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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 March 31, 2010
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 Filero | Accelerated Filero | Non-Accelerated Filero | Smaller Reporting Companyþ | |||
(Do not check if a smaller reporting company) |
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 May 7, 2010 | |
Common Stock, par value $.10 per share | 4,506,686 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)
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(In thousands, except share data) | ||||||||
ASSETS | ||||||||
Assets: | ||||||||
Cash and due from banks | $ | 7,940 | $ | 8,615 | ||||
Federal funds sold | 13,423 | 6,597 | ||||||
Total cash and cash equivalents | 21,363 | 15,212 | ||||||
Investment securities available for sale, at fair value, amortized cost of $199,546 in 2010 and $224,130 in 2009 | 206,450 | 230,533 | ||||||
Federal Home Loan Bank stock, at cost | 11,825 | 11,825 | ||||||
Loans, net of allowance for loan losses of $7,277 in 2010 and $7,168 in 2009 | 537,176 | 529,451 | ||||||
Premises and equipment, net | 7,700 | 7,209 | ||||||
Accrued interest receivable | 2,593 | 2,727 | ||||||
Deferred income tax asset, net | 3,998 | 4,315 | ||||||
Bank-owned life insurance | 11,235 | 11,120 | ||||||
Prepaid FDIC insurance | 2,867 | 3,069 | ||||||
Other assets | 1,360 | 1,137 | ||||||
Total assets | $ | 806,567 | $ | 816,598 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Liabilities: | ||||||||
Core deposits | $ | 277,762 | $ | 252,389 | ||||
Term deposits | 226,556 | 240,405 | ||||||
Total deposits | 504,318 | 492,794 | ||||||
Long-term borrowed funds | 226,930 | 245,971 | ||||||
Short-term borrowed funds | 3,095 | 7,111 | ||||||
Subordinated debt | 6,000 | 6,000 | ||||||
Mortgagors’ escrow accounts | 1,028 | 776 | ||||||
Other liabilities | 3,157 | 3,426 | ||||||
Total liabilities | 744,528 | 756,078 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, Series A, $.10 par value per share; 5,000,000 shares authorized, none issued | — | — | ||||||
Common stock, $.10 par value per share; 20,000,000 shares authorized; 4,506,686 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively | 451 | 451 | ||||||
Additional paid-in capital | 60,004 | 60,004 | ||||||
Accumulated deficit | (2,571 | ) | (3,802 | ) | ||||
Accumulated other comprehensive income, net of tax | 4,155 | 3,867 | ||||||
Total stockholders’ equity | 62,039 | 60,520 | ||||||
Total liabilities and stockholders’ equity | $ | 806,567 | $ | 816,598 | ||||
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
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LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(In thousands, except share data) | ||||||||
Interest and dividend income: | ||||||||
Loans | $ | 7,706 | $ | 6,677 | ||||
Investment securities available for sale | 2,379 | 3,364 | ||||||
Short-term investments | 8 | 4 | ||||||
Total interest and dividend income | 10,093 | 10,045 | ||||||
Interest expense: | ||||||||
Deposits | 2,231 | 2,659 | ||||||
Long-term borrowed funds | 2,495 | 2,774 | ||||||
Short-term borrowed funds | 3 | 40 | ||||||
Subordinated debt | 129 | — | ||||||
Total interest expense | 4,858 | 5,473 | ||||||
Net interest income | 5,235 | 4,572 | ||||||
Provision for loan losses | 700 | 240 | ||||||
Net interest income after provision for loan losses | 4,535 | 4,332 | ||||||
Non-interest income: | ||||||||
Deposit account fees | 223 | 223 | ||||||
Loan servicing fees, net | 82 | 52 | ||||||
Gains on sales of securities | 697 | 227 | ||||||
Income on bank-owned life insurance | 115 | 124 | ||||||
Prepayment penalty on FHLB advances | (149 | ) | — | |||||
Other income | 123 | 105 | ||||||
Total non-interest income | 1,091 | 731 | ||||||
Non-interest expense: | ||||||||
Salaries and employee benefits | 1,816 | 1,743 | ||||||
Occupancy and equipment | 475 | 374 | ||||||
Data processing | 240 | 241 | ||||||
Professional | 112 | 185 | ||||||
Marketing | 145 | 142 | ||||||
Other real estate owned | 5 | 1 | ||||||
FDIC deposit insurance | 211 | 391 | ||||||
Other | 476 | 546 | ||||||
Total non-interest expense | 3,480 | 3,623 | ||||||
Income before income tax expense | 2,146 | 1,440 | ||||||
Income tax expense | 600 | 476 | ||||||
Net income before preferred stock dividends and accretion | 1,546 | 964 | ||||||
Preferred stock dividends and accretion | — | (159 | ) | |||||
Net income available to common shareholders | $ | 1,546 | $ | 805 | ||||
Average basic common shares outstanding | 4,506,686 | 4,470,941 | ||||||
Common stock equivalents | 2,325 | 73 | ||||||
Average diluted common shares outstanding | 4,509,011 | 4,471,014 | ||||||
Basic earnings per common share | $ | 0.34 | $ | 0.18 | ||||
Diluted earnings per common share | $ | 0.34 | $ | 0.18 | ||||
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, 2009 AND THE
THREE MONTHS ENDED MARCH 31, 2010
(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, 2008 | $ | 14,455 | $ | 447 | $ | 60,179 | $ | (6,250 | ) | $ | 3,311 | $ | 72,142 | |||||||||||
Net income | — | — | — | 5,037 | — | 5,037 | ||||||||||||||||||
Other comprehensive income - Unrealized gain on securities available for sale (tax effect $343) | — | — | — | — | 556 | 556 | ||||||||||||||||||
Total comprehensive income | 5,593 | |||||||||||||||||||||||
Stock-based compensation | — | — | 121 | — | — | 121 | ||||||||||||||||||
Exercise of stock options and tax benefits (28,995 shares) | — | 4 | 264 | — | — | 268 | ||||||||||||||||||
Common dividends declared and paid ($0.30 per share) | — | — | — | (1,344 | ) | — | (1,344 | ) | ||||||||||||||||
Preferred dividends declared and paid | — | — | — | (700 | ) | — | (700 | ) | ||||||||||||||||
Accretion of discount on preferred stock | 545 | — | — | (545 | ) | — | — | |||||||||||||||||
Redemption of preferred stock | (15,000 | ) | — | — | — | — | (15,000 | ) | ||||||||||||||||
Repurchase of warrants issued with preferred stock | — | — | (560 | ) | — | — | (560 | ) | ||||||||||||||||
Balance at December 31, 2009 | — | 451 | 60,004 | (3,802 | ) | 3,867 | 60,520 | |||||||||||||||||
Net income | — | — | — | 1,546 | — | 1,546 | ||||||||||||||||||
Other comprehensive income - Unrealized gain on securities available for sale (tax effect $213) | — | — | — | — | 288 | 288 | ||||||||||||||||||
Total comprehensive income | 1,834 | |||||||||||||||||||||||
Dividends declared and paid ($0.07 per common share) | — | — | — | (315 | ) | — | (315 | ) | ||||||||||||||||
Balance at March 31, 2010 | $ | — | $ | 451 | $ | 60,004 | $ | (2,571 | ) | $ | 4,155 | $ | 62,039 | |||||||||||
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)
(UNAUDITED)
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,546 | $ | 964 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 700 | 240 | ||||||
Gains on sales of securities | (697 | ) | (227 | ) | ||||
Net accretion of investment securities | (57 | ) | (202 | ) | ||||
Depreciation and amortization of premises and equipment | 174 | 137 | ||||||
Decrease (increase) in accrued interest receivable | 134 | (61 | ) | |||||
Deferred income tax provision | 105 | 132 | ||||||
Stock-based compensation | — | 8 | ||||||
Income on bank-owned life insurance | (115 | ) | (124 | ) | ||||
(Increase) decrease in other assets and prepaid FDIC Insurance | (22 | ) | 96 | |||||
(Decrease) increase in other liabilities | (269 | ) | 333 | |||||
Net cash provided by operating activities | 1,499 | 1,296 | ||||||
Cash flows from investing activities: | ||||||||
Proceeds from maturities of investment securities available for sale | 11,779 | — | ||||||
Proceeds from sales of investment securities available for sale | 15,631 | 3,457 | ||||||
Purchases of investment securities available for sale | (15,844 | ) | (7,173 | ) | ||||
Principal payments of investment securities available for sale | 13,772 | 20,132 | ||||||
Loan originations, net of principal payments | (8,425 | ) | (20,524 | ) | ||||
Loans purchased | — | (6,837 | ) | |||||
Purchases of premises and equipment | (665 | ) | (246 | ) | ||||
Net cash provided by (used in) investing activities | 16,248 | (11,191 | ) | |||||
Cash flows from financing activities: | ||||||||
Net increase in deposits | 11,524 | 25,024 | ||||||
Additions to long-term borrowed funds | 9,000 | — | ||||||
Payments on long-term borrowed funds | (28,041 | ) | (2,039 | ) | ||||
Net decrease in short-term borrowed funds | (4,016 | ) | (7,366 | ) | ||||
Increase in mortgagors’ escrow accounts | 252 | 132 | ||||||
Dividends paid to preferred shareholders | — | (131 | ) | |||||
Dividends paid to common shareholders | (315 | ) | (671 | ) | ||||
Net cash (used in) provided by financing activities | (11,596 | ) | 14,949 | |||||
Net increase in cash and cash equivalents | 6,151 | 5,054 | ||||||
Cash and cash equivalents, beginning of period | 15,212 | 13,328 | ||||||
Cash and cash equivalents, end of period | $ | 21,363 | $ | 18,382 | ||||
Cash paid during the period for: | ||||||||
Interest on deposits | $ | 2,235 | $ | 2,666 | ||||
Interest on borrowed funds | 2,727 | 2,849 | ||||||
Income taxes | 692 | 367 |
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
March 31, 2010
March 31, 2010
(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, 2009 filed with the Securities and Exchange Commission.
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2. INVESTMENTS
The following table reflects the components and carrying values of the investment securities portfolio at March 31, 2010 and December 31, 2009:
3/31/10 | 12/31/09 | |||||||||||||||||||||||||||||||
Amortized | Unrealized | Fair | Amortized | Unrealized | Fair | |||||||||||||||||||||||||||
Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||||||||||
U.S. Treasury obligations | $ | 5,552 | $ | 254 | $ | — | $ | 5,806 | $ | 5,557 | $ | 237 | $ | — | $ | 5,794 | ||||||||||||||||
Government-sponsored enterprise obligations (1) | 32,717 | 218 | (16 | ) | 32,919 | 33,379 | 188 | (49 | ) | 33,518 | ||||||||||||||||||||||
Residential mortgage-backed: | ||||||||||||||||||||||||||||||||
U.S. government guaranteed | 14,229 | 470 | — | 14,699 | 16,037 | 483 | — | 16,520 | ||||||||||||||||||||||||
Government-sponsored enterprises | 102,532 | 5,474 | (6 | ) | 108,000 | 118,537 | 5,543 | (71 | ) | 124,009 | ||||||||||||||||||||||
Residential collateralized mortgage obligations: | ||||||||||||||||||||||||||||||||
U.S. government guaranteed | 26,246 | 193 | (13 | ) | 26,426 | 21,965 | 94 | (80 | ) | 21,979 | ||||||||||||||||||||||
Government-sponsored enterprises | 13,532 | 217 | (1 | ) | 13,748 | 21,283 | 389 | — | 21,672 | |||||||||||||||||||||||
Private-label | 1,271 | 149 | — | 1,420 | 1,415 | 93 | — | 1,508 | ||||||||||||||||||||||||
Corporate obligations | — | — | — | — | 2,489 | — | (111 | ) | 2,378 | |||||||||||||||||||||||
Total debt securities | 196,079 | 6,975 | (36 | ) | 203,018 | 220,662 | 7,027 | (311 | ) | 227,378 | ||||||||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||
Mutual funds | 1,000 | — | (25 | ) | 975 | 1,000 | — | (34 | ) | 966 | ||||||||||||||||||||||
Equity securities | 2,467 | — | (10 | ) | 2,457 | 2,468 | — | (279 | ) | 2,189 | ||||||||||||||||||||||
Total equity securities | 3,467 | — | (35 | ) | 3,432 | 3,468 | — | (313 | ) | 3,155 | ||||||||||||||||||||||
Total investment securities | $ | 199,546 | $ | 6,975 | $ | (71 | ) | $ | 206,450 | $ | 224,130 | $ | 7,027 | $ | (624 | ) | $ | 230,533 | ||||||||||||||
(1) | Government-sponsored enterprise obligations include investment securities issued by government sponsored enterprises (“GSEs”) such as Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal Home Loan Bank (“FHLB”). These investment securities do not represent obligations of the U.S. Government and are not backed by the full faith and credit of the Treasury. |
The net unrealized gains on securities available for sale at March 31, 2010 totaled $6.9 million, or $4.2 million net of taxes. One preferred equity security is on the Bank’s securities watch list due to its current credit rating by external, independent rating agencies. Management believes that the Company will collect all amounts due on this investment in accordance with its contractual terms. The cost of this investment totaled $2.0 million at March 31, 2010, with an unrealized loss of $10,000, or 0.5% of cost. This watch list security recovered a significant portion of the unrealized losses during the fourth quarter of 2009 and the first quarter of 2010 due to the improved outlook of the issuer. 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 this security on a monthly basis, does not intend to sell the security, and it is not more likely than not that the Company will be required to sell the security before recovery of its cost. Therefore, management does not consider this investment to be other-than-temporarily impaired at March 31, 2010. The remainder of the gross unrealized losses resulted from changes in interest rates and are not material as of March 31, 2010.
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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 March 31, 2010.
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||
Government-sponsored enterprise obligations | $ | 15,365 | $ | (16 | ) | $ | — | $ | — | $ | 15,365 | $ | (16 | ) | ||||||||||
Residential mortgage- backed securities | — | — | 1,267 | (6 | ) | 1,267 | (6 | ) | ||||||||||||||||
Residential collateralized mortgage obligations | 10,327 | (14 | ) | — | — | 10,327 | (14 | ) | ||||||||||||||||
Total debt securities | 25,692 | (30 | ) | 1,267 | (6 | ) | 26,959 | (36 | ) | |||||||||||||||
Equity securities: | ||||||||||||||||||||||||
Mutual funds | — | — | 975 | (25 | ) | 975 | (25 | ) | ||||||||||||||||
Equity securities | — | — | 2,030 | (10 | ) | 2,030 | (10 | ) | ||||||||||||||||
Total equity securities | — | — | 3,005 | (35 | ) | 3.005 | (35 | ) | ||||||||||||||||
Total temporarily impaired securities | $ | 25,692 | $ | (30 | ) | $ | 4,272 | $ | (41 | ) | $ | 29,964 | $ | (71 | ) | |||||||||
The Company realized gross gains of $702,000 and gross losses of $5,000 on the sale of $15.6 million of investments available for sale in the first three months of 2010.
The following table is a summary of the contractual maturities of debt securities available for sale at March 31, 2010. These amounts exclude mutual funds and equity securities, which have no contractual maturities. 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) | ||||||||
Debt securities: | ||||||||
Within 1 year | $ | 978 | $ | 978 | ||||
After 1 year through 5 years | 44,945 | 45,565 | ||||||
After 5 years through 10 years | 22,656 | 23,066 | ||||||
After 10 years | 127,500 | 133,409 | ||||||
Total debt securities | $ | 196,079 | $ | 203,018 | ||||
Investment securities pledged as collateral for customer repurchase and wholesale repurchase agreements at March 31, 2010 totaled $6.5 million and $46.2 million, respectively.
3. CONTINGENCIES
The Bank is involved in various legal proceedings incidental to its business. During the quarter ended March 31, 2010, 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.
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4. FAIR VALUES OF ASSETS AND LIABILITIES
The estimated fair values of the Company’s financial instruments at March 31, 2010 and December 31, 2009, follow:
March 31, 2010 | December 31, 2009 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
(In thousands) | ||||||||||||||||
Financial assets: | ||||||||||||||||
Cash and due from banks | $ | 7,940 | $ | 7,940 | $ | 8,615 | $ | 8,615 | ||||||||
Short-term investments | 13,423 | 13,423 | 6,597 | 6,597 | ||||||||||||
Investment securities available for sale | 206,450 | 206,450 | 230,533 | 230,533 | ||||||||||||
Federal Home Loan Bank stock | 11,825 | 11,825 | 11,825 | 11,825 | ||||||||||||
Accrued interest receivable | 2,593 | 2,593 | 2,727 | 2,727 | ||||||||||||
Loans, net | 537,176 | 536,693 | 529,451 | 526,087 | ||||||||||||
Financial liabilities: | ||||||||||||||||
Core deposits | 277,762 | 277,762 | 252,389 | 252,389 | ||||||||||||
Certificates of deposit | 226,556 | 230,326 | 240,405 | 244,002 | ||||||||||||
Borrowed funds | 236,025 | 249,788 | 259,082 | 272,320 | ||||||||||||
Mortgagors’ escrow accounts | 1,028 | 1,028 | 776 | 776 | ||||||||||||
Accrued interest payable | 882 | 882 | 987 | 987 |
The fair values for cash and short-term investments approximate their carrying amounts because of the short-term nature of the assets. 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 from an independent pricing service that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. The Company did not make any changes to the input factors used by the external pricing service. 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. The fair value of stock in the Federal Home Loan Bank of Boston is based upon the redemption value of the stock which equates to its carrying value. 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 estimated using 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 the liabilities. 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.
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
Assets measured at fair value on a recurring basis at March 31, 2010 and December 31, 2009, are summarized below. There are no liabilities measured at fair value on a recurring basis. The Company had no transfers into or out of Levels 1, 2 or 3 during the three months ended March 31, 2010.
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2010 | Level 1 | Level 2 | Level 3 | Fair Value | ||||||||||||
(In thousands) | ||||||||||||||||
Investment securities available for sale: | ||||||||||||||||
U.S. Treasury obligations | $ | 5,806 | $ | — | $ | — | $ | 5,806 | ||||||||
All other debt securities | — | 197,212 | — | 197,212 | ||||||||||||
Equity securities | 2,030 | 977 | 425 | 3,432 | ||||||||||||
Total recurring assets | $ | 7,836 | $ | 198,189 | $ | 425 | $ | 206,450 | ||||||||
2009 | Level 1 | Level 2 | Level 3 | Fair Value | ||||||||||||
(In thousands) | ||||||||||||||||
Investment securities available for sale: | ||||||||||||||||
U.S. Treasury obligations | $ | 5,794 | $ | — | $ | — | $ | 5,794 | ||||||||
All other debt securities | — | 221,584 | — | 221,584 | ||||||||||||
Equity securities | 1,760 | 970 | 425 | 3,155 | ||||||||||||
Total recurring assets | $ | 7,554 | $ | 222,554 | $ | 425 | $ | 230,533 | ||||||||
There were no changes in Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2010 and the year ended December 31, 2009. The investments carried under Level 3 assumptions are carried at par value since all redemptions have been made at par value and represent non-marketable securities.
The Company may also be required, from time to time, to measure certain other assets 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. There are no liabilities measured at fair value on a non-recurring basis at March 31, 2010 or December 31, 2009. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the assets measured at fair value on a non-recurring basis as of March 31, 2010 and December 31, 2009. The losses represent the amount of losses recorded during 2010 on the assets held at March 31, 2010 and during 2009 on the assets held at December 31, 2009.
Three months ended | ||||||||||||||||
March 31, 2010 | ||||||||||||||||
2010 | Level 1 | Level 2 | Level 3 | Total Losses | ||||||||||||
(In thousands) | ||||||||||||||||
Impaired loans | $ | — | $ | — | $ | 2,786 | $ | 280 | ||||||||
Year ended | ||||||||||||||||
December 31, 2009 | ||||||||||||||||
2009 | Level 1 | Level 2 | Level 3 | Total Losses | ||||||||||||
(In thousands) | ||||||||||||||||
Impaired loans | $ | — | $ | — | $ | 2,781 | $ | 415 | ||||||||
Losses applicable to impaired loans that are collateral dependent are based on the appraised value of the underlying collateral, discounted as necessary due to management’s estimates of changes in market conditions. The factors used to determine the fair value of such collateral include selling prices of similar properties, expected future cash flows of the subject property and other economic factors. These losses are recorded as a component in determining the overall adequacy of the allowance for loan losses. Adjustments to the estimated fair value of impaired loans may result in increases or decreases to the provision for loan losses.
5. RECENT ACCOUNTING PRONOUNCEMENTS
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. The Company adopted this new guidance on January 1, 2010, as required, and did not 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
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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. The Company adopted this new guidance on January 1, 2010, as required, and did not have a material 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. The Company adopted this new guidance on January 1, 2010, as required, and did not have a material impact on the Company’s Consolidated Financial Statements.
In January 2010, the FASB amended its guidance on fair value measurements and disclosures. These changes increase the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.
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 2009 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 2009 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 2009 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 under different conditions.
EXECUTIVE LEVEL OVERVIEW
The Company recorded first quarter 2010 net income of $1.5 million, or $0.34 per diluted common share, as compared to $805,000, or $0.18 per diluted common share, for the first quarter of 2009. The largest factors affecting the quarterly results were gains on sales of investments totaling $697,000 and $227,000 in the first quarter of 2010 and 2009, respectively, offset in part by FDIC deposit insurance premiums amounting to $211,000 and $391,000 in the same periods, respectively, as well as the preferred stock dividend and accretion of $159,000 in the first quarter of 2009. Another positive factor in the first quarter of 2010 was the $663,000 improvement in net interest income offset by the $460,000 increased loan loss provision from the first quarter of 2009.
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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 Company’s most significant source of revenue and is 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.
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 as well as securities gains or losses.
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 March 31, 2010 was $5.2 million, a 14.5% increase from $4.6 million for the comparable period in 2009, 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 ended March 31, 2010.
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 $806.6 million at March 31, 2010, compared to $816.6 million at December 31, 2009. The decrease in asset size at March 31, 2010 from December 31, 2009 reflected an effort to reduce wholesale funding while increasing deposit growth. The Company experienced local loan growth of $7.8 million or 1.5% from December 31, 2009.
Investments:
The investment securities portfolio totaled $206.5 million, or 25.6% of total assets, at March 31, 2010, a decrease of $24.1 million, compared to $230.5 million, or 28.2% of total assets at December 31, 2009.
During the first three months of 2010, the Bank experienced cash inflows of $13.8 million of investments from principal payments and prepayments, $11.8 million in calls and maturities, as well as $15.6 million in proceeds from
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sales of investments. The funds were reinvested in investment securities purchases totaling $15.8 million, funded new loan originations and paid down maturing FHLBB advances. 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 $7.8 million to $544.5 million and represented 67.5% of total assets at March 31, 2010, versus $536.6 million and 65.7% of total assets, respectively, at December 31, 2009. Retail loans, comprised primarily of residential mortgage loans, increased $3.2 million while corporate loans, comprised mainly of construction and commercial real estate loans, increased $4.7 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 ongoing loan contraction by the larger, regional institutions.
The following table reflects the loan portfolio at March 31, 2010 and December 31, 2009:
3/31/10 | 12/31/09 | |||||||
(In thousands) | ||||||||
Residential real estate | $ | 133,962 | $ | 131,441 | ||||
Home equity lines and second mortgages | 27,707 | 27,003 | ||||||
Consumer | 588 | 657 | ||||||
Retail loans | 162,257 | 159,101 | ||||||
Construction and land development | 61,313 | 62,772 | ||||||
Commercial real estate | 283,448 | 282,716 | ||||||
Commercial business | 37,435 | 32,030 | ||||||
Corporate loans | 382,196 | 377,518 | ||||||
Total loans | 544,453 | 536,619 | ||||||
Allowance for loan losses | (7,277 | ) | (7,168 | ) | ||||
Net loans | $ | 537,176 | $ | 529,451 | ||||
Allowance For Loan Losses:
The following table summarizes changes in the allowance for loan losses for the three months ended March 31, 2010 and 2009:
Three months ended | ||||||||
3/31/10 | 3/31/09 | |||||||
(Dollars in thousands) | ||||||||
Beginning balance | $ | 7,168 | $ | 5,885 | ||||
Provision for loan losses | 700 | 240 | ||||||
Recoveries on loans previously charged-off | 1 | 1 | ||||||
Loans charged-off | (592 | ) | (37 | ) | ||||
Ending balance | $ | 7,277 | $ | 6,089 | ||||
Ratios: | ||||||||
Annualized net charge-offs to average loans outstanding | 0.44 | % | 0.03 | % | ||||
Allowance for loan losses to total loans at end of period | 1.34 | % | 1.27 | % |
The allowance for loan losses increased to $7.3 million at March 31, 2010 compared to $7.2 million and $6.1 million, respectively, at December 31, 2009 and March 31, 2009. The coverage of the allowance for loan losses increased slightly to 1.34% at March 31, 2010 from 1.27% at March 31, 2009. The Company believes that asset quality remains high, as evidenced by the relatively low levels of non-performing and delinquent loans as a
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percentage of total loans and OREO or total assets as defined below. See “Risk Assets” below. The level of loan charge-offs combined with the low levels of delinquent loans and sustained asset quality of the loan portfolio contributed to the assessment of the allowance for loan losses and resulted in the increase in the allowance for loan loss coverage as a percentage of total loans from December 31, 2009 to March 31, 2010. 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 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 that are 90 days or more past due and loans that are 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 $4.8 million at March 31, 2010, compared to $6.0 million at December 31, 2009 and $2.7 million as of March 31, 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. The Bank expects the commercial business non-performing loans totaling $728,000 will be partially protected by a guaranty by the SBA in the amount of $415,000. The decrease in total risk assets in the first quarter of 2010 resulted from one commercial real estate loan for $1.1 million paying all arrearages up to date.
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 $10.0 million and $7.3 million at March 31, 2010 and December 31, 2009, respectively. Of the $10.0 million in impaired loans, $1.7 million represent modifications on residential, owner-occupied properties at March 31, 2010. Additionally, one residential construction loan with a balance of $2.8 million was modified with a lower interest rate as it experienced a slow down in sales activity during the winter months. This residential construction loan matures in the later part of 2010 and is included in the accruing loan portfolio. The Company does not have collateral concerns and the residential construction loan remained current on its payment status. The remaining impaired loans are reported below as nonaccrual loans in the table below in their respective loan category. All of the impaired loans at March 31, 2010, had been measured using either the fair value of the collateral method or the estimated cash flow method. Five of these impaired loans required a related allowance that in the aggregate totaled $120,000. The Company had impaired loans totaling $3.2 million at March 31, 2009.
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The following table summarizes the Company’s risk assets at March 31, 2010, December 31, 2009 and March 31, 2009:
3/31/10 | 12/31/09 | 3/31/09 | ||||||||||
(Dollars in thousands) | ||||||||||||
Non-performing loans: | ||||||||||||
Residential real estate | $ | 1,176 | $ | 1,211 | $ | 209 | ||||||
Construction and land development | 2,027 | 2,527 | 349 | |||||||||
Commercial real estate | 797 | 1,528 | 1,951 | |||||||||
Commercial business | 728 | 683 | — | |||||||||
Equity | 39 | 54 | 67 | |||||||||
Total non-performing loans | 4,767 | 6,003 | 2,576 | |||||||||
Other real estate owned | — | — | 120 | |||||||||
Total risk assets | $ | 4,767 | $ | 6,003 | $ | 2,696 | ||||||
Restructured loans — accruing | $ | 6,224 | $ | 2,634 | $ | 859 | ||||||
Risk assets as a percent of total loans and OREO | 0.88 | % | 1.12 | % | 0.56 | % | ||||||
Risk assets as a percent of total assets | 0.59 | % | 0.74 | % | 0.35 | % | ||||||
Deposits:
Deposits increased $11.5 million during the first three months of 2010 to $504.3 million at March 31, 2010, from $492.8 million at December 31, 2009. Core deposits, consisting of NOW accounts, demand deposit accounts, savings accounts and money market accounts, increased $25.4 million, or 10.1%, amounting to $277.8 million at March 31, 2010, compared to $252.4 million at December 31, 2009. Savings accounts experienced an increase of $10.4 million from December 31, 2009, to $101.1 million at March 31, 2010, primarily due to higher-rate promotional accounts. NOW and money market accounts increased $2.4 million and $12.7 million, respectively, from December 31, 2009, to $23.1 million and $119.4 million, respectively, at March 31, 2010, while demand deposit accounts decreased modestly to $34.2 million at March 31, 2010. Term deposits, comprised of brokered certificates of deposit and certificates of deposit, decreased $13.8 million, or 5.8%, totaling $226.6 million at March 31, 2010, versus $240.4 million at December 31, 2009. Certificates of deposit decreased $4.9 million to $206.1 million at March 31, 2010, while brokered certificates of deposit decreased $8.9 million from December 31, 2009, to $20.4 million at March 31, 2010. The decrease in brokered deposits reflects a maturity of $8.9 million.
Due to the recent turmoil in the financial markets, the Bank has seen an inflow of deposits as evidenced by the 2.3% growth in total deposits during the first three months of 2010. 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 March 31, 2010 and December 31, 2009:
3/31/10 | 12/31/09 | |||||||
(In thousands) | ||||||||
NOW accounts | $ | 23,147 | $ | 20,739 | ||||
Demand deposit accounts | 34,187 | 34,368 | ||||||
Savings accounts | 101,061 | 90,642 | ||||||
Money market accounts | 119,367 | 106,640 | ||||||
Core deposits | 277,762 | 252,389 | ||||||
Brokered certificates of deposit | 20,411 | 29,344 | ||||||
Certificates of deposit | 206,145 | 211,061 | ||||||
Term deposits | 226,556 | 240,405 | ||||||
Total deposits | $ | 504,318 | $ | 492,794 | ||||
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Borrowed Funds:
Borrowed funds consist of long-term and short-term Federal Home Loan Bank of Boston (FHLBB) advances, securities sold under agreements to repurchase and subordinated debt. Total borrowed funds amounted to $236.0 million at March 31, 2010, compared to $259.1 million at December 31, 2009, a decrease of $23.1 million or 8.9%. Short-term borrowed funds decreased $4.0 million from December 31, 2009, due primarily to depositors preference for higher returns, while long-term FHLBB borrowed funds decreased $19.0 million due to maturing advances totaling $23.0 million and $5.0 million in prepayments. Wholesale repurchase agreements remained stable at $40 million at both March 31, 2010 and December 31, 2009. In October 2009, the Bank entered into a subordinated debt agreement for $6.0 million on an unsecured basis with a final maturity in October 2016. The subordinated agreement calls for a fixed interest rate of 8.5% and equal annual principal payments of $1.2 million commencing on the third anniversary of the agreement. The entire amount of the subordinated debt was included as part of the Bank’s Tier 2 capital for regulatory purposes at both March 31, 2010 and December 31, 2009. 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 March 31, 2010 and December 31, 2009:
3/31/10 | 12/31/09 | |||||||
(In thousands) | ||||||||
Long-term borrowed funds: | ||||||||
FHLBB long-term advances | $ | 186,930 | $ | 205,971 | ||||
Subordinated debt | 6,000 | 6,000 | ||||||
Wholesale repurchase agreements | 40,000 | 40,000 | ||||||
232,930 | 251,971 | |||||||
Short-term borrowed funds: | ||||||||
FHLBB short-term borrowings | — | — | ||||||
Customer repurchase agreements | 3,095 | 7,111 | ||||||
3,095 | 7,111 | |||||||
Total borrowed funds | $ | 236,025 | $ | 259,082 | ||||
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2010 and 2009
SUMMARY
The Company reported net income of $1.5 million, or $0.34 per diluted common share, as compared to $805,000, or $0.18 per diluted common share, for the three months ended March 31, 2010 and 2009, respectively. The largest factors affecting net income were gains on sales of investments amounting to $697,000 in the first quarter of 2010 as compared to $227,000 in the first quarter of 2009. Offsetting the impact of these gains were FDIC deposit insurance premiums totaling $211,000 and $391,000 for the first quarter of 2010 and 2009, respectively, as well as the preferred stock dividend and accretion of $159,000 in the first quarter of 2009. Another positive factor in the first quarter of 2010 was the $663,000 improvement in net interest income offset by the $460,000 increased loan loss provision from the first quarter of 2009.
Net Interest Income:
Net interest income for the three months ended March 31, 2010 increased by $663,000, or 14.5%, to $5.2 million from $4.6 million for the same period of 2009. The net interest rate spread increased slightly to 2.44% for the three months ended March 31, 2010 versus 2.14% for the same period of 2009. Interest income for the three months ended March 31, 2010 increased $48,000, or 0.5%, primarily due to higher average loan balances compared to the same period of 2009. Coupled with the increase in total interest income was a decrease of $615,000 in total interest expense, primarily due to a decrease in average deposit rates. Net interest margin increased to 2.69% versus 2.48% for the quarters ended March 31, 2010 and 2009, respectively.
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Interest and Dividend Income:
Interest and dividend income increased $48,000, or 0.5%, during the first quarter of 2010 versus the same quarter in 2009, primarily due to a rise in average loan balances, partially offset by a decline in average investment securities and a decline in interest rates. Interest income on loans for the three months ended March 31, 2010, increased $1.0 million, or 15.4%, from the same period of 2009.
Average loan interest rates decreased 4 basis points from 5.83% to 5.79% during the first quarter of 2010 as compared to the same quarter of 2009, resulting in a decrease of $68,000 to interest income. Average loan balances rose $74.7 million, or 16.1%, from $464.7 million in 2009 to $539.3 million in 2010, contributing $1.1 million to interest income.
Interest income on investment securities for the three months ended March 31, 2010, decreased $981,000 or 29.1%, from the same period in 2009. Average investment security interest rates decreased 99 basis points during the first quarter of 2010, from 4.85% in 2009 to 3.86% in 2010, resulting in a decrease of $467,000 to interest income. Average investment security balances declined $31.0 million or 11.0%, from $281.8 million in 2009 to $250.8 million in 2010, resulting in a decrease of $514,000 to interest income.
Interest Expense:
Interest expense decreased $615,000 during the first quarter of 2010, from $5.5 million in the first quarter of 2009 to $4.9 million in the first quarter of 2010, primarily due to the decline in average deposit rates.
Interest expense on deposits for the three months ended March 31, 2010, decreased $428,000, or 16.1%, from the same period in 2009. Average deposit interest rates decreased 80 basis points, from 2.74% to 1.94% in the first quarter of 2010 as compared to the same quarter of 2009, decreasing interest expense by $645,000. Average interest-bearing deposit balances increased by $72.3 million or 18.4%, from $393.7 million in 2009 to $466.0 million in 2010, accompanied by a change in the mix resulting in a preference for higher rate promotional savings accounts which increased interest expense by $217,000.
Interest expense on borrowed funds for the three months ended March 31, 2010, decreased $187,000, or 6.6%, from the same period in 2009. Average interest rates on borrowed funds rose 5 basis points from 4.16% in the first quarter of 2009 to 4.21% in the same quarter of 2010. A reduction in the relative amount of short-term borrowings, however, decreased interest expense by $46,000. Average borrowed funds balances decreased $21.5 million, or 7.8%, from $274.3 million in 2009 to $252.9 million in 2010. This decrease resulted in a decline in interest expense of $141,000 due primarily to maturities and prepayments of longer term borrowed funds.
Provision for Loan Losses:
The provision for loan losses totaled $700,000 and $240,000 for the three months ended March 31, 2010 and 2009, respectively. The provisions in 2010 and 2009 reflect management’s analysis of loan growth and changes in risk during the first quarters of 2010 and 2009 with the highest levels of growth coming from the commercial real estate and residential loan portfolios. The balance of the allowance for loan losses grew to $7.3 million at March 31, 2010, from $6.1 million at March 31, 2009.
Non-Interest Income :
Non-interest income increased $360,000 for the three months ended March 31, 2010, compared to the same period in 2009, to $1.1 million in 2010 compared to income of $731,000 in 2009. The largest factor in the increase in 2010 was the increase in gains on sales of securities which increased $470,000 to $697,000 from $227,000 in the first quarter of 2010 versus 2009, respectively, which was partially offset by a prepayment penalty in 2010 amounting to $149,000 on the prepayment of $5 million in FHLB advances. Deposit account fees remained stable at $223,000 for the three months ended March 31, 2010 and 2009, respectively. Loan servicing fees increased by $30,000, or 57.7%, to $82,000 from $52,000 for the three months ended March 31, 2010 and 2009, respectively, due to the increase in late and prepayment fees on loans and the absence of amortization of service loan fees. Income on bank-owned life insurance decreased $9,000 to $115,000 for the three months ended March 31, 2010 from $124,000 for
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the same period in 2009 based on lower investment income earned by the underlying insurance company. Other income increased $18,000 or 17.1% to $123,000 from $105,000 for the three months ended March 31, 2010 and 2009, respectively, due to an increase in ATM and debit card fees.
Non-Interest Expense:
Non-interest expenses decreased $143,000, or 3.9%, during the first quarter of 2010 to $3.5 million versus $3.6 million for the same period of 2009 primarily resulting from a decrease of $180,000 in FDIC deposit insurance premiums. These FDIC deposit insurance premiums totaled $211,000 for the three months ended March 31, 2010 compared to $391,000 for the same period of 2009 as the Company began accruing for the special assessment in the first quarter of 2009. Salary and employee benefits totaled $1.8 million and $1.7 million in the first quarter of 2010 and 2009, respectively, due primarily to increases in bonuses, medical and dental coupled with a reduction in deferred salaries resulting from fewer loan closings in 2010. Occupancy and equipment expense increased $101,000, or 27.0%, to $475,000 in the first quarter of 2010 from $374,000 in the same period of 2009 due mainly to an increase in rent expense and in building and equipment repairs and maintenance as well as depreciation due to the opening of the newly relocated Lawrence, MA, branch. Data processing expense remained stable at $240,000 and $241,000 in the first quarters of 2010 and 2009, respectively. Professional fees decreased $73,000, or 39.5%, to $112,000 in the first quarter of 2010 from $185,000 in the first quarter of 2009 due primarily to a decrease in legal fees. Marketing expense remained stable at $145,000 and $142,000 in 2010 and 2009, respectively. OREO expense totaled $5,000 in the three months ended March 31, 2010 compared to $1,000 in the same period of 2009. Other expenses decreased $70,000, or 12.8%, to $476,000 in the first quarter of 2010 from $546,000 in the same period of 2009 due primarily to a decrease in loan workout expenses associated with one nonaccrual loan coupled with an increase in education and training.
Income Taxes:
The Company reported an income tax expense of $600,000 for the three months ended March 31, 2010 for an effective income tax rate of 28.0%. This compares to an income tax expense of $476,000 for the three months ended March 31, 2009 for an effective income tax rate of 33.1%. The modest decrease in the effective tax rate in the first quarter of 2010 was due primarily to the recognition of a tax benefit of $190,000 resulting from a previously recorded state tax valuation reserve on the Fannie Mae and Freddie Mac preferred stock holdings. Notwithstanding the recognition of this tax benefit, the effective tax rate would have been 36%. Subsidiaries within the consolidated group pay various state income tax rates, the mix of taxable earnings within the group can change and, beginning in 2010, 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 March 31, 2010 and 2009. Average loans include non-performing loans.
Three months ended | Three months ended | |||||||||||||||||||||||
3/31/10 | 3/31/09 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Average | Interest | Average | Interest | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Investment securities: | ||||||||||||||||||||||||
Short-term investments | $ | 13,530 | $ | 8 | 0.24 | % | $ | 8,718 | $ | 4 | 0.19 | % | ||||||||||||
U. S. Treasury and government- sponsored enterprise obligations | 39,723 | 218 | 2.23 | 21,626 | 191 | 3.58 | ||||||||||||||||||
Other bonds and equity securities | 17,101 | 79 | 1.87 | 20,040 | 128 | 2.59 | ||||||||||||||||||
Collateralized mortgage obligations and mortgage- backed securities | 180,426 | 2,082 | 4.68 | 231,389 | 3,045 | 5.34 | ||||||||||||||||||
Total investment securities | 250,780 | 2,387 | 3.86 | 281,773 | 3,368 | 4.85 | ||||||||||||||||||
Loans: | ||||||||||||||||||||||||
Residential real estate | 132,958 | 1,771 | 5.40 | 116,158 | 1,613 | 5.63 | ||||||||||||||||||
Home equity | 27,253 | 260 | 3.87 | 23,795 | 249 | 4.24 | ||||||||||||||||||
Consumer | 673 | 11 | 6.63 | 780 | 13 | 6.76 | ||||||||||||||||||
Total retail loans | 160,884 | 2,042 | 5.15 | 140,733 | 1,875 | 5.40 | ||||||||||||||||||
Construction and land | 63,085 | 841 | 5.41 | 58,942 | 764 | 5.26 | ||||||||||||||||||
Commercial real estate | 282,228 | 4,417 | 6.35 | 233,099 | 3,667 | 6.38 | ||||||||||||||||||
Commercial | 33,144 | 406 | 4.97 | 31,917 | 371 | 4.71 | ||||||||||||||||||
Total corporate loans | 378,457 | 5,664 | 6.07 | 323,958 | 4,802 | 6.01 | ||||||||||||||||||
Total loans | 539,341 | 7,706 | 5.79 | 464,691 | 6,677 | 5.83 | ||||||||||||||||||
Total interest-earning assets | 790,121 | 10,093 | 5.18 | % | 746,464 | 10,045 | 5.46 | % | ||||||||||||||||
Allowance for loan losses | (7,385 | ) | (5,965 | ) | ||||||||||||||||||||
Other assets | 35,622 | 30,515 | ||||||||||||||||||||||
Total assets | $ | 818,358 | $ | 771,014 | ||||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
NOW accounts | $ | 21,216 | $ | 19 | 0.36 | % | $ | 18,183 | $ | 9 | 0.20 | % | ||||||||||||
Regular savings accounts | 95,006 | 247 | 1.05 | 59,686 | 219 | 1.49 | ||||||||||||||||||
Money market accounts | 114,209 | 339 | 1.20 | 77,753 | 353 | 1.84 | ||||||||||||||||||
Certificates of deposit and escrow | 235,580 | 1,626 | 2.80 | 238,094 | 2,078 | 3.54 | ||||||||||||||||||
Total interest-bearing deposits | 466,011 | 2,231 | 1.94 | 393,716 | 2,659 | 2.74 | ||||||||||||||||||
Borrowed funds: | ||||||||||||||||||||||||
Long-term borrowed funds | 247,322 | 2,624 | 4.30 | 259,003 | 2,774 | 4.34 | ||||||||||||||||||
Short-term borrowed funds | 5,543 | 3 | 0.22 | 15,324 | 40 | 1.06 | ||||||||||||||||||
Total borrowed funds | 252,865 | 2,627 | 4.21 | 274,327 | 2,814 | 4.16 | ||||||||||||||||||
Total interest-bearing liabilities | 718,876 | 4,858 | 2.74 | 668,043 | 5,473 | 3.32 | % | |||||||||||||||||
Non-interest-bearing deposits | 35,134 | 28,267 | ||||||||||||||||||||||
Other liabilities | 2,983 | 2,934 | ||||||||||||||||||||||
Total liabilities | 756,993 | 699,244 | ||||||||||||||||||||||
Stockholders’ equity | 61,365 | 71,770 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 818,358 | $ | 771,014 | ||||||||||||||||||||
Net interest rate spread | 2.44 | % | 2.14 | % | ||||||||||||||||||||
Net interest income | $ | 5,235 | $ | 4,572 | ||||||||||||||||||||
Net interest margin on average earning assets | 2.69 | % | 2.48 | % | ||||||||||||||||||||
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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 three months of 2010 and 2009, 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 2010 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 March 31, 2010, 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 $9.6 million which was available in its entirety at March 31, 2010.
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 March 31, 2010 was $258.6 million, of which $186.9 million had been borrowed.
At March 31, 2010, the Company’s stockholders’ equity totaled $62.0 million, an increase of $1.5 million when compared to $60.5 million at December 31, 2009. The increase was primarily attributable to net income of $1.5 million coupled with an increase in the net unrealized gain on investment securities available for sale of $288,000, net of tax, partially offset by cash dividends to common shareholders of $315,000.
Each of the Company and the Bank was “well-capitalized” for bank regulatory purposes as of March 31, 2010.
The following table presents the Company’s and the Bank’s capital ratios at March 31, 2010, December 31, 2009, and March 31, 2009:
Regulatory Threshold | ||||||||||||||||
for “Well Capitalized” | ||||||||||||||||
Category | 03/31/10 | 12/31/09 | 03/31/09 | |||||||||||||
LSB Corporation Tier 1 risk-based | 6.0 | % | 10.02 | % | 9.74 | % | 12.87 | % | ||||||||
River Bank Tier 1 leverage ratio | 5.0 | % | 7.03 | % | 6.85 | % | 8.00 | % | ||||||||
River Bank Tier 1 risk-based | 6.0 | % | 9.91 | % | 9.57 | % | 11.59 | % | ||||||||
River Bank total risk-based | 10.0 | % | 12.20 | % | 11.84 | % | 12.73 | % |
The increase in the Company’s and the Bank’s regulatory capital ratios was primarily attributable to the decrease in total assets as well as the increase in total stockholders’ equity since December 31, 2009.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Management believes there have been no material changes to the discussion under the caption “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK” of the Company’s 2009 Annual Report on Form 10-K which is incorporated by reference.
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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 March 31, 2010, 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
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, 2009.
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(i).3 | Articles of Amendment to the Articles of Organization of LSB Corporation, establishing the fixed rate cumulative perpetual preferred stock, Series B (Filed as Exhibit 3.1 to the Company’s Current Report of Form 8-K filed December 17, 2008, 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) |
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Number | Description | |
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) | |
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. | |
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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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 | ||||
May 12, 2010 | /s/ Gerald T. Mulligan | |||
Gerald T. Mulligan | ||||
President and Chief Executive Officer | ||||
May 12, 2010 | /s/ Diane L. Walker | |||
Diane L. Walker | ||||
Executive Vice President, Treasurer and Chief Financial Officer | ||||
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LSB CORPORATION AND SUBSIDIARY
Quarterly Report on Form 10-Q for the three months ended March 31, 2010
Quarterly Report on Form 10-Q for the three months ended March 31, 2010
EXHIBIT INDEX
Page | ||||
31.1 Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 | 26 | |||
31.2 Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 | 27 | |||
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 | 28 | |||
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 | 29 |
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