other assets (1,485) 932
Net increase (decrease) in other liabilities 318 4,657
Provision for loan losses 1,062 771
(Gain) loss on sale of investment securities 0 (541)
(Gain) loss on sale of premise and equipment 18 7
-------- --------
Net Cash provided by operating activities 11,449 4,408
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (332) (1,504)
Proceeds from maturities of securities held to maturity 11,923 16,579
Proceeds from sales of securities held to maturity 0 0
Purchases of securities available for sale (16,700) (36,750)
Proceeds from maturities of securities available for sale 14,200 22,500
Proceeds from sales of securities available for sale 0 555
Net (increase) decrease in loans made to customers (23,376) (7,853)
Purchases of premises and equipment (1,976) (1,309)
Proceeds from sale of premises and equipment 0 0
Net (increase) decrease in federal funds sold
and securities purchased under resale agreements 25,975 12,890
-------- --------
Net cash (used by) provided by investing activities 9,714 5,108
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW, money market and savings accounts 15,290 10,053
Net increase (decrease) in time deposits (22,381) (22,536)
Net increase (decrease) in securities
sold under agreements to repurchase (1,835) 504
Proceeds from long term debt 0 10,000
Payments on long term debt (300) (2,150)
Dividends Paid (2,538) (2,363)
Proceeds from issuance of common stock 329 51
Common stock acquired (90) (67)
-------- --------
Net cash provided by (used by) financing activities (11,525) (6,508)
-------- --------
Increase (decrease) in cash and cash equivalents 9,638 3,008
Cash and cash equivalents at the beginning of the period 35,918 34,673
-------- --------
Cash and cash equivalents at the end of the period $ 45,556 $ 37,681
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for:
Interest $ 8,422 $ 15,304
Income Taxes 2,771 2,060
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS
Transfer of loans to other real estate owned $ 1,188 $ 903
Unrealized gains/(losses) on securities available for sale:
Change in securities available for sale 636 662
Change in deferred income taxes (245) (255)
Change in shareholders' equity 391 407
Notes to consolidated financial statements are an integral part hereof.
LSB Bancshares, Inc.
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2002 and 2001
NOTE 1. BASIS OF PRESENTATION
The accompanying interim 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, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002.
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
Investment 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, 2001.
NOTE 2. INVESTMENT SECURITIES
The valuations of investment securities as of June 30, 2002 and
December 31, 2001 were as follows (in thousands):
June 30, 2002
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Securities held to maturity:
U.S. Treasury and other U.S.
government agency obligations $ 15,012 $ 425 $ 0 $ 15,437
State, county and municipal securities 32,029 1,283 89 33,223
--------- ---------- ---------- -----------
Total securities held to maturity $ 47,041 $ 1,708 $ 89 $ 48,660
========= ========== ========== ===========
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Securities available for sale:
U.S. Treasury and other U.S.
government agency obligations $ 92,995 $ 1,738 $ 0 $ 94,733
State, county and municipal securities 1,854 55 4 1,905
Federal Home Loan Bank stock 3,165 0 0 3,165
--------- ---------- ---------- -----------
Total securities available for sale $ 98,014 $ 1,793 $ 4 $ 99,803
========= ========== ========== ===========
December 31, 2001
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Securities held to maturity:
U.S. Treasury and other U.S.
government agency obligations $ 25,022 $ 718 $ 0 $ 25,740
State, county and municipal securities 33,613 834 445 34,002
--------- ---------- ---------- -----------
Total securities held to maturity $ 58,635 $ 1,552 $ 445 $ 59,742
========= ========== ========== ===========
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Securities available for sale:
U.S. Treasury and other U.S.
government agency obligations $ 91,029 $ 1,267 $ 141 $ 92,155
State, county and municipal securities 1,355 38 11 1,382
Federal Home Loan Bank stock 3,165 0 0 3,165
--------- ---------- ---------- -----------
Total securities available for sale $ 95,549 $ 1,305 $ 152 $ 96,702
========= ========== ========== ===========
No investment securities were sold during the period ending June 30,
2002.
Investment securities with amortized cost of $96,180,000 and
$95,088,694, as of June 30, 2002 and December 31, 2001, respectively,
were pledged to secure public deposits and for other purposes. The
Bank also has a $10,000,000 irrevocable letter of credit with FHLB that
is used in lieu of securities to pledge against public deposits.
NOTE 3. LOANS (Table in thousands)
A summary of consolidated loans follows:
June 30
2002 2001
-------- --------
Commercial, financial, & agricultural $245,841 $183,852
Real estate - construction 31,216 39,059
Real estate - mortgage 263,494 265,142
Installment loans to individuals 56,170 63,258
Lease financing 488 129
Other 8,055 10,605
-------- --------
Total loans, net of unearned income $605,264 $562,045
======== ========
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 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 $84,921 for the period was recorded on an accrual basis.
Interest income on nonaccrual loans is recognized on a cash basis. No
interest was collected during the period on nonaccrual loans since
being
placed in a nonaccrual status. Interest income on nonaccrual loans that
would have been recorded in accordance with the original terms of the
notes was $153,791. The adoption of SFAS 114 and SFAS 118 did not have
a material effect on the Corporation's financial position or results of
operations and required no increase to the reserve for loan and lease
losses.
At June 30, 2002, the total investment in loans that are considered
impaired under SFAS 114 was $6,722,000, including nonaccrual loans of
$1,005,000. A related valuation allowance of $1,144,000 was determined
for the total amount of impaired loans. The average recorded investment
in impaired loans for the quarter ended June 30, 2002 was approximately
$6,647,000.
At June 30, 2002, loans totaling $ 9,835,000 were held for sale stated
at the lower of cost or market on an individual loan basis.
NOTE 4. RESERVE FOR LOAN LOSSES (in thousands)
The following sets forth the analysis of the consolidated reserve for
loan losses:
Six Months Ended
June 30
2002 2001
------- -------
Balances at beginning of periods $ 6,440 $ 5,959
Provision for loan losses 1,062 771
Recoveries of amounts previously
charged off 157 135
Loan losses (711) (807)
------- -------
Balances at end of periods $ 6,948 $ 6,058
======= =======
NOTE 5. OTHER ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes new
accounting and reporting requirements for derivative instruments embedded in
other contracts and hedging activities. In June 2000, the FASB issued SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities".
SFAS 138 addresses issues related to the implementation of SFAS 133. Bancshares
does not presently have any derivative instruments within the definition of SFAS
133 and does not anticipate any material effect on its financial position or
operating results from adoption of the standard.
In September 2000, the FASB issued SFAS 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" which replaces
SFAS 125. SFAS 140 revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
additional disclosures regarding these activities. SFAS 140 is effective for
transfers and servicing of financial assets or extinguishment of liabilities
that occur after March 31, 2001. SFAS 140 was adopted by Bancshares with no
resulting material effect on its financial position or operating results.
In June 2001, the FASB issued SFAS 141, "Business Combinations". SFAS 141
supersedes APB Opinion Number 16, "Business Combinations". SFAS 141 eliminates
the pooling-of-interests method of accounting for business combinations and
requires that all business combinations in the scope of SFAS 141 be accounted
for using the purchase method of accounting. SFAS 141 is effective for business
combinations initiated after June 30, 2001. Bancshares has no current
application for SFAS 141.
In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets".
SFAS 142 requires that goodwill and other intangible assets that have indefinite
lives are to no longer be amortized unless there is an impairment. SFAS 142 is
effective for fiscal years beginning after December 15, 2001. At December 31,
2001, Bancshares had $490,330 in goodwill which will no longer be amortized, but
will be monitored for impairment annually.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The discussion presented herein is intended to provide an overview of
the changes in financial condition and results of operation for LSB
Bancshares, Inc, ("Bancshares") and its wholly owned subsidiary,
Lexington State Bank ("LSB") for the three months and six months ended
June 30, 2002 and 2001. The consolidated financial statements also
include the accounts and results of operation of LSB's wholly owned
subsidiaries, Peoples Finance Company of Lexington, Inc. ("Peoples
Finance") and LSB Investment Services, Inc. ("LSB Investment
Services"). This discussion and analysis is intended to complement the
unaudited financial statements, footnotes and supplemental financial
data in this Form 10Q, and should be read in conjunction therewith.
This report contains certain forward-looking statements related to
anticipated future operating and financial performance, and other
similar statements of expectations. These forward-looking statements
are based on estimates, beliefs and assumptions made by management and
are not guarantees of future performance. Actual results may differ
from those expressed or implied as the result of various factors,
including: (1) the strength of the United States economy generally and
the strength of the local economies in which Bancshares conducts
operations may be different than expected resulting in, among other
things, a deterioration in credit quality or a reduced demand for
credit, including the resultant effect on Bancshares' loan portfolio
and allowance for loan losses; (2) the effects of, and changes in,
trade, monetary and fiscal policies and laws, including interest rate
policies of the Board of Governors of the Federal Reserve System; (3)
inflation, interest rate, market and monetary fluctuations; (4) adverse
conditions in the stock market, the public debt market and other
capital markets (including changes in interest rate conditions) and the
impact of such conditions on Bancshares' capital markets and capital
management activities, including, without limitation, Bancshares'
private equity investment activities and brokerage activities; (5) the
timely development of competitive new products and services by
Bancshares and the acceptance of these products and services by new and
existing customers; (6) the willingness of customers to accept third
party products marketed by Bancshares; (7) the willingness of customers
to substitute competitors' products and services for Bancshares'
products and services and vice versa; (8) the impact of changes in
financial services' laws and regulations (including laws concerning
taxes, banking and securities); (9) technological changes; (10) changes
in consumer spending and saving habits; (11) the effect of corporate
restructurings, acquisitions and/or disposition, and the failure to
achieve the expected revenue growth and/or expense savings from such
corporate restructurings, acquisitions and/or dispositions; (12) the
growth and profitability of Bancshares' noninterest or fee income being
less than expected; (13) unanticipated regulatory or judicial
proceedings; (14) the impact of changes in accounting policies by the
Securities and Exchange Commission; (15) adverse changes in financial
performance and/or condition of Bancshares' borrowers which could
impact repayment of such borrowers' outstanding loans; and (16)
Bancshares' success at managing the risks involved in the foregoing.
Bancshares cautions that the foregoing list of important factors is not
exclusive. Bancshares does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time
by or on behalf of Bancshares.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
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.
Following the dramatic declines in interest rates during 2001, interest
income and interest expense for 2002 remain below prior year levels on
a comparative basis. For the second quarter of 2002 total interest
income of $12.951 million was down $2.000 million or 13.4% compared to
$14.951 million for the second quarter of 2001. Total interest expense
for the second quarter of 2002 of $3.788 million was down $3.086
million or 44.9% compared to $6.874 million for the second quarter of
2001. As a result, net interest income for the second quarter of 2002
of $9.163 million increased $1.086 million or 13.4% compared to $8.077
million for the second quarter of 2001. Improvement of the bank's net
interest margin in the first quarter continued during the second
quarter resulting in the improved net interest income. The net interest
margin for the second quarter of 2002 was 4.85% compared to 4.46% for
the fourth quarter of 2001 and 4.29% for the second quarter of 2001.
Emphasis on relationship banking with a more disciplined approach to
asset and liability pricing has benefited the bank's net interest
margin and interest income.
Noninterest Income and Expense
Noninterest income for the second quarter of 2002 increased $359,000 or
13.0% compared to the second quarter of 2001. In the second quarter of
2001, a gain of $541,000 was realized from the sale of stock held in a
corporation providing electronic transaction processing to financial
institutions. Excluding this one-time gain, noninterest income for the
second quarter of 2002 increased $900,000 or 40.5% compared to the
second quarter of 2001. Fee income related to service charges on
deposit accounts for the second quarter of 2002 increased $626,000 or
61.4% compared to the second quarter of 2001. The increase in deposit
account fee income is primarily attributable to a new product
introduction in the fourth quarter of 2001 and to an increase in
certain service fees in the second quarter of 2002. Gains on the sale
of mortgage loans doubled in the second quarter of 2002 compared to the
same period of 2001 as the bank increased the volume of mortgages made
and sold. Other operating income for the second quarter of 2002
increased $201,000 or 17.8% compared to the second quarter of 2001.
Within the other operating income category, fee income from the Bank's
bankcard division increased $72,000 or 19.3% the second quarter of 2002
compared to the corresponding period in 2001. Trust income increased
4.5% in the second quarter of 2002 compared to the second quarter of
2001. Commissions generated by LSB Investment Services increased
$46,000 or 25.0% in the second quarter of 2002 compared to the
corresponding quarter of 2001. LSB Investment Services generates
commission income from the sale of mutual funds, annuities and
equities.
Noninterest expense for the second quarter of 2002 increased $628,000
or 8.8% compared to the second quarter of 2001. Personnel expense for
the second quarter of 2002, comprised of salaries and fringe benefits,
increased $353,000 or 8.8% over the second quarter of 2001. The
increase is attributable to normal increases in compensation and
increases in the number of full-time equivalent employees as the Bank
expands into Guilford County. Occupancy expense during the second
quarter of 2002 increased $15,000 or 4.4% compared to the second
quarter of 2001, while equipment depreciation and maintenance expense
increased $49,000 or 12.3% for the same period. Other operating expense
for the second quarter of 2002 increased $211,000 or 8.8% compared to
the second quarter of 2001. Within the other operating expense
category, automated processing expenses for the second quarter of 2002
increased $45,000 or 11.3% compared to the corresponding quarter of
2001. Advertising expense increased $180,000 for the second quarter of
2002 as the Bank launched a branding and marketing campaign.
Preparation for the campaign was begun in the fourth quarter of 2001
and will continue through 2002 with some associated expenses. Postage
expense for the period decreased slightly but is expected to increase
with the rise of postage rates now in effect.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Net Interest Income
Total interest income for the first six months of 2002 of $26.369
million was down $3.874 or 12.8% compared to $30.243 million for the
first six months of 2001. Like wise, total interest expense of $7.955
million for the first six months of 2002 was down 45.1% compared to
$14.493 million for the first six months of 2001. The bank's emphasis
on asset/liability pricing and relationship banking has resulted in a
strong net interest margin. Consequently, net interest income for the
first six months of 2002 increased $2.664 million or 16.9% compared to
the first six months of 2001.
For the period ended June 30, 2002 deposits were down $7.091 million or
1.0% compared to December 31, 2001, but had increased $15.581 million
or 2.4% compared to June 30, 2001. Higher cost deposits (certificates
of deposit) have decreased during the periods being compared improving
overall cost of funds. Demand deposits were up $1.609 million or 2.0%
from December 31, 2001 and up $1.872 million or 2.3% compared to the
second quarter of 2001. Savings, NOW and money market deposits
increased $13.682 million or 3.9% compared to December 31, 2001 and
$43.156 million or 13.4% compared to June 30, 2001. Loan growth
increased $16.900 million or 2.9% compared to December 31, 2001 and
$43.219 million or 7.7% compared to June 30, 2002.
Noninterest Income and Expense
Noninterest income for the first six months of 2002 was up $961,000 or
19.9% compared to the first six months of 2001. In the second quarter
of 2001, a gain of $541,000 was realized from the sale of stock held in
a corporation providing electronic transaction processing to financial
institutions. Excluding non-recurring gains from sales of investment
securities, noninterest income for the first six months of 2002 was up
$1.502 million or 35.0%. Fee income from service charges on deposit
accounts for the first six months of 2002 increased $1.104 million or
56.2% compared to the first six months of 2001. The increase in deposit
account fee income is primarily attributable to a new product
introduction in the fourth quarter of 2001 and to an increase in
certain
service fees in the second quarter of 2002. Gains on the sale of
mortgage loans for the six-month period ended June 30, 2002 increased
$220,000 or 201.8% compared to the same period of 2001 as the bank
increased the volume of mortgages made and sold. Other operating income
for the first six months of 2002 increased $178,000 or 8.0% compared to
the first six months of 2001. Fee income from the Bank's bankcard
division for the six-month period ended June 30, 2002 increased $98,000
or 13.0% compared to the same period of 2001. General fee and
commission income for the first six months of 2002 was up $118,000
compared to the comparable period of 2001. Commissions generated by the
investment services' subsidiary increased $38,000 or 10.7% the first
six months of 2002 compared to the first six months of 2001. The bank's
investment services subsidiary generates commission income from the
sale of mutual funds, annuities and equities.
Noninterest expense for the first six months of 2002 increased $2.041
million or 15.2% compared to the same period of 2001. Personnel expense
for the first six months of 2002, comprised of salaries and fringe
benefits, increased $1.123 million or 15.2% over the comparable period
of 2001. Increases in the period's personnel expenses come from normal
changes to compensation and additions to sales staff as the bank
expands into Guilford County. Additions were also made to the sales
staff of the bank's subsidiaries during the first half of 2002 as those
divisions saw expansion. The increase for the first six months of 2002
in occupancy expense was $37,000 or 5.5% compared to the first six
months of 2001. Equipment depreciation and maintenance expense
increased $114,000 or 15.0% for the period being compared. Other
operating expense for the first six months of 2002 increased $767,000
or 16.9% over the first six months of 2001. For the first six months of
2002, advertising expense increased $315,000 or 196.5% compared to the
corresponding period of 2001 as the Bank launched a branding and
marketing campaign. Preparation for the campaign was begun in the
fourth quarter of 2001 and will continue through 2002 with some
associated expenses. Postage expense for the period increased slightly.
It is anticipated that this expense will increase with the rise of
postage rates effective the second half of 2002. Automated processing
expenses for the first half of 2002 increased $52,000 or 6.1% compared
to the first half of 2001.
Asset Quality and Provision for Loan Losses
The reserve for loan losses was $6.948 million or 1.15% of loans
outstanding at June 30, 2002 compared to $6.440 million or 1.09% of
loans outstanding at December 31, 2001 and $6.058 million or 1.08% at
June 30, 2001. Non-performing assets (including loans over 90 days past
due and still accruing) totaled $6.402 million or 0.77% of total assets
at June 30, 2002 compared to $4.551 million or .55% of total assets at
December 31, 2001 and $3.060 million or .38% of total assets at June
30, 2001. Nonperforming assets include nonaccrual loans, restructured
loans, other real estate acquired through foreclosed properties and
accruing loans ninety days or more past due. As of June 30, 2002,
Bancshares had $1.791 million in restructured loans, $1.878 million in
other real estate and $1.005 million in nonaccrual loans. Accruing
loans past due 90 days or more were $1.728 million at June 30, 2002
compared to $2.412 million at December 31, 2001 and $1.441 million at
June 30, 2001. 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, 2002, the
reserve for loan losses was 1.09 times non-performing assets, compared
to 1.42 times at December 31, 2001 and 1.98 at June 30, 2001.
Responsibility for market risk management resides with the
Asset/Liability Management Committee ("ALCO"). The ALCO Committee
monitors market conditions, interest rate trends and the economic
environment in its decision-making process. Based upon its view of
existing and expected market conditions, balance sheet strategies are
adopted to optimize net interest income while minimizing the risks
associated with unanticipated changes in interest rates.
The provision for loan losses that was charged to operations the first
six months of 2002 was $1.062 million compared to $771,000 for the same
period in 2001. The increase in the provision for loan losses was due
to $43.219 million in net loan growth. Net charge-offs for the six
months ended June 30, 2002 were $554,000, or .19% of average loans
outstanding on an annualized basis compared to $672,000 or .24% for the
first six months of 2001. Management continues to monitor the asset
quality of the loan portfolio and charge-offs are recorded based upon
the financial condition of the borrower and the likelihood of
repayment.
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.
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.
ASSET QUALITY ANALYSIS
Quarter Ended Year Ended Quarter Ended
6/30/2002 12/31/2001 6/30/2001
------------- ---------- -------------
RESERVE FOR LOAN LOSSES
Beginning Balance $ 6,440 $ 5,959 $ 5,959
Provision for loan losses 1,062 1,862 771
Net (charge-off) recoveries (554) (1,381) (672)
------------- ---------- -------------
Ending balance 6,948 6,440 6,058
RISK ASSETS
Nonaccrual loans $ 1,005 $ 935 $ 391
Foreclosed real estate 1,878 880 895
Restructured loans 1,791 324 333
Loans 90 days or more past due
and still accruing 1,728 2,412 1,441
------------- ---------- -------------
Total risk assets 6,402 4,551 3,060
ASSET QUALITY RATIOS
Nonaccrual loans as a percentage of total loans 0.16% 0.20% 0.07%
Nonperforming assets as a percentage of:
Total assets 0.77 0.55 0.38
Loans plus foreclosed property 1.05 0.44 0.55
Net charge-offs as a percentage of average loans 0.19 X 0.24 0.24 X
Reserve for loan losses as a percentage of loans 1.15 1.09 1.08
Ratio of reserve for loan losses to:
Net charge-offs 6.27 X 4.66 4.50 X
Nonaccrual loans 6.91 6.89 15.51
*N/M Denotes Non Meaningful
X Denotes Annualized
Income Taxes
Accrued taxes applicable to income for the six-month period ended June
30, 2002 were $2.542 million compared to $2.071 million for the
six-month period ended June 30, 2001. Pretax income for the first six
months of 2002 of $7.711 million was up $1.293 million compared to
$6.418 million for the first six months of 2001. The increase in
accrued taxes for the period ended June 30, 2002 is primarily due to
this higher taxable income.
Capital Resources and Shareholders' Equity
Regulatory guidelines require minimum levels of capital based on a risk
weighting of each asset category and off-balance sheet contingencies.
Regulatory agencies divide capital into Tier 1 or core capital and
total capital. Tier 1 capital, as defined by regulatory agencies,
consists primarily of common shareholders' equity less goodwill
and certain other intangible assets. Total capital consists of Tier 1
capital plus the allowable portion of the reserve for loan losses and
certain long-term debt. At June 30, 2002, based on these measures,
Bancshares' had a Tier 1 capital ratio of 13.73% compared to the
regulatory requirement of 4% and total capital ratio of 14.91% 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 June 30, 2002, Bancshares' Tier 1 leverage ratio was
9.76%.
Market Risk Management
Bancshares' market risk arises primarily from the interest rate risk
inherent in its lending and deposit-taking activities. The objectives
of market risk management are to ensure long-range profitability
performance and minimize risk, adhere to proper liquidity and maintain
sound capital. To meet these goals, the Asset/Liability Management
Committee ("ALCO") monitors the exposure to interest rate risk, balance
sheet trends, pricing policies and liquidity position. The objectives
are to achieve relatively stable net interest margins and assure
liquidity through coordinating the volumes, maturities or repricing
opportunities of earning assets, deposits and borrowed funds. This is
accomplished through strategic pricing of asset and liability accounts.
As a result of this management, appropriate maturities and/or repricing
opportunities are developed to produce consistent earnings during
changing interest rate environments.
Based upon its view of existing and expected market conditions, ALCO
adopts balance sheet strategies intended to optimize net interest
income to the extent possible while minimizing the risk associated with
unanticipated changes in interest rates. Core deposits have
historically been the primary funding sources for asset growth.
Correspondent relationships have also been maintained with several
large banks in order to have access to federal funds purchases when
needed. The Bank also has available lines of credit maintained with the
Federal Home Loan Bank (the "FHLB") which can be used for funding
and/or liquidity needs. The Bank has also executed a retail CD
brokerage agreement, which provides an additional source for liquidity
or funding needs. The Bank also has a $10 million irrevocable letter
of credit with FHLB that is used in lieu of securities to pledge
against public deposits.
To minimize risk of interest rate movements, the asset/liability
management process seeks to match maturities and repricing
opportunities of interest-sensitive assets and interest-sensitive
liabilities. The bank uses an asset/liability simulation model to
produce a gap analysis. The simulation model computes projected runoff
of deposits that do not have contractual maturity dates. On June 30,
2002 the gap between interest-sensitive assets and interest-sensitive
liabilities was a positive $55,285,000 or 1.21. Under current economic
conditions, management believes that is an acceptable ratio.
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. The bank's liquidity position is primarily
accomplished through deposit growth, loan repayments and investment
securities management. The bank also has access to federal fund lines
at correspondent banks and borrowings from the Federal Reserve discount
window.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk reflects the risk of economic loss resulting from adverse
changes in market price and interest rates. This risk of loss can be
reflected in diminished current market values and/or reduced potential
net interest income in future periods.
Bancshares' market risk arises primarily from the interest rate risk
inherent in its lending and deposit-taking activities. The structure of
Bancshares' loan and deposit portfolios is such that a significant
decline in interest rates may adversely impact net market values and
net interest income. Bancshares' does not maintain a trading account
nor is it subject to currency exchange risk or commodity price risk.
Responsibility for monitoring interest rate risk rests with the
Asset/Liability Management Committee ("ALCO"), which is appointed by
the Board of
Directors. ALCO meets on a regular basis to review interest rate risk
exposure and liquidity positions. Balance sheet management and funding
strategies are reviewed to ensure that any potential impact on earnings
and liquidity, resulting from a fluctuation in interest rates is within
acceptable standards.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits.
Exhibit 99.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
B. Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the six
months ended June 30, 2002.
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 13, 2002 LSB BANCSHARES, INC.
-----------------------------------------------
(Registrant)
By: /s/ Monty J. Oliver
-------------------------------------------
Name: Monty J. Oliver
Title: Secretary and Chief Financial Officer
(Authorized Officer and Chief Accounting
Officer)