Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2009
o | Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 000-32955
LSB Corporation
(Exact name of registrant as specified in its charter)
Massachusetts (State or other jurisdiction of incorporation or organization) | 04-3557612 (I.R.S. Employer Identification Number) | |
30 Massachusetts Avenue, North Andover, MA (Address of principal executive offices) | 01845 (Zip Code) |
(978) 725-7500
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Indicate by check mark 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 report), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yeso Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer o (Do not check if a smaller reporting company) | Smaller Reporting Company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class | Outstanding as of November 6, 2009 | |
Common Stock, par value $.10 per share | 4,499,936 shares |
LSB CORPORATION AND SUBSIDIARY
INDEX
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PART 1 — FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(In thousands, except share data) | ||||||||
ASSETS | ||||||||
Assets: | ||||||||
Cash and due from banks | $ | 8,000 | $ | 6,859 | ||||
Federal funds sold | 10,218 | 6,469 | ||||||
Total cash and cash equivalents | 18,218 | 13,328 | ||||||
Investment securities available for sale (amortized cost of $231,635 in 2009 and $259,057 in 2008) | 240,341 | 264,561 | ||||||
Federal Home Loan Bank stock, at cost | 11,825 | 11,825 | ||||||
Loans, net of allowance for loan losses | 511,806 | 446,736 | ||||||
Premises and equipment | 6,453 | 5,528 | ||||||
Accrued interest receivable | 2,695 | 2,720 | ||||||
Deferred income tax asset, net | 3,087 | 4,447 | ||||||
Bank-owned life insurance | 11,005 | 10,641 | ||||||
Other real estate owned | 120 | 120 | ||||||
Other assets | 1,403 | 1,418 | ||||||
Total assets | $ | 806,953 | $ | 761,324 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Liabilities: | ||||||||
Core deposits | $ | 232,255 | $ | 177,639 | ||||
Term deposits | 239,096 | 231,024 | ||||||
Total deposits | 471,351 | 408,663 | ||||||
Long-term borrowed funds | 249,111 | 259,228 | ||||||
Short-term borrowed funds | 5,704 | 17,262 | ||||||
Mortgagors’ escrow accounts | 886 | 619 | ||||||
Other liabilities | 3,541 | 3,410 | ||||||
Total liabilities | 730,593 | 689,182 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, Series A, $.10 par value per share: 5,000,000 shares authorized, none issued | — | — | ||||||
Cumulative perpetual preferred stock, Series B, (liquidation preference $1,000 per share) 15,000 shares authorized and issued | 14,537 | 14,455 | ||||||
Common stock, $.10 par value per share; 20,000,000 shares authorized; 4,499,936 and 4,470,941 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively | 450 | 447 | ||||||
Additional paid-in capital | 60,460 | 60,179 | ||||||
Accumulated deficit | (4,372 | ) | (6,250 | ) | ||||
Accumulated other comprehensive income, net of tax | 5,285 | 3,311 | ||||||
Total stockholders’ equity | 76,360 | 72,142 | ||||||
Total liabilities and stockholders’ equity | $ | 806,953 | $ | 761,324 | ||||
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
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LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In thousands, except share data) | ||||||||||||||||
Interest and dividend income: | ||||||||||||||||
Loans | $ | 7,462 | $ | 6,570 | $ | 21,216 | $ | 18,636 | ||||||||
Investment securities available for sale | 2,795 | 3,212 | 9,162 | 9,621 | ||||||||||||
Federal Home Loan Bank stock | — | 88 | — | 344 | ||||||||||||
Short-term interest income | 11 | 55 | 22 | 167 | ||||||||||||
Total interest and dividend income | 10,268 | 9,925 | 30,400 | 28,768 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 2,501 | 2,521 | 7,746 | 7,566 | ||||||||||||
Long-term borrowed funds | 2,721 | 2,911 | 8,265 | 8,519 | ||||||||||||
Short-term borrowed funds | 4 | 50 | 47 | 127 | ||||||||||||
Total interest expense | 5,226 | 5,482 | 16,058 | 16,212 | ||||||||||||
Net interest income | 5,042 | 4,443 | 14,342 | 12,556 | ||||||||||||
Provision for loan losses | 400 | 330 | 1,100 | 835 | ||||||||||||
Net interest income after provision for loan losses | 4,642 | 4,113 | 13,242 | 11,721 | ||||||||||||
Non-interest income (loss): | ||||||||||||||||
Impairment write-downs on securities | — | (9,383 | ) | — | (9,383 | ) | ||||||||||
Deposit account fees | 253 | 269 | 710 | 782 | ||||||||||||
Loan servicing fees, net | 34 | 27 | 150 | 100 | ||||||||||||
Gains on sales of investments | 572 | — | 1,030 | — | ||||||||||||
Income on bank-owned life insurance | 115 | 124 | 364 | 317 | ||||||||||||
Other income | 122 | 115 | 347 | 341 | ||||||||||||
Total non-interest income (loss) | 1,096 | (8,848 | ) | 2,601 | (7,843 | ) | ||||||||||
Non-interest expense: | ||||||||||||||||
Salaries and employee benefits | 1,643 | 1,692 | 5,013 | 4,963 | ||||||||||||
Occupancy and equipment | 357 | 312 | 1,077 | 985 | ||||||||||||
Data processing | 228 | 228 | 702 | 705 | ||||||||||||
Professional | 113 | 160 | 450 | 422 | ||||||||||||
Marketing | 116 | 98 | 374 | 344 | ||||||||||||
Other real estate owned | 4 | 60 | 6 | 116 | ||||||||||||
Deposit insurance | 262 | 18 | 1,022 | 47 | ||||||||||||
Other | 544 | 417 | 1,702 | 1,206 | ||||||||||||
Total non-interest expense | 3,267 | 2,985 | 10,346 | 8,788 | ||||||||||||
Income (loss) before income tax expense | 2,471 | (7,720 | ) | 5,497 | (4,910 | ) | ||||||||||
Income tax expense | 910 | 530 | 1,911 | 1,481 | ||||||||||||
Net income (loss) | 1,561 | (8,250 | ) | 3,586 | (6,391 | ) | ||||||||||
Preferred stock dividends and accretion | (215 | ) | — | (588 | ) | — | ||||||||||
Net income (loss) available to common shareholders | $ | 1,346 | $ | (8,250 | ) | $ | 2,998 | $ | (6,391 | ) | ||||||
Average common shares outstanding | 4,495,356 | 4,456,821 | 4,479,316 | 4,469,884 | ||||||||||||
Common stock equivalents | 1,324 | 12,661 | 1,031 | 19,881 | ||||||||||||
Average diluted common shares outstanding | 4,496,680 | 4,469,482 | 4,480,347 | 4,489,765 | ||||||||||||
Basic earnings (loss) per share | $ | 0.30 | $ | (1.85 | ) | $ | 0.66 | $ | (1.43 | ) | ||||||
Diluted earnings (loss) per share | $ | 0.30 | $ | (1.85 | ) | $ | 0.66 | $ | (1.42 | ) | ||||||
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
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LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2008 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2008 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||
Preferred | Common | Paid-In | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||||
Stock | Stock | Capital | Deficit | Income | Equity | |||||||||||||||||||
(In thousands, except share data) | ||||||||||||||||||||||||
Balance at December 31, 2007 | $ | — | $ | 452 | $ | 60,382 | $ | (934 | ) | $ | 398 | $ | 60,298 | |||||||||||
Net loss | — | — | — | (2,723 | ) | — | (2,723 | ) | ||||||||||||||||
Other comprehensive income — Unrealized gain on securities available for sale, (tax effect $1,935) | — | — | — | — | 2,913 | 2,913 | ||||||||||||||||||
Total comprehensive income | — | — | — | — | — | 190 | ||||||||||||||||||
Stock-based compensation | — | — | 156 | — | — | 156 | ||||||||||||||||||
Issuance of preferred stock, net of discount $549 | 14,451 | — | — | — | — | 14,451 | ||||||||||||||||||
Accretion of discount on preferred stock | 4 | — | — | (4 | ) | — | — | |||||||||||||||||
Fair value of warrants issued with preferred stock | — | — | 549 | — | — | 549 | ||||||||||||||||||
Exercise of stock options and tax benefits (9,500 shares) | — | 1 | 120 | — | — | 121 | ||||||||||||||||||
Common stock repurchased (64,620 shares) | — | (6 | ) | (1,028 | ) | (1,034 | ) | |||||||||||||||||
Dividends declared and paid ($0.58 per share) | — | — | — | (2,589 | ) | — | (2,589 | ) | ||||||||||||||||
Balance at December 31, 2008 | 14,455 | 447 | 60,179 | (6,250 | ) | 3,311 | 72,142 | |||||||||||||||||
Net income | — | — | — | 3,586 | — | 3,586 | ||||||||||||||||||
Other comprehensive income — Unrealized gain on securities available for sale, (tax effect $1,228) | — | — | — | — | 1,974 | 1,974 | ||||||||||||||||||
Total comprehensive income | — | — | 5,560 | |||||||||||||||||||||
Stock-based compensation | — | — | 19 | — | — | 19 | ||||||||||||||||||
Accretion of discount on preferred stock | 82 | — | — | (82 | ) | — | — | |||||||||||||||||
Exercise of stock options (28,995 shares) | — | 3 | 262 | — | — | 265 | ||||||||||||||||||
Dividends paid on Series B preferred stock 5% | — | — | — | (507 | ) | — | (507 | ) | ||||||||||||||||
Dividends declared and paid ($0.25 per common share) | — | — | — | (1,119 | ) | — | (1,119 | ) | ||||||||||||||||
Balance at September 30, 2009 | $ | 14,537 | $ | 450 | $ | 60,460 | $ | (4,372 | ) | $ | 5,285 | $ | 76,360 | |||||||||||
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
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LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended September 30, | ||||||||
2009 | 2008 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 3,586 | $ | (6,391 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Provision for loan losses | 1,100 | 835 | ||||||
Impairment write-down on securities | — | 9,383 | ||||||
Net losses on sales of other real estate owned | — | 52 | ||||||
Gains on sales of investments | (1,030 | ) | — | |||||
Net accretion of investment securities | (528 | ) | (386 | ) | ||||
Depreciation and amortization of premises and equipment | 453 | 472 | ||||||
Decrease (increase) in accrued interest receivable | 25 | (189 | ) | |||||
Deferred income tax provision (benefit) | 132 | (172 | ) | |||||
Stock-based compensation | 19 | 47 | ||||||
Income on Bank-owned life insurance | (364 | ) | (317 | ) | ||||
Decrease (increase) in other assets | 15 | (40 | ) | |||||
Increase in other liabilities | 131 | 806 | ||||||
Net cash provided by operating activities | 3,539 | 4,100 | ||||||
Cash flows from investing activities: | ||||||||
Proceeds from maturities of investment securities available for sale | 20,367 | 8,246 | ||||||
Proceeds from sales of investment securities available for sale | 19,348 | — | ||||||
Purchases of investment securities available for sale | (74,902 | ) | (62,841 | ) | ||||
Purchases of FHLBB stock | — | (1,602 | ) | |||||
Principal payments of investment securities available for sale | 64,167 | 33,984 | ||||||
Loan originations, net of principal payments | (59,333 | ) | (80,470 | ) | ||||
Proceeds from sales of other real estate owned | — | 490 | ||||||
Loans purchased | (6,837 | ) | — | |||||
Purchases of premises and equipment | (1,378 | ) | (1,897 | ) | ||||
Net cash used in investing activities | (38,568 | ) | (104,090 | ) | ||||
Cash flows from financing activities: | ||||||||
Net increase in deposits | 62,688 | 78,278 | ||||||
Additions to long-term borrowed funds | — | 63,000 | ||||||
Payments on long-term borrowed funds | (10,117 | ) | (27,111 | ) | ||||
Net (decrease) increase in short-term borrowed funds | (11,558 | ) | 1,563 | |||||
Increase in advance payments by borrowers | 267 | 144 | ||||||
Dividends paid to preferred shareholders | (507 | ) | — | |||||
Dividends paid to common shareholders | (1,119 | ) | (1,920 | ) | ||||
Proceeds from exercise of stock options | 265 | 117 | ||||||
Common stock repurchased | — | (1,035 | ) | |||||
Net cash provided by financing activities | 39,919 | 113,036 | ||||||
Net increase in cash and cash equivalents | 4,890 | 13,046 | ||||||
Cash and cash equivalents, beginning of period | 13,328 | 7,550 | ||||||
Cash and cash equivalents, end of period | $ | 18,218 | $ | 20,596 | ||||
Cash paid during the period for: | ||||||||
Interest on deposits | $ | 7,758 | $ | 7,547 | ||||
Interest on borrowed funds | 8,399 | 8,593 | ||||||
Income taxes | 1,791 | 1,775 | ||||||
Supplemental noncash investing and financing activities: | ||||||||
Transfers to other real estate owned | — | 1,481 |
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
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LSB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(UNAUDITED)
1. BASIS OF PRESENTATION
LSB Corporation (the “Corporation” or the “Company”) is a Massachusetts corporation and the holding company of its wholly-owned subsidiary River Bank (the “Bank”), a state-chartered Massachusetts savings bank organized in 1868. The Corporation was organized by the Bank on July 1, 2001 to be a bank holding company and to acquire all of the capital stock of the Bank.
The Corporation is supervised by the Board of Governors of the Federal Reserve System (“FRB”), and it is also subject to the jurisdiction of the Massachusetts Division of Banks, while the Bank is subject to the regulations of, and periodic examination by, the Federal Deposit Insurance Corporation (“FDIC”) and the Massachusetts Division of Banks. The Bank’s deposits are currently insured by the Deposit Insurance Fund of the FDIC up to $250,000 per depositor, as defined by the FDIC (which level is permanent for certain retirement accounts, including IRAs, but temporary for all other deposit accounts through December 31, 2013), and the Depositors Insurance Fund (“DIF”) of Massachusetts, a private industry-sponsored insurer, for customer deposit amounts in excess of FDIC insurance limits. The Consolidated Financial Statements include the accounts of LSB Corporation and its wholly-owned consolidated subsidiary, River Bank, and the Bank’s wholly-owned subsidiaries, Shawsheen Security Corporation, Shawsheen Security Corporation II, and Spruce Wood Realty Trust. All inter-company balances and transactions have been eliminated in consolidation. The Company has one reportable operating segment. In the opinion of management, the accompanying Consolidated Financial Statements reflect all necessary adjustments consisting of normal recurring adjustments for fair presentation. Certain amounts in prior periods may be re-classified to conform to the current presentation.
The Corporation’s Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Accordingly, management is required to make estimates and assumptions that affect amounts reported in the balance sheets and statements of income. Actual results could differ significantly from those estimates and judgments. Material estimates that are particularly susceptible to change relate to the allowance for loan losses, income taxes and impairment of investment securities.
The interim results of consolidated income are not necessarily indicative of the results for any future interim period or for the entire year. These interim Consolidated Financial Statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the annual Consolidated Financial Statements and accompanying notes included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2008 filed with the Securities and Exchange Commission.
2. INVESTMENTS
The following table reflects the components and carrying values of the investment securities portfolio at September 30, 2009, and December 31, 2008:
9/30/09 | 12/31/08 | |||||||||||||||||||||||||||||||
Amortized | Unrealized | Fair | Amortized | Unrealized | Fair | |||||||||||||||||||||||||||
Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
U.S. Treasury obligations | $ | 5,561 | $ | 275 | $ | — | $ | 5,836 | $ | 5,578 | $ | 426 | $ | — | $ | 6,004 | ||||||||||||||||
Government-sponsored enterprise obligations | 24,508 | 220 | (3 | ) | 24,725 | 15,485 | 240 | (3 | ) | 15,722 | ||||||||||||||||||||||
Mortgage-backed securities | 155,480 | 7,960 | (2 | ) | 163,438 | 181,367 | 5,919 | (80 | ) | 187,206 | ||||||||||||||||||||||
Collateralized mortgage obligations | 40,132 | 654 | — | 40,786 | 46,725 | 379 | (45 | ) | 47,059 | |||||||||||||||||||||||
Corporate obligations | 2,486 | — | (130 | ) | 2,356 | 6,433 | — | (750 | ) | 5,683 | ||||||||||||||||||||||
Mutual funds | 1,000 | — | (20 | ) | 980 | 1,000 | — | (42 | ) | 958 | ||||||||||||||||||||||
Equity securities | 2,468 | — | (248 | ) | 2,220 | 2,469 | — | (540 | ) | 1,929 | ||||||||||||||||||||||
Total investment securities available for sale | $ | 231,635 | $ | 9,109 | $ | (403 | ) | $ | 240,341 | $ | 259,057 | $ | 6,964 | $ | (1,460 | ) | $ | 264,561 | ||||||||||||||
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The net unrealized gains on securities available for sale as of September 30, 2009 totaled $8.7 million, or $5.3 million net of taxes. The unrealized gains are attributable to changes in interest rates. One corporate debt obligation and one preferred equity security are on the Bank’s securities watch list due to their current credit ratings by external, independent rating agencies. Management believes that the Company will collect all amounts due on these investments in accordance with their contractual terms. The amortized cost of these investments totaled $4.5 million as of September 30, 2009, with an unrealized loss of $378,000, or 8.4% of amortized cost. These watch list securities recovered a significant portion of the unrealized losses during the third quarter of 2009 due to the improved outlook of the two issuers. If a decline in value is determined to be other-than-temporary, a charge to earnings would be recognized at that time. Management is monitoring these securities on a monthly basis, does not intend to sell the securities, and it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost. Therefore, management does not consider these investments to be other-than-temporarily impaired at September 30, 2009. The remainder of the unrealized losses resulted from changes in interest rates and are not material as of September 30, 2009.
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2009.
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Government-sponsored enterprise obligations | $ | 4,997 | $ | (3 | ) | $ | — | $ | — | $ | 4,997 | $ | (3 | ) | ||||||||||
Mortgage-backed securities | — | — | 1,696 | (2 | ) | 1,696 | (2 | ) | ||||||||||||||||
Collateralized mortgage obligations | — | — | — | — | — | — | ||||||||||||||||||
Corporate obligations | — | — | 2,356 | (130 | ) | 2,356 | (130 | ) | ||||||||||||||||
Mutual funds | — | — | 980 | (20 | ) | 980 | (20 | ) | ||||||||||||||||
Equity securities | — | — | 1,792 | (248 | ) | 1,792 | (248 | ) | ||||||||||||||||
Total temporarily impaired securities | $ | 4,997 | $ | (3 | ) | $ | 6,824 | $ | (400 | ) | $ | 11,821 | $ | (403 | ) | |||||||||
The Company realized gains of $1.0 million on the sale of $19.3 million of investments available for sale in the first nine months of 2009, including $6,000 in net gains from the sale of two debt securities that were on the Company’s watch list as of December 31, 2008.
The following table is a summary of the contractual maturities of debt securities available for sale at September 30, 2009. These amounts exclude mutual funds and equity securities, which have no contractual maturities. The mortgage-backed securities and collateralized mortgage obligations consist of FHLMC, FNMA, SBA, and GNMA certificates, except for $1.6 million in private label securities. Mortgage-backed securities and collateralized mortgage obligations are shown at their final contractual maturity date but are expected to have shorter average lives.
Amortized Cost | Fair Value | |||||||
(In thousands) | ||||||||
U.S. Treasury and government-sponsored enterprise obligations: | ||||||||
Within 1 year | $ | 499 | $ | 500 | ||||
2 to 5 years | 29,570 | 30,061 | ||||||
Subtotal | 30,069 | 30,561 | ||||||
Mortgage-backed securities | 155,480 | 163,438 | ||||||
Collateralized mortgage obligations: | ||||||||
2 to 5 years | 76 | 84 | ||||||
After 5 years | 40,056 | 40,702 | ||||||
Subtotal | 40,132 | 40,786 | ||||||
Corporate obligations: | ||||||||
Within 1 year | 2,486 | 2,356 | ||||||
Total debt securities available for sale | $ | 228,167 | $ | 237,141 | ||||
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3. CONTINGENCIES
The Bank is involved in various legal proceedings incidental to its business. During the quarter ended September 30, 2009, no new legal proceeding was filed and no material development in any pending legal proceeding occurred that the Company expects will have a material adverse effect on its financial condition or operating results.
4. FAIR VALUES OF ASSETS AND LIABILITIES
The estimated fair values of the Company’s financial instruments at September 30, 2009, and December 31, 2008 follow:
September 30, 2009 | December 31, 2008 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
(In thousands) | ||||||||||||||||
Financial assets: | ||||||||||||||||
Cash and due from banks | $ | 8,000 | $ | 8,000 | $ | 6,859 | $ | 6,859 | ||||||||
Short-term investments | 10,218 | 10,218 | 6,469 | 6,469 | ||||||||||||
Investment securities available for sale | 240,341 | 240,341 | 264,561 | 264,561 | ||||||||||||
Federal Home Loan Bank stock | 11,825 | 11,825 | 11,825 | 11,825 | ||||||||||||
Accrued interest receivable | 2,695 | 2,695 | 2,720 | 2,720 | ||||||||||||
Loans, net | 511,806 | 517,888 | 446,736 | 446,609 | ||||||||||||
Financial liabilities: | ||||||||||||||||
Core deposits | 232,255 | 232,255 | 177,639 | 177,639 | ||||||||||||
Certificates of deposit | 239,096 | 243,827 | 231,024 | 236,443 | ||||||||||||
Borrowed funds | 254,815 | 273,566 | 276,490 | 297,385 | ||||||||||||
Mortgagors’ escrow accounts | 886 | 886 | 619 | 619 | ||||||||||||
Accrued interest payable | 1,006 | 1,006 | 1,106 | 1,106 |
The fair values for cash and short-term investments approximate their carrying amounts because of the short maturity of these instruments. The fair values for investment securities available for sale are based on quoted bid prices received from securities dealers or third-party pricing services. The fair value of stock in the Federal Home Loan Bank of Boston equals its carrying amount as reported in the balance sheet because this stock is redeemable only at par by the FHLBB. The securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. These securities include marketable equity securities and U.S. Treasury obligations. Securities measured at fair value in Level 2 are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and net issue data. These securities include government-sponsored enterprise obligations, mortgage-backed securities, collateralized mortgage obligations and corporate obligations. Securities measured at fair value in Level 3 include non-marketable equity securities that are carried at par value based on the redemptive provisions of the issuers. Loans are estimated by discounting contractual cash flows adjusted for prepayment estimates and using discount rates approximately equal to current market rates on loans with similar characteristics and maturities. The incremental credit risk for non-performing loans has been considered in the determination of the fair value of the loans. The fair values of demand deposit accounts, NOW accounts, savings accounts and money market accounts are equal to their respective carrying amounts because they are equal to the amounts payable on demand at the reporting date. Certificates of deposit, Federal Home Loan Bank advances, and wholesale repurchase agreements are based on the discounted value of contractual cash flows. The discount rates used are representative of approximate market rates currently offered on instruments with similar remaining maturities. The fair values of short-term borrowed funds, accrued interest receivable, mortgagors’ escrow accounts and accrued interest payable approximate their carrying amounts because of the short-term nature of these financial instruments. The majority of the Company’s commitments for unused lines and outstanding standby letters of credit and unadvanced portions of loans are at floating rates and, therefore, there is no fair value adjustment.
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In accordance with the fair value measurements, the Company groups its assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Assets measured at fair value on a recurring basis
Assets measured at fair value on a recurring basis at September 30, 2009 and December 31, 2008, are summarized below. There are no liabilities measured at fair value.
Quoted Prices in | ||||||||||||||||
Active Markets | Significant | |||||||||||||||
For Identical | Significant Other | Unobservable | ||||||||||||||
Assets | Observable Inputs | Inputs | Total | |||||||||||||
Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
September 30, 2009: | ||||||||||||||||
Investment securities available for sale | $ | 7,628 | $ | 232,288 | $ | 425 | $ | 240,341 | ||||||||
December 31, 2008: | ||||||||||||||||
Investment securities available for sale | $ | 7,504 | $ | 256,632 | $ | 425 | $ | 264,561 | ||||||||
There were no changes in Level 3 assets measured at fair value on a recurring basis during the nine months ended September 30, 2009 or 2008.
The investments carried under Level 3 assumptions are carried at par value because all redemptions have been made at par value and represent non-marketable securities.
Assets measured at fair value on a non-recurring basis
The Company may be required, from time to time, to measure certain other assets and liabilities on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets at September 30, 2009.
Level 1 | Level 2 | Level 3 | Total Losses | |||||||||||||
(In thousands) | ||||||||||||||||
At or for the nine months ended September 30, 2009: | ||||||||||||||||
Impaired loans | $ | — | $ | — | $ | 4,587 | $ | (399 | ) | |||||||
Other real estate owned | — | — | 120 | — | ||||||||||||
$ | — | $ | — | $ | 4,707 | $ | (399 | ) | ||||||||
Impaired loan balances in the above table represent collateral dependent loans where management has estimated the credit loss by comparing the loans’ carrying values against the expected realizable fair value of the collateral. The amount of other real estate owned represents a property acquired through foreclosure carried at estimated fair value (based on appraised value) less estimated costs to sell. Appraised values are typically based on a blend of (a) an income approach using unobservable cash flows to measure fair value, and (b) a market approach using observable market comparables. These appraised values may be discounted based on management’s historical knowledge, expertise or changes in market conditions from the time of valuation. For these reasons, impaired loans and other real estate owned are categorized as Level 3 assets.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2009, the FASB issued two accounting pronouncements relating to interim disclosures about fair value of financial instruments, one pronouncement related to determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly, and two pronouncements relating to the recognition and presentation of other-than-temporary impairments. These pronouncements provide additional guidance for estimating fair value and recognition of other-than-temporary
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impairment as well as additional disclosures. These pronouncements were adopted for the quarter ended June 30, 2009 and did not have a material impact on the Company’s Consolidated Financial Statements.
In May 2009, the FASB issued an accounting pronouncement which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The Company’s adoption of this pronouncement for the quarter ended June 30, 2009 did not have a material impact on the Company’s Consolidated Financial Statements. For the purposes of this accounting pronouncement, the Company has evaluated subsequent events through November 12, 2009, the date Consolidated Financial Statements were issued.
In June 2009, the FASB amended its guidance surrounding the accounting for transfers and servicing of financial assets and extinguishments of liabilities and will not require more information about transfers of financial assets, including securitization transactions, where entities have continuing exposure to the risks related to transferred financial assets. This guidance eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. This guidance will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. Management does not believe this guidance will have a material impact on the Company’s Consolidated Financial Statements.
In June 2009, the FASB amended its guidance on the consolidation of variable interest entities and changed how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. This guidance will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. Management does not believe this guidance will have a material impact on the Company’s Consolidated Financial Statements.
In August 2009, the FASB amended its guidance on fair value measurements and disclosures. This guidance provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the techniques provided for in this update. This guidance was adopted by the Company for the quarter ended September 30, 2009 and did not have an impact on the Company’s Consolidated Financial Statements.
In September 2009, the FASB amended its guidance on fair value measurements and disclosures relating to investments in certain entities that calculate net asset value per share (or its equivalent). This guidance permits a reporting entity to measure the fair value of certain investments on the basis of the net asset value per share of the investment (or its equivalent). This guidance also requires new disclosures, by major category of investments, about the attributes of investments within the scope of this guidance. This guidance is effective for interim and annual periods ending after December 15, 2009. Early adoption is permitted for earlier interim and annual periods that have not been issued. Adoption of this guidance is not expected go have a material impact on the Company’s Consolidated Financial Statements.
6. SUBSEQUENT EVENTS
On October 20, 2009, the registrant entered into a subordinated debt agreement between River Bank (as borrower) and Commerce Bank & Trust Company (as lender) whereby River Bank borrows $6.0 million under an unsecured term subordinated loan with a final maturity on October 20, 2016. The subordinated debt agreement calls for a fixed interest rate of 8.5% and equal annual principal payments of $1.2 million commencing on the third anniversary.
River Bank’s obligations under the subordinated debt agreement, including the principal, premium, if any, and interest, are subordinate and junior in right of payment to River Bank’s obligations to its depositors, and its other obligations to its general and secured creditors, except such other creditors holding obligations of River Bank ranking on a parity with or junior to the subordinated note, if any.
The Company expects that the entire amount of the subordinated debt will be included as part of River Bank’s Tier 2 capital as of December 31, 2009.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In this report, the Company has made forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 as amended) that are subject to risks and uncertainties. Such forward-looking statements are expressions of management’s expectations as of the date of this report regarding future events or trends and which do not relate to historical matters. Such expectations may or may not be realized, depending on a number of variable factors, including, but not limited to, changes in interest rates, general economic conditions, including real estate conditions in the Bank’s lending areas, regulatory considerations and competition. For more information about these factors, please see our 2008 Annual Report on Form 10-K on file with the SEC, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. As a result of such risk factors and uncertainties, among others, the Company’s actual results may differ materially from such forward-looking statements. The Company does not undertake and specifically disclaims any obligation to publicly release updates or revisions to any such forward-looking statements as a result of new information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company has not changed its significant accounting and reporting policies from those disclosed in its 2008 Annual Report on Form 10-K. In applying these accounting policies, management is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. As discussed in the Company’s 2008 Annual Report on Form 10-K, the three most significant areas in which management applies critical assumptions and estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses, income taxes and impairment of the investment portfolio. Management’s estimates and assumptions affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from the amount derived from management’s estimates and assumptions using different conditions.
EXECUTIVE LEVEL OVERVIEW
The Company recorded third quarter 2009 net income available to common shareholders of $1.3 million, or $0.30 per diluted common share, as compared to a net loss of $(8.3) million, or $(1.85) per diluted common share, for the third quarter of 2008. The largest factor in the 2009 quarter’s results was the increase in the FDIC deposit insurance premiums from $18,000 for the third quarter of 2008 to $262,000 for the third quarter of 2009 which was more than offset by gains on sales of investments in the third quarter of 2009 totaling $572,000. The largest factor in the quarterly results for 2008 was the other-than-temporary impairment write-downs of investments in Fannie Mae and Freddie Mac preferred stock, the value of which was adversely affected by events surrounding the September 7, 2008 appointment of a conservator for Fannie Mae and Freddie Mac. This non-cash charge reduced earnings by $(9.4) million, or $(2.10) per diluted share, for the quarter ended September 30, 2008.
The Company’s financial results are dependent on the following areas of the income statement: net interest income, provision for loan losses, non-interest income, non-interest expense and provision for income taxes. Net interest income is the primary earnings of the Company and the main focus of management. Net interest income is the difference between interest earned on loans and investment securities and interest paid on deposits and borrowings. Management’s efforts in this area are to increase the corporate loan portfolio, which includes construction, commercial real estate and commercial loans, and the residential loan portfolio. Management’s efforts for funding are to increase core deposit accounts, which are lower interest-bearing accounts and include savings and money market accounts, and demand deposit accounts. Deposits and borrowings typically have short durations and the costs of these funds do not necessarily rise and fall concurrent with earnings from loans and investment securities. There are many risks involved in managing net interest income including, but not limited to, credit risk, interest rate risk and duration risk. These risks have a direct impact on the level of net interest income. The Company manages these risks through its internal credit and underwriting function and review at meetings of the Asset and Liability Management Committee (“ALCO”) on a regular basis. The credit review process reviews loans for underwriting and grading of loan quality while ALCO reviews the liquidity, interest rate risk, duration risk and allocation of capital resources. Loan quality has a direct impact on the amount of provisions for loan losses the Company reports.
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Non-interest income includes gains and losses on sales of investment securities, various fees and increases in the cash surrender value of the Company’s investment in Bank-Owned Life Insurance (“BOLI”). Customers’ loan and deposit accounts generate various amounts of fee income depending on the product selected. The Company receives fee income from servicing loans that were sold in previous periods. Non-interest income is primarily impacted by the volume of customer transactions, which could change in response to changes in interest rates, pricing and competition.
Non-interest expenses include salaries and employee benefits, occupancy and equipment, professional, data processing and other expenses of the Company, which generally are directly related to business volume and are controlled by a budget process.
Income tax expense is directly related to earnings of the Company. Changes in the statutory tax rates and the earnings of the Company, the Bank and its subsidiaries, as well as the mix of earnings among the different entities, would also affect the amount of income tax expense reported and the overall effective income tax rate recorded.
The Company believes that the most significant challenge in the current interest rate environment is to increase net interest income while also maintaining competitive deposit rates. The Company’s net interest income for the three months ended September 30, 2009 was $5.0 million, a 13.5% increase from $4.4 million for the comparable period in 2008, primarily due to sustained loan growth. The results from the Company’s continued emphasis on increasing loan originations instead of purchasing lower-yielding investment securities favorably affected net interest income during the quarter and nine months ended September 30, 2009.
FINANCIAL CONDITION
SUMMARY
The Company maintains its commitment to servicing the banking needs of the local community in the Merrimack Valley area of northeastern Massachusetts and southern New Hampshire. The Company had total assets of $807.0 million at September 30, 2009, compared to $761.3 million at December 31, 2008. The increase in asset size at September 30, 2009 from December 31, 2008 reflected strong loan growth of $65.8 million since year-end 2008 augmented by an increase of $3.7 million in federal funds sold and partially offset by a decrease of $24.2 million in the investment portfolio since December 31, 2008.
Investments:
The investment securities portfolio totaled $240.3 million, or 29.8% of total assets at September 30, 2009, a decrease of $24.2 million, compared to $264.6 million, or 34.8% of total assets at December 31, 2008.
During the first nine months of 2009, the Bank experienced cash inflows of $64.2 million of investments from principal payments and prepayments as well as $19.3 million in proceeds from sales of investments. The funds were reinvested in investment securities purchases totaling $74.9 million and funded new loan originations. These purchases were primarily for use as collateral for wholesale repurchase agreements, FHLBB short-term and long-term advances and customer repurchase agreements. The Company intends to utilize future principal paydowns and maturities from the investment portfolio to fund future loan growth.
Loans:
Total loans increased $65.8 million to $518.4 million and represented 64.2% of total assets at September 30, 2009, versus $452.6 million and 59.5% of total assets, respectively, at December 31, 2008. Retail loans, comprised primarily of residential mortgage loans, increased $22.8 million including $6.8 million of seasoned, 15-year fixed rate residential mortgage loans purchased during the first nine months of 2009 while corporate loans, comprised mainly of construction and commercial real estate loans, increased $43.0 million during the same period. The increase is due to loan growth experienced in the commercial real estate and residential loan categories and reflects the continued strategic preference toward loan originations rather than investment security purchases. There has been increased demand from the Bank’s existing borrowers and increased loan opportunities from new customers as a result of the retrenchment by the large, multi-national banks in our market area.
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The following table reflects the loan portfolio at September 30, 2009 and December 31, 2008:
9/30/09 | 12/31/08 | |||||||
(In thousands) | ||||||||
Residential real estate | $ | 129,832 | $ | 109,276 | ||||
Home equity lines and second mortgages | 26,191 | 23,972 | ||||||
Consumer | 832 | 831 | ||||||
Retail loans | 156,855 | 134,079 | ||||||
Construction and land development | 81,461 | 78,169 | ||||||
Commercial real estate | 250,267 | 206,577 | ||||||
Commercial business | 29,859 | 33,796 | ||||||
Corporate loans | 361,587 | 318,542 | ||||||
Total loans | 518,442 | 452,621 | ||||||
Allowance for loan losses | (6,636 | ) | (5,885 | ) | ||||
Net loans | $ | 511,806 | $ | 446,736 | ||||
Allowance For Loan Losses:
The following table summarizes changes in the allowance for loan losses for the three and nine months ended September 30, 2009 and 2008:
Three months ended | Nine months ended | |||||||||||||||
9/30/09 | 9/30/08 | 9/30/09 | 9/30/08 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Beginning balance | $ | 6,399 | $ | 5,238 | $ | 5,885 | $ | 4,810 | ||||||||
Provision for loan losses | 400 | 330 | 1,100 | 835 | ||||||||||||
Recoveries on loans previously charged-off | 1 | 1 | 3 | 3 | ||||||||||||
Loans charged-off | (164 | ) | (34 | ) | (352 | ) | (113 | ) | ||||||||
Ending balance | $ | 6,636 | $ | 5,535 | $ | 6,636 | $ | 5,535 | ||||||||
Ratios: | ||||||||||||||||
Annualized net charge-offs to average loans outstanding | 0.13 | % | 0.03 | % | 0.10 | % | 0.04 | % | ||||||||
Allowance for loan losses to total loans at end of period | 1.28 | % | 1.27 | % | 1.28 | % | 1.27 | % |
The allowance for loan losses increased to $6.6 million at September 30, 2009 compared to $5.9 million and $5.5 million, respectively, at December 31, 2008 and September 30, 2008. The coverage of the allowance for loan losses increased slightly to 1.28% at September 30, 2009 from 1.27% at September 30, 2008, due to the loan growth of $65.8 million experienced during the first nine months of 2009 as compared to $78.9 million in the first nine months of 2008. Included in the loan growth of $65.8 million in the first nine months of 2009 was the purchase of $6.8 million of seasoned, 15-year fixed rate residential mortgages discussed above. The Company believes that asset quality remains high, as evidenced by the relatively low levels of non-performing and delinquent loans as a percentage of total loans and OREO or total assets as defined below. See “Risk Assets” below. The low levels of delinquent loans and sustained asset quality of the loan portfolio combined with minimal levels of loan charge-offs contributed to the assessment of the allowance for loan losses and resulted in the aforementioned stability in the allowance for loan loss coverage as a percentage of total loans from December 31, 2008 to September 30, 2009. The Company has not engaged in any subprime lending, which it views as one-to-four-family residential loans to a borrower with a credit score below 620 on a scale that ranges from 300 to 850.
The Company considers the current level of the allowance for loan losses to be appropriate and adequate. The amount of the allowance for loan losses reflects management’s assessment of estimated credit quality and is based on a review of the risk characteristics of the loan portfolio. The Company considers many factors in determining the adequacy of the allowance for loan losses. Collateral values on a loan by loan basis, trends of loan delinquencies on a portfolio segment level, risk classification identified in the Company’s regular review of individual loans, and
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economic conditions are primary factors in establishing allowance levels. Management believes the allowance level is adequate to absorb the estimated credit losses inherent in the loan portfolio.
Risk Assets:
Risk assets consist of non-performing loans and other real estate owned (“OREO”). Non-performing loans consist of both loans 90 days or more past due and loans placed on non-accrual because full collection of the principal balance and interest is in doubt. OREO is comprised of foreclosed properties where the Company has formally received title or has possession of the collateral and is carried at the lower of the carrying amount of the loan plus capital improvements or the estimated fair value of the property, less selling costs.
Total risk assets were $3.7 million at September 30, 2009, compared to $2.7 million at December 31, 2008 and $4.3 million as of June 30, 2009. As evidenced by the table below, the economy has had an impact on the level of non-performing loans and in residential non-performing loans in particular. Offsetting the commercial business, non-performing loans of $668,000 are SBA guarantees in the amount of $415,000.
Impaired loans are commercial and commercial real estate loans and individually significant residential mortgage loans for which management believes it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans totaled $4.6 million and $3.1 million at September 30, 2009 and December 31, 2008, respectively. Of the $4.6 million in impaired loans, $2.1 million represent modifications on residential, owner-occupied properties at September 30, 2009. All of the impaired loans at September 30, 2009, had been measured using either the fair value of the collateral method or the estimated cash flow method with one loan requiring a related allowance of $50,000. The Company had impaired loans totaling $490,000 at September 30, 2008.
The following table summarizes the Company’s risk assets at September 30, 2009, December 31, 2008 and September 30, 2008:
9/30/09 | 12/31/08 | 9/30/08 | ||||||||||
(Dollars in thousands) | ||||||||||||
Non-performing loans: | ||||||||||||
Residential | $ | 1,052 | $ | 305 | $ | 128 | ||||||
Construction and land development | 350 | 350 | 490 | |||||||||
Commercial real estate | 1,478 | 1,951 | — | |||||||||
Commercial business | 668 | — | — | |||||||||
Total non-performing loans | 3,548 | 2,606 | 618 | |||||||||
Other real estate owned | 120 | 120 | 939 | |||||||||
Total risk assets | $ | 3,668 | $ | 2,726 | $ | 1,557 | ||||||
Risk assets as a percent of total loans and OREO | 0.71 | % | 0.60 | % | 0.36 | % | ||||||
Risk assets as a percent of total assets | 0.45 | % | 0.36 | % | 0.21 | % | ||||||
Deposits:
Deposits increased $62.7 million during the first nine months of 2009 to $471.4 million at September 30, 2009 from $408.7 million at December 31, 2008. Core deposits, consisting of NOW accounts, demand deposit accounts, savings accounts and money market accounts, increased $54.6 million, or 30.7%, amounting to $232.3 million at September 30, 2009, compared to $177.6 million at December 31, 2008. Savings accounts experienced an increase of $29.5 million from December 31, 2008, to $85.7 million at September 30, 2009, primarily due to the higher-rate promotional accounts. NOW and demand deposit accounts increased $2.1 million and $10.2 million, respectively, from December 31, 2008, to $19.3 million and $37.7 million, respectively, at September 30, 2009, while money market accounts increased $12.8 million to $89.4 million at September 30, 2009. Term deposits comprised of brokered certificates of deposit and certificates of deposit increased $8.0 million, or 3.5%, totaling $239.1 million at September 30, 2009, versus $231.0 million at December 31, 2008. Certificates of deposit increased $11.5 million to
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$209.8 million at September 30, 2009, while brokered certificates of deposit decreased $3.4 million from December 31, 2008, to $29.3 million at September 30, 2009. The decrease in brokered deposits reflects a maturity of $3.5 million.
Due to the recent turmoil in the financial markets, the Bank has seen an inflow of deposits as evidenced by the 15.3% growth in total deposits during the first nine months of 2009. However, the Company continues to face strong competition for deposits which will impact the rate of growth of deposits for the foreseeable future.
The following table reflects the components of the deposit portfolio at September 30, 2009 and December 31, 2008:
9/30/09 | 12/31/08 | |||||||
(In thousands) | ||||||||
NOW accounts | $ | 19,345 | $ | 17,239 | ||||
Demand deposit accounts | 37,747 | 27,546 | ||||||
Savings accounts | 85,736 | 56,251 | ||||||
Money market accounts | 89,427 | 76,603 | ||||||
Core deposits | 232,255 | 177,639 | ||||||
Brokered certificates of deposit | 29,344 | 32,819 | ||||||
Certificates of deposit | 209,752 | 198,205 | ||||||
Term deposits | 239,096 | 231,024 | ||||||
Total deposits | $ | 471,351 | $ | 408,663 | ||||
Borrowed Funds:
Borrowed funds consist of long-term and short-term Federal Home Loan Bank of Boston (FHLBB) advances and securities sold under agreements to repurchase. Total borrowed funds amounted to $254.8 million at September 30, 2009, compared to $276.5 million at December 31, 2008, a decrease of $21.7 million or 7.8%. Short-term borrowed funds decreased $11.6 million from December 31, 2008, due primarily to payments of maturing short-term FHLBB advances of $11.0 million, while long-term FHLBB borrowed funds decreased $10.1 million due to maturing advances. Wholesale repurchase agreements remained stable at $40 million at September 30, 2009 and December 31, 2008, respectively. The Company reduced its borrowing position with a view toward lessening the Company’s exposure to rate fluctuations that may occur in the coming year.
The following table reflects the components of borrowings at September 30, 2009 and December 31, 2008:
9/30/09 | 12/31/08 | |||||||
(In thousands) | ||||||||
Long-term borrowed funds: | ||||||||
FHLBB long-term advances | $ | 209,111 | $ | 219,228 | ||||
Wholesale repurchase agreements | 40,000 | 40,000 | ||||||
249,111 | 259,228 | |||||||
Short-term borrowed funds: | ||||||||
FHLBB short-term borrowings | — | 11,000 | ||||||
Customer repurchase agreements | 5,704 | 6,262 | ||||||
5,704 | 17,262 | |||||||
Total borrowed funds | $ | 254,815 | $ | 276,490 | ||||
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
SUMMARY
The Company reported net income available to common shareholders of $1.3 million, or $0.30 per diluted common share, as compared to a net loss of $(8.3) million, or $(1.85) per diluted common share, for the three months ended September 30, 2009 and 2008, respectively. The largest factor in 2008’s quarterly results was the other-than-
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temporary impairment write-down of investments in Fannie Mae and Freddie Mac preferred stock resulting in a non-cash charge of $(9.4) million, or $(2.10) per diluted common share. The largest factor in the decline of the normalized quarterly net income in 2009 was the increase in the FDIC deposit insurance premiums which totaled $262,000 for the three months ended September 30, 2009 versus $18,000 in the comparable quarter of 2008. Other significant factors in 2009 were the elimination of Fannie Mae and Freddie Mac preferred stock dividends and the suspension of FHLBB dividends that together resulted in a decrease of $191,000 for 2009 from the results for the comparable three-month period in 2008. Partially offsetting these impacts were gains on sales of investments of $572,000 in the quarter ended September 30, 2009 compared to none in the comparable three-month period in 2008.
Net Interest Income:
Net interest income for the three months ended September 30, 2009 increased by $599,000, or 13.5%, to $5.0 million from $4.4 million for the same period of 2008. The net interest rate spread increased slightly to 2.26% for the three months ended September 30, 2009 versus 2.21% for the same period of 2008. Interest income for the three months ended September 30, 2009 increased $343,000, or 3.5%, primarily due to higher average loan balances compared to the same period of 2008. Coupled with the increase in total interest income was a decrease of $256,000 in total interest expense, primarily due to a decrease in average deposit rates. Net interest margin increased to 2.59% versus 2.54% for the quarters ended September 30, 2009 and 2008, respectively.
Interest and Dividend Income:
Interest and dividend income increased $343,000, or 3.5%, during the third quarter of 2009 versus the same quarter in 2008, primarily due to a rise in average loan balances.
Average loan interest rates decreased 38 basis points from 6.21% to 5.83% during the third quarter of 2009 as compared to the same quarter of 2008, resulting in a decrease of $417,000 to interest income. Average loan balances rose $86.8 million, or 20.6%, from $421.0 million in 2008 to $507.8 million in 2009, contributing $1.3 million to interest income.
Average investment security interest rates decreased 66 basis points during the third quarter of 2009, from 4.88% in 2008 to 4.22% in 2009, resulting in a decrease of $380,000 to interest income. Average investment security balances declined $10.0 million or 3.7%, from $273.6 million in 2008 to $263.6 million in 2009, resulting in a decrease of $169,000 to interest income. In connection with the conservatorship of Fannie Mae and Freddie Mac, in the third quarter of 2008 future dividend payments by those entities ceased. During the third quarter of 2009, the Company recognized no dividend income from FNMA and FHLMC preferred stock compared to dividend income from its preferred stock investments of $103,000 that was recognized in the third quarter of 2008. FHLB stock dividends have also been suspended indefinitely. These dividends amounted to $88,000 in the three months ended September 30, 2008 compared to zero in the comparable period of 2009.
Interest Expense:
Interest expense decreased $256,000 during the third quarter of 2009, from $5.5 million in the third quarter of 2008 to $5.2 million in the third quarter of 2009, primarily due to the decline in average deposit rates.
Average deposit interest rates decreased 53 basis points, from 2.84% to 2.31% in the third quarter of 2009 as compared to the same quarter of 2008, decreasing interest expense by $489,000. Average interest-bearing deposit balances increased by $75.9 million or 21.5%, from $353.6 million in 2008 to $429.5 million in 2009, accompanied by a change in the mix resulting in a preference for higher costing certificates of deposit, and higher rate promotional savings accounts which increased interest expense by $469,000.
Average borrowed funds interest rates declined 6 basis points from 4.28% in the third quarter of 2008 to 4.22% in the same quarter of 2009 resulting in an decrease of $57,000 to interest expense. Average borrowed funds balances decreased $19.4 million, or 7.0%, from $275.5 million in 2008 to $256.1 million in 2009. This decrease resulted in a decline in interest expense of $179,000 due primarily to maturities of longer term borrowed funds.
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Provision for Loan Losses:
The provision for loan losses totaled $400,000 and $330,000 for the three months ended September 30, 2009 and 2008, respectively. The provisions in 2009 and 2008 reflect management’s analysis of loan growth and changes in risk during the third quarters of 2009 and 2008 with the highest levels of growth coming from the commercial real estate and residential loan portfolio. The balance of the allowance for loan losses grew to $6.6 million at September 30, 2009, from $5.5 million at September 30, 2008.
Non-Interest Income (Loss):
Non-interest income increased $9.9 million for the three months ended September 30, 2009, compared to the same period in 2008, to $1.1 million in 2009 compared to a loss of $(8.8) million in 2008. The largest factor in the increase in 2009 was due to the non-cash impairment write-down of $(9.4) million incurred in 2008. The normalized non-interest income for the three months ended September 30, 2008, excluding the non-cash impairment write-down, would have been $535,000 as compared to $524,000 in 2009, excluding the gains on sales of investments. Deposit account fees decreased $16,000, or 5.9%, to $253,000 from $269,000 for the three months ended September 30, 2009 and 2008, respectively, due mainly to a decrease of $11,000 in NOW account fees. Loan servicing fees increased by $7,000, or 25.9%, to $34,000 from $27,000 for the three months ended September 30, 2009 and 2008, respectively, due to the increase in the number of loans processed. Income on bank-owned life insurance decreased $9,000 to $115,000 for the three months ended September 30, 2009 from $124,000 for the same period in 2008 based on lower investment income earned by the underlying insurance company. Other income increased to $122,000 from $115,000 for the three months ended September 30, 2009 and 2008, respectively.
Non-Interest Expense:
Non-interest expenses increased $282,000, or 9.4%, during the third quarter of 2009 to $3.3 million versus $3.0 million for the same period of 2008 primarily resulting from the increase of $244,000 in FDIC deposit insurance premiums. These FDIC deposit insurance premiums totaled $262,000 for the three months ended September 30, 2009 compared to $18,000 for the same period of 2008. Salary and employee benefits totaled $1.6 million and $1.7 million in the third quarter of 2009 and 2008, respectively. Occupancy and equipment expense increased $45,000, or 14.4%, to $357,000 in the third quarter of 2009 from $312,000 in the same period of 2008 due mainly to an increase in building repairs and maintenance as well as depreciation due to the opening of the new branch in Derry, New Hampshire. Data processing expense remained stable at $228,000 in the third quarters of 2009 and 2008, respectively. Professional fees decreased $47,000, or 29.4%, to $113,000 in the third quarter of 2009 from $160,000 in the third quarter of 2008 due primarily to a decrease in legal and consulting fees. Marketing expense increased $18,000, or 18.4%, due to increased direct mail solicitations. OREO expense totaled $4,000 in the three months ended September 30, 2009 compared to $60,000 in the same period of 2008. Other expenses increased $127,000, or 30.5%, to $544,000 in the third quarter of 2009 from $417,000 in the same period of 2008 due primarily to an increase in loan workout expenses associated with one nonaccrual loan coupled with increases in recurring costs such as printing costs, telephone expenses and office supplies, primarily in conjunction with the Derry, New Hampshire branch opening.
Income Taxes:
The Company reported an income tax expense of $910,000 for the three months ended September 30, 2009 for an effective income tax rate of 36.8%. This compares to an income tax expense of $530,000 for the three months ended September 30, 2008 for an effective income tax rate of 31.9%, excluding the non-cash impairment write-down. The Company recognized the tax benefit of $3.3 million on the Fannie Mae and Freddie Mac preferred stock impairment charges in the fourth quarter of 2008. The modest increase in the effective tax rate in the third quarter of 2009 was due primarily to the adjustments in the third quarter of 2008 effective tax rate resulting from additional dividend income and tax-exempt income as a percentage of total consolidated income before income tax expense. Subsidiaries within the consolidated group pay various state income tax rates, the mix of taxable earnings within the group can change and, beginning in 2009, the taxable losses of one subsidiary can be used to offset taxable income in another subsidiary in the consolidated group.
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The following table presents the Company’s average balance sheet, net interest income and average interest rates for the three months ended September 30, 2009 and 2008. Average loans include non-performing loans.
Three months ended | Three months ended | |||||||||||||||||||||||
9/30/09 | 9/30/08 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Average | Interest | Average | Interest | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Investment securities: | ||||||||||||||||||||||||
Short-term investments | $ | 18,057 | $ | 11 | 0.24 | % | $ | 12,094 | $ | 55 | 1.81 | % | ||||||||||||
U. S. Treasury and government- sponsored enterprise obligations | 26,640 | 148 | 2.20 | 23,057 | 229 | 3.95 | ||||||||||||||||||
Corporate and other investment securities | 18,983 | 107 | 2.24 | 28,453 | 338 | 4.73 | ||||||||||||||||||
Collateralized mortgage obligations and mortgage- backed securities | 199,933 | 2,540 | 5.04 | 210,005 | 2,733 | 5.18 | ||||||||||||||||||
Total investment securities | 263,613 | 2,806 | 4.22 | 273,609 | 3,355 | 4.88 | ||||||||||||||||||
Loans: | ||||||||||||||||||||||||
Residential real estate | 127,655 | 1,735 | 5.39 | 101,850 | 1,431 | 5.59 | ||||||||||||||||||
Home equity | 25,611 | 257 | 3.98 | 22,922 | 295 | 5.12 | ||||||||||||||||||
Consumer | 636 | 11 | 6.86 | 1,100 | 16 | 5.79 | ||||||||||||||||||
Total retail loans | 153,902 | 2,003 | 5.16 | 125,872 | 1,742 | 5.51 | ||||||||||||||||||
Construction and land | 79,821 | 1,170 | 5.82 | 68,585 | 1,062 | 6.16 | ||||||||||||||||||
Commercial real estate | 244,662 | 3,937 | 6.38 | 199,705 | 3,356 | 6.69 | ||||||||||||||||||
Commercial | 29,407 | 352 | 4.75 | 26,792 | 410 | 6.09 | ||||||||||||||||||
Total corporate loans | 353,890 | 5,459 | 6.12 | 295,082 | 4,828 | 6.51 | ||||||||||||||||||
Total loans | 507,792 | 7,462 | 5.83 | 420,954 | 6,570 | 6.21 | ||||||||||||||||||
Total interest-earning assets | 771,405 | 10,268 | 5.28 | % | 694,563 | 9,925 | 5.68 | % | ||||||||||||||||
Allowance for loan losses | (6,454 | ) | (5,328 | ) | ||||||||||||||||||||
Other assets | 30,855 | 29,482 | ||||||||||||||||||||||
Total assets | $ | 795,806 | $ | 718,717 | ||||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
NOW and super NOW accounts | $ | 18,482 | $ | 9 | 0.19 | % | $ | 18,402 | $ | 9 | 0.19 | % | ||||||||||||
Regular savings accounts | 80,411 | 244 | 1.20 | 46,605 | 183 | 1.56 | ||||||||||||||||||
Money market accounts | 86,088 | 277 | 1.28 | 87,856 | 497 | 2.25 | ||||||||||||||||||
Certificates of deposit and escrow | 244,543 | 1,971 | 3.20 | 200,742 | 1,832 | 3.63 | ||||||||||||||||||
Total interest-bearing deposits | 429,524 | 2,501 | 2.31 | 353,605 | 2,521 | 2.84 | ||||||||||||||||||
Borrowed funds: | ||||||||||||||||||||||||
Long-term borrowed funds | 250,309 | 2,721 | 4.31 | 265,409 | 2,911 | 4.36 | ||||||||||||||||||
Short-term borrowed funds | 5,819 | 4 | 0.27 | 10,109 | 50 | 1.97 | ||||||||||||||||||
Total borrowed funds | 256,128 | 2,725 | 4.22 | 275,518 | 2,961 | 4.28 | ||||||||||||||||||
Total interest-bearing liabilities | 685,652 | 5,226 | 3.02 | % | 629,123 | 5,482 | 3.47 | % | ||||||||||||||||
Non-interest-bearing deposits | 32,383 | 29,294 | ||||||||||||||||||||||
Other liabilities | 3,211 | 2,804 | ||||||||||||||||||||||
Total liabilities | 721,246 | 661,221 | ||||||||||||||||||||||
Stockholders’ equity | 74,560 | 57,496 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 795,806 | $ | 718,717 | ||||||||||||||||||||
Net interest rate spread | 2.26 | % | 2.21 | % | ||||||||||||||||||||
Net interest income | $ | 5,042 | $ | 4,443 | ||||||||||||||||||||
Net interest margin on average earning assets | 2.59 | % | 2.54 | % | ||||||||||||||||||||
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NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
SUMMARY
The Company reported net income available to common shareholders of $3.0 million, or $0.66 per diluted common share, as compared to a net loss of $(6.4) million, or $(1.42) per diluted common share, for the nine months ended September 30, 2009 and 2008, respectively. The largest factor in 2009’s year-to-date results was the increase in the FDIC deposit insurance premiums which totaled $1.0 million for the nine months ended September 30, 2009 versus $47,000 in the comparable quarter of 2008. This reflects the aforementioned special deposit assessment of $370,000 in 2009 that was assessed to all financial institutions. Other significant factors were the elimination of Fannie Mae and Freddie Mac preferred stock dividends and the suspension of FHLBB dividends that together resulted in a decrease of $780,000 for 2009 from the results for the comparable nine month period in 2008. Partially offsetting these impacts were gains on sales of investments of $1.0 million in the nine months ended September 30, 2009 compared to none in the comparable nine month period in 2008. The largest factor in 2008’s year-to-date results was the non-cash impairment write-down on investments in Fannie Mae and Freddie Mac preferred stock totaling $(9.4) million or $(2.10) per diluted share. The normalized earnings excluding the non-cash impairment write-down totaled $3.0 million, or $0.67 per share, for the nine months ended September 30, 2008.
Net Interest Income:
Net interest income for the nine months ended September 30, 2009 increased by $1.8 million, or 14.2%, to $14.3 million from $12.6 million for the same period of 2008. The net interest rate spread increased to 2.19% for the nine months ended September 30, 2009 versus 2.15% for the same period of 2008. Interest income for the nine months ended September 30, 2009 increased $1.6 million primarily due to higher average loan balances compared to the same period of 2008. Coupled with the increase in total interest income was a decrease of $154,000 in total interest expense primarily due to a decrease in average deposit rates. Net interest margin remained stable at 2.53% for the nine months ended September 30, 2009 and 2008, respectively.
Interest and Dividend Income:
Interest and dividend income increased $1.6 million, or 5.7%, during the first nine months of 2009 versus the same period in 2008, primarily due to a rise in average loan balances.
Average loan interest rates decreased 55 basis points from 6.38% to 5.83% during the first nine months of 2009 as compared to the same period of 2008, resulting in a decrease of $1.8 million to interest income. Average loan balances rose $96.6 million, or 24.7%, from $390.3 million in 2008 to $486.8 million in 2009, contributing $4.4 million to interest income.
Average investment security interest rates decreased 44 basis points during the first nine months of 2009, from 4.98% in 2008 to 4.54% in 2009, resulting in a decrease of $829,000 to interest income. Average investment security balances declined $1.2 million, from $271.6 million in 2008 to $270.3 million in 2009, resulting in a decrease of $119,000 to interest income. In connection with the conservatorship of Fannie Mae and Freddie Mac, in the third quarter of 2008 future dividend payments of those entities ceased. During the first nine months of 2009, the Company recognized no dividend income from FNMA and FHLMC preferred stock while dividend income from its preferred stock investments of $436,000 was recognized in the first nine months of 2008. FHLB stock dividends have also been suspended indefinitely. These dividends amounted to $344,000 in the nine months ended September 30, 2008 compared to zero in 2009.
Interest Expense:
Interest expense decreased $154,000, or 0.9%, during the first nine months of 2009, from $16.2 million in 2008 to $16.1 million in the same period of 2009, primarily due to the rise in average deposit and average borrowed funds volumes.
Average deposit interest rates decreased 61 basis points, from 3.13% to 2.52% in the first nine months of 2009 as compared to the same period of 2008, decreasing interest expense by $1.7 million. Average interest-bearing deposit
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balances increased by $87.5 million or 27.1%, from $323.3 million in 2008 to $410.8 million in 2009, accompanied by a change in the mix resulting in a preference for higher costing certificates of deposit and high rate promotional savings accounts, which increased interest expense by $1.8 million.
Average borrowed funds interest rates decreased 9 basis points from 4.30% in the first nine months of 2008 to 4.21% in the same period of 2009, resulting in a decrease of $182,000 to interest expense. Average borrowed funds balances declined $4.6 million, or 1.7%, from $268.8 million in 2008 to $264.3 million in 2009. This decrease resulted in a decline in interest expense of $152,000 due primarily to a decrease in longer term borrowed funds.
Provision for Loan Losses:
The provision for loan losses totaled $1.1 million and $835,000 for the nine months ended September 30, 2009 and 2008, respectively. The provisions in 2009 and 2008 reflect management’s analysis of loan growth and changes in risk during the first nine months of 2009 and 2008 with the highest levels of growth coming from the commercial real estate and residential loan portfolio. The balance of the allowance for loan losses grew to $6.6 million at September 30, 2009, from $5.5 million at September 30, 2008.
Non-Interest Income (Loss):
Non-interest income increased $10.4 million, or 133.2%, for the nine months ended September 30, 2009 to $2.6 million in 2009 versus a loss of $(7.8) million in 2008. The largest factor in 2009 was the gains on sales of investments of $1.0 million as compared to none in the first nine months of 2008. The non-cash impairment write-down totaled $(9.4) million in 2008. Normalized non-interest income, excluding the non-cash impairment write-down totaled $1.5 million in 2008. Deposit account fees decreased $72,000, or 9.2%, to $710,000 from $782,000 for the nine months ended September 30, 2009 and 2008, respectively, due mainly to a decrease of $37,000 in NOW account fees. Loan servicing fees increased by $50,000, or 50.0%, to $150,000 from $100,000 for the nine months ended September 30, 2009 and 2008, respectively, due to increased refinancing activity. Income on bank-owned life insurance increased $47,000 to $364,000 for the nine months ended September 30, 2009 from $317,000 for the same period in 2008. Other income increased modestly to $347,000 from $341,000 for the nine months ended September 30, 2009 and 2008, respectively.
Non-Interest Expense:
Non-interest expenses increased $1.6 million, or 17.7%, during the first nine months of 2009 to $10.3 million versus $8.8 million for the same period of 2008 primarily resulting from the increase of $975,000 in FDIC deposit insurance premiums which totaled $1.0 million and $47,000 in the nine months ended September 30, 2009 versus 2008, respectively, and an increase in other expenses due to an increase in loan workout expenses. Included in the year-to-date FDIC deposit insurance premiums of $1.0 million was a charge for the special FDIC deposit assessment of $370,000. Salary and employee benefits increased $50,000, or 1.0%, to $5.0 million for the nine months ended September 30, 2009 and 2008, respectively, due to the increase in head count for full staffing of the new Derry, New Hampshire, branch as well as an increase in medical insurance costs. Occupancy and equipment expense increased $92,000, or 9.3%, to $1.1 million in the first nine months of 2009 from $985,000 in the same period of 2008 due mainly to an increase in building repairs and maintenance coupled with an increase in depreciation of the new Derry, NH branch. Data processing expense amounted to $702,000 versus $705,000 in the first nine months of 2009 and 2008, respectively. Professional fees increased $28,000, or 6.6%, to $450,000 in the first nine months of 2009 from $422,000 in the first nine months of 2008 due primarily to an increase in legal fees and regulatory exam assessments. Marketing expenses increased $30,000, or 8.7%, to $374,000 in the first nine months of 2009 from $344,000 for the comparable period of 2008 primarily due to increased marketing campaigns for the opening of the new Derry, New Hampshire branch. OREO expense totaled $6,000 in the nine months ended September 30, 2009 compared to $116,000 in 2008. Other expenses increased $496,000, or 41.1%, to $1.7 million in the first nine months of 2009 from $1.2 million in the same period of 2008 due primarily to an increase in loan workout expenses associated with one nonaccrual loan in the amount of $231,000 and expenses associated with a third party debit card fraud in the amount of $70,000. These increases were coupled with increases in recurring costs such as printing costs, telephone expenses and office supplies, primarily in conjunction with the Derry, New Hampshire branch opening in January 2009.
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Income Taxes:
The Company reported an income tax expense of $1.9 million for the nine months ended September 30, 2009 for an effective income tax rate of 34.8%. This compares to an income tax expense of $1.5 million for the nine months ended September 30, 2008 for an effective income tax rate of 33.1%, excluding the non-cash impairment write-down.
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The following table presents the Company’s average balance sheet, net interest income and average interest rates for the nine months ended September 30, 2009 and 2008. Average loans include non-performing loans.
Nine months ended | Nine months ended | |||||||||||||||||||||||
9/30/09 | 9/30/08 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Average | Interest | Average | Interest | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Investment securities: | ||||||||||||||||||||||||
Short-term investments | $ | 14,715 | $ | 22 | 0.20 | % | $ | 10,424 | $ | 167 | 2.14 | % | ||||||||||||
U. S. Treasury and government- sponsored enterprise obligations | 23,153 | 519 | 3.00 | 23,825 | 726 | 4.07 | ||||||||||||||||||
Corporate and other investment securities | 19,456 | 360 | 2.47 | 27,660 | 1,161 | 5.61 | ||||||||||||||||||
Collateralized mortgage obligations and mortgage- backed securities | 213,031 | 8,283 | 5.20 | 209,667 | 8,078 | 5.15 | ||||||||||||||||||
Total investment securities | 270,355 | 9,184 | 4.54 | 271,576 | 10,132 | 4.98 | ||||||||||||||||||
Loans: | ||||||||||||||||||||||||
Residential real estate | 122,118 | 5,029 | 5.51 | 92,535 | 3,898 | 5.63 | ||||||||||||||||||
Home equity | 24,661 | 754 | 4.09 | 22,645 | 907 | 5.35 | ||||||||||||||||||
Consumer | 683 | 35 | 6.85 | 1,002 | 49 | 6.53 | ||||||||||||||||||
Total retail loans | 147,462 | 5,818 | 5.28 | 116,182 | 4,854 | 5.58 | ||||||||||||||||||
Construction and land | 66,769 | 2,759 | 5.52 | 63,290 | 3,099 | 6.54 | ||||||||||||||||||
Commercial real estate | 242,157 | 11,545 | 6.37 | 183,949 | 9,401 | 6.83 | ||||||||||||||||||
Commercial | 30,447 | 1,094 | 4.80 | 26,837 | 1,282 | 6.38 | ||||||||||||||||||
Total corporate loans | 339,373 | 15,398 | 6.07 | 274,076 | 13,782 | 6.72 | ||||||||||||||||||
Total loans | 486,835 | 21,216 | 5.83 | 390,258 | 18,636 | 6.38 | ||||||||||||||||||
Total interest-earning assets | 757,190 | 30,400 | 5.37 | % | 661,834 | 28,768 | 5.81 | % | ||||||||||||||||
Allowance for loan losses | (6,219 | ) | (5,032 | ) | ||||||||||||||||||||
Other assets | 30,745 | 26,843 | ||||||||||||||||||||||
Total assets | $ | 781,716 | $ | 683,645 | ||||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
NOW and super NOW accounts | $ | 18,419 | $ | 27 | 0.20 | % | $ | 17,933 | $ | 26 | 0.19 | % | ||||||||||||
Regular savings accounts | 69,294 | 685 | 1.32 | 37,929 | 332 | 1.17 | ||||||||||||||||||
Money market accounts | 80,245 | 911 | 1.52 | 80,532 | 1,439 | 2.39 | ||||||||||||||||||
Certificates of deposit and escrow | 242,867 | 6,123 | 3.37 | 186,942 | 5,769 | 4.12 | ||||||||||||||||||
Total interest-bearing deposits | 410,825 | 7,746 | 2.52 | 323,336 | 7,566 | 3.13 | ||||||||||||||||||
Borrowed funds: | ||||||||||||||||||||||||
Long-term borrowed funds | 255,207 | 8,265 | 4.33 | 259,933 | 8,519 | 4.38 | ||||||||||||||||||
Short-term borrowed funds | 9,067 | 47 | 0.69 | 8,913 | 127 | 1.90 | ||||||||||||||||||
Total borrowed funds | 264,274 | 8,312 | 4.21 | 268,846 | 8,646 | 4.30 | ||||||||||||||||||
Total interest-bearing liabilities | 675,099 | 16,058 | 3.18 | % | 592,182 | 16,212 | 3.66 | % | ||||||||||||||||
Non-interest-bearing deposits | 30,403 | 28,817 | ||||||||||||||||||||||
Other liabilities | 3,055 | 2,939 | ||||||||||||||||||||||
Total liabilities | 708,557 | 623,938 | ||||||||||||||||||||||
Stockholders’ equity | 73,159 | 59,707 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 781,716 | $ | 683,645 | ||||||||||||||||||||
Net interest rate spread | 2.19 | % | 2.15 | % | ||||||||||||||||||||
Net interest income | $ | 14,342 | $ | 12,556 | ||||||||||||||||||||
Net interest margin on average earning assets | 2.53 | % | 2.53 | % | ||||||||||||||||||||
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LIQUIDITY AND CAPITAL RESOURCES:
The Company’s primary source of funds is cash dividends from its wholly-owned subsidiary, River Bank. The Bank did not pay dividends to the Company in the first nine months of 2009 and 2008, respectively.
The Bank’s primary sources of funds include collections of principal payments and repayments on outstanding loans, investment security maturities and amortization, increases in deposits, advances from the FHLBB and securities sold under agreements to repurchase.
Based on its monitoring of deposit trends and its current pricing strategy for deposits, management believes the Company will retain a large portion of its existing deposit base. Continued deposit growth during the remainder of 2009 will depend on several factors, including the interest rate environment and competitor pricing. The Company also considers the use of brokered certificates of deposit as an additional source of deposits and evaluates them in conjunction with its own retail certificates of deposit.
The Bank has a collateralized line of credit of $3.0 million with the FHLBB. At September 30, 2009, the entire $3.0 million was available. In addition, the Bank established a collateralized line of credit with the Federal Reserve Bank discount window for $15.0 million which was available in its entirety at September 30, 2009.
The FHLBB requires member banks to maintain qualified collateral for its advances. Collateral is comprised of the Bank’s residential mortgage portfolio, certain commercial real estate loans, home equity lines and loans and the portion of the investment portfolio that meets FHLBB qualifying collateral requirements and has been designated as such. The Bank’s borrowing capacity at the FHLBB at September 30, 2009 was $296.4 million, of which $209.1 million had been borrowed.
At September 30, 2009, the Company’s stockholders’ equity totaled $76.4 million, an increase of $4.2 million when compared to $72.1 million at December 31, 2008. The increase was primarily attributable to net income of $3.6 million coupled with an increase in the net unrealized gain on investment securities available for sale of $2.0 million, net of tax, partially offset by cash dividends to common shareholders of $1.1 million and cash dividends to preferred shareholders of $507,000.
Each of the Company and the Bank was “well-capitalized” for bank regulatory purposes as of September 30, 2009. The following table presents the Company’s and the Bank’s capital ratios at September 30, 2009, December 31, 2008, and September 30, 2008:
Regulatory Threshold | ||||||||||||||||
for “Well Capitalized” | ||||||||||||||||
Category | 09/30/09 | 12/31/08 | 09/30/08 | |||||||||||||
LSB Corporation Tier 1 risk-based | 6.0 | % | 12.64 | % | 13.30 | % | 10.62 | % | ||||||||
River Bank Tier 1 leverage ratio | 5.0 | % | 8.17 | % | 8.18 | % | 7.33 | % | ||||||||
River Bank Tier 1 risk-based | 6.0 | % | 11.54 | % | 11.83 | % | 10.54 | % | ||||||||
River Bank total risk-based | 10.0 | % | 12.72 | % | 12.97 | % | 11.64 | % |
The modest decline in the Company’s and the Bank’s regulatory capital ratios was primarily attributable to the increase in total assets as well as the mix of assets changing from investments to loans since December 31, 2008.
After the end of the quarter ended September 30, 2009, on October 20, 2009, the Bank entered into an unsecured subordinated debt agreement (the “agreement”) in the amount of $6.0 million which matures on October 20, 2016. The agreement calls for a fixed interest rate of 8.5% and equal annual principal payments commencing on the third anniversary. The Company expects that the entire amount of the subordinated debt will be included as part of the Bank’s Tier 2 capital as of December 31, 2009.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Management believes there have been no material changes to the discussion under the sub-caption “Interest Rate Sensitivity” of the caption “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” of the Company’s 2008 Annual Report on Form 10-K which is incorporated by reference.
ITEM 4T: CONTROLS AND PROCEDURES
The Company’s chief executive officer and chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report (the “Evaluation Date”), have concluded that as of the Evaluation Date the Company’s disclosure controls and procedures were effective and designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
During the period covered by this quarterly report, there were no changes in the Company’s internal controls that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Bank is involved in various legal proceedings incidental to its business. During the three months ended September 30, 2009, no new legal proceeding was filed or terminated and no material development in any pending legal proceeding occurred that the Company expects will have a material adverse effect on its financial condition or operating results.
ITEM 1A. RISK FACTORS
Other than the risk factor discussed below and the risk factor set forth in the Company’s Quarterly Report on Form 10Q for the quarter ended March 31, 2009, management believes that there have been no material changes in the Company’s risk factors as reported in the Annual Report on Form 10-K for the year ended December 31, 2008.
When the Company becomes subject to the full SEC requirements under Section 404 of the Sarbanes-Oxley Act of 2002, it will likely incur significant costs in connection with first providing internal control reports.Under current SEC regulations, as a “smaller reporting company” under the federal securities laws, the Company became subject to the management reporting component for its year ended December 31, 2007, and will become subject to the outside auditors’ attestation component of Section 404 of the Sarbanes-Oxley Act of 2002 for its year ending December 31, 2010. Section 404 requires that the Company prepare a management report on its internal control over financial reporting and obtain an attestation on that report from its auditors in connection with its most recent consolidated financial statements included with its annual report. During the past several years, many SEC reporting companies have incurred significant costs in connection with first providing internal control reports. The Company will likely incur significant costs in connection with obtaining the outside auditors’ attestation report of the Company’s internal control reports. If the Company does incur such costs, the costs could have an adverse effect on the Company’s results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) | None. | ||
(b) | None. |
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(c) | None. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
(a) | None. | ||
(b) | None. |
ITEM 6. EXHIBITS
Number | Description | |
2 | Plan of Reorganization and Acquisition, dated as of March 12, 2001 between LSB Corporation and Lawrence Savings Bank (Filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and incorporated herein by reference) | |
3(i).1 | Articles of Organization of LSB Corporation (Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and incorporated by reference) | |
3(i).2 | Articles of Amendment of the Articles of Organization of LSB Corporation, as submitted for filing in the Office of the Secretary of the Commonwealth of Massachusetts on December 30, 2005, (Filed as Exhibit 3(i).1 to the Company’s Current Report on Form 8-K filed January 6, 2006, and incorporated herein by reference) | |
3(ii) | Amended and Restated By-Laws of LSB Corporation (Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed October 31, 2007, and incorporated herein by reference) | |
3(iii) | Lawrence Savings Bank Certificate of Vote of Directors Establishing a Series of a Class of Stock (Filed as Exhibit 3(iii) to the Company’s 2005 Annual Report on Form 10-K and incorporated herein by reference) | |
4.1 | Specimen certificate of shares of common stock of the Company (Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and incorporated herein by reference) | |
4.2 | Renewed Rights Agreement dated as of November 17, 2005, between LSB Corporation and Computershare Trust Company, N.A., as Rights Agent (Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed January 31, 2006, and incorporated herein by reference) | |
10.1 | Subordinated Debt Agreement dated October 20, 2009, between River Bank and Commerce Bank & Trust Company (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 23, 2009, and incorporated herein by reference). | |
31.1 | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. |
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Table of Contents
Number | Description | |
32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002. |
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Table of Contents
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.
LSB CORPORATION | ||||
November 12, 2009 | /s/ Gerald T. Mulligan | |||
Gerald T. Mulligan | ||||
President and Chief Executive Officer | ||||
November 12, 2009 | /s/ Diane L. Walker | |||
Diane L. Walker | ||||
Executive Vice President, Treasurer and Chief Financial Officer |
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Table of Contents
LSB CORPORATION AND SUBSIDIARY
Quarterly Report on Form 10-Q for the nine months ended September 30, 2009
Quarterly Report on Form 10-Q for the nine months ended September 30, 2009
EXHIBIT INDEX
Page | ||||||
31.1 | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 | 30 | ||||
31.2 | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 | 31 | ||||
32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002 | 32 | ||||
32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002 | 33 |
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