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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20529
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 June 30, 2007
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.
Yes þ No o
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one).
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
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 August 7, 2007 | |
Common Stock, par value $.10 per share | 4,585,917 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)
June 30, | December 31, | |||||||
2007 | 2006 | |||||||
(In thousands, except share data) | ||||||||
ASSETS | ||||||||
Assets: | ||||||||
Cash and due from banks | $ | 9,081 | $ | 6,896 | ||||
Federal funds sold | 14,762 | 11,871 | ||||||
Total cash and cash equivalents | 23,843 | 18,767 | ||||||
Investment securities available for sale (amortized cost of $204,610 in 2007 and $221,652 in 2006) | 200,167 | 218,682 | ||||||
Federal Home Loan Bank stock, at cost | 10,185 | 10,046 | ||||||
Loans, net of allowance for loan losses | 328,641 | 283,854 | ||||||
Premises and equipment | 3,469 | 3,807 | ||||||
Accrued interest receivable | 2,242 | 2,259 | ||||||
Deferred income tax asset, net | 4,213 | 3,606 | ||||||
Bank-owned life insurance | 5,005 | — | ||||||
Other assets | 1,358 | 1,944 | ||||||
Total assets | $ | 579,123 | $ | 542,965 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Liabilities: | ||||||||
Deposits | $ | 314,712 | $ | 295,662 | ||||
Borrowed funds | 203,043 | 184,782 | ||||||
Advance payments by borrowers for taxes and insurance | 577 | 586 | ||||||
Other liabilities | 2,832 | 3,404 | ||||||
Total liabilities | 521,164 | 484,434 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $.10 par value per share: 5,000,000 shares authorized, none issued | — | — | ||||||
Common stock, $.10 par value per share; 20,000,000 shares authorized; 4,596,617 and 4,593,617 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively | 460 | 459 | ||||||
Additional paid-in capital | 61,569 | 61,578 | ||||||
Accumulated deficit | (1,782 | ) | (2,090 | ) | ||||
Accumulated other comprehensive loss, net of tax | (2,288 | ) | (1,416 | ) | ||||
Total stockholders’ equity | 57,959 | 58,531 | ||||||
Total liabilities and stockholders’ equity | $ | 579,123 | $ | 542,965 | ||||
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 | Six months ended | |||||||||||||||
June 30 | June 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(In thousands, except share data) | ||||||||||||||||
Interest and dividend income: | ||||||||||||||||
Loans | $ | 5,709 | $ | 4,277 | $ | 11,006 | $ | 8,226 | ||||||||
Investment securities available for sale | 2,445 | 2,661 | 4,959 | 5,100 | ||||||||||||
Federal Home Loan Bank stock | 167 | 8 | 327 | 131 | ||||||||||||
Short term interest income | 190 | 101 | 312 | 126 | ||||||||||||
Total interest and dividend income | 8,511 | 7,047 | 16,604 | 13,583 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 2,409 | 1,702 | 4,624 | 3,248 | ||||||||||||
Borrowed funds | 2,258 | 2,042 | 4,363 | 3,737 | ||||||||||||
Total interest expense | 4,667 | 3,744 | 8,987 | 6,985 | ||||||||||||
Net interest income | 3,844 | 3,303 | 7,617 | 6,598 | ||||||||||||
Provision for loan losses | 155 | 30 | 215 | 30 | ||||||||||||
Net interest income after provision for loan losses | 3,689 | 3,273 | 7,402 | 6,568 | ||||||||||||
Non-interest income (loss): | ||||||||||||||||
Deposit account fees | 251 | 189 | 437 | 398 | ||||||||||||
Loan servicing fees, net | 56 | 34 | 114 | 41 | ||||||||||||
Gain on sales of mortgage loans, net | — | 3 | — | 7 | ||||||||||||
Loss on sales of investment securities | — | (2,417 | ) | — | (2,417 | ) | ||||||||||
Other income | 127 | 117 | 237 | 227 | ||||||||||||
Total non-interest income (loss) | 434 | (2,074 | ) | 788 | (1,744 | ) | ||||||||||
Non-interest expense: | ||||||||||||||||
Salaries and employee benefits | 1,616 | 1,936 | 3,380 | 4,004 | ||||||||||||
Occupancy and equipment expense | 303 | 494 | 590 | 823 | ||||||||||||
Data processing expense | 244 | 263 | 525 | 496 | ||||||||||||
Marketing expense | 192 | 417 | 220 | 455 | ||||||||||||
Professional expense | 111 | 201 | 220 | 364 | ||||||||||||
Other expense | 408 | 838 | 796 | 1,231 | ||||||||||||
Total non-interest expense | 2,874 | 4,149 | 5,731 | 7,373 | ||||||||||||
Income (loss) before income tax expense (benefit) | 1,249 | (2,950 | ) | 2,459 | (2,549 | ) | ||||||||||
Income tax expense (benefit) | 417 | (1,008 | ) | 863 | (867 | ) | ||||||||||
Net income (loss) | $ | 832 | $ | (1,942 | ) | $ | 1,596 | $ | (1,682 | ) | ||||||
Average shares outstanding | 4,602,331 | 4,539,834 | 4,600,241 | 4,518,045 | ||||||||||||
Common stock equivalents | 28,088 | 50,449 | 29,385 | 54,959 | ||||||||||||
Average diluted shares outstanding | 4,630,419 | 4,590,283 | 4,629,626 | 4,573,004 | ||||||||||||
Basic earnings per share | $ | 0.18 | $ | (0.43 | ) | $ | 0.35 | $ | (0.37 | ) | ||||||
Diluted earnings per share | $ | 0.18 | $ | (0.42 | ) | $ | 0.34 | $ | (0.37 | ) | ||||||
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, 2006 AND THE
SIX MONTHS ENDED JUNE 30, 2007
(UNAUDITED)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2006 AND THE
SIX MONTHS ENDED JUNE 30, 2007
(UNAUDITED)
(Accumulated | Accumulated | |||||||||||||||||||
Additional | Deficit)/ | Other | Total | |||||||||||||||||
Common | Paid-In | Retained | Comprehensive | Stockholders’ | ||||||||||||||||
Stock | Capital | Earnings | Loss | Equity | ||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||
Balance at December 31, 2005 | $ | 446 | $ | 59,856 | $ | 326 | $ | (706 | ) | $ | 59,922 | |||||||||
Net income | — | — | 126 | — | 126 | |||||||||||||||
Other comprehensive loss: | ||||||||||||||||||||
Unrealized loss on securities available for sale, net (tax effect $619) | — | — | — | (1,160 | ) | (1,160 | ) | |||||||||||||
Total comprehensive loss | (1,034 | ) | ||||||||||||||||||
Stock-based compensation | — | 400 | — | — | 400 | |||||||||||||||
Exercise of stock options and tax benefit | 13 | 1,322 | — | — | 1,335 | |||||||||||||||
Adjustment to initially apply SFAS No. 158, net of tax | 450 | 450 | ||||||||||||||||||
Dividends declared and paid ($0.56 per share) | — | — | (2,542 | ) | — | (2,542 | ) | |||||||||||||
Balance at December 31, 2006 | $ | 459 | $ | 61,578 | $ | (2,090 | ) | $ | (1,416 | ) | $ | 58,531 | ||||||||
Accumulated | ||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||
Common | Paid-In | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||
Stock | Capital | Deficit | Loss | Equity | ||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||
Balance at December 31, 2006 | $ | 459 | $ | 61,578 | $ | (2,090 | ) | $ | (1,416 | ) | $ | 58,531 | ||||||||
Net income | — | — | 1,596 | — | 1,596 | |||||||||||||||
Other comprehensive income: | ||||||||||||||||||||
Unrealized loss on securities available for sale, net (tax effect $601) | — | — | — | (872 | ) | (872 | ) | |||||||||||||
Total comprehensive income | 724 | |||||||||||||||||||
Stock-based compensation | — | 16 | — | — | 16 | |||||||||||||||
Common stock repurchase program | (1 | ) | (153 | ) | — | — | (154 | ) | ||||||||||||
Exercise of stock options and tax benefit | 2 | 128 | — | — | 130 | |||||||||||||||
Dividends declared and paid ($0.28 per share) | — | — | (1,288 | ) | — | (1,288 | ) | |||||||||||||
Balance at June 30, 2007 | $ | 460 | $ | 61,569 | $ | (1,782 | ) | $ | (2,288 | ) | $ | 57,959 | ||||||||
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)
Six months ended June 30, | ||||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 1,596 | $ | (1,682 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Provision for loan losses | 215 | 30 | ||||||
Gains on sales of mortgage loans, net | — | (7 | ) | |||||
Losses on sales of investment securities | — | 2,417 | ||||||
Net amortization (accretion) of investment securities | (32 | ) | 562 | |||||
Depreciation and amortization of premises and equipment | 303 | 402 | ||||||
Loans originated for sale | — | (1,042 | ) | |||||
Proceeds from sales of mortgage loans | — | 1,521 | ||||||
Decrease in accrued interest receivable | 17 | 436 | ||||||
Deferred income tax benefit | (6 | ) | (704 | ) | ||||
Stock-based compensation | 16 | 64 | ||||||
Increase in cash surrender value on Bank-owned life insurance | (5 | ) | — | |||||
Decrease (increase) in other assets | 586 | (647 | ) | |||||
(Decrease) increase in other liabilities | (572 | ) | 562 | |||||
Net cash provided by operating activities | 2,118 | 1,912 | ||||||
Cash flows from investing activities: | ||||||||
Proceeds from maturities of investment securities held to maturity | — | 2,900 | ||||||
Proceeds from maturities of investment securities available for sale | 5,009 | 10,000 | ||||||
Sales of investment securities available for sale | — | 78,457 | ||||||
Purchases of investment securities available for sale | (24 | ) | (83,917 | ) | ||||
Purchases of Bank-owned life insurance | (5,000 | ) | — | |||||
Redemption of FHLB stock | 65 | 738 | ||||||
Purchase FHLB stock | (204 | ) | — | |||||
Principal payments of investment securities held to maturity | — | 4,680 | ||||||
Principal payments of investment securities available for sale | 12,089 | 6,638 | ||||||
Increase in loans, net | (45,002 | ) | (13,836 | ) | ||||
Reductions (purchases) of premises and equipment | 35 | (521 | ) | |||||
Net cash provided by (used in) investing activities | (33,032 | ) | 5,139 | |||||
Cash flows from financing activities: | ||||||||
Net increase in deposits | 19,050 | 1,795 | ||||||
Additions to Federal Home Loan Bank advances | 119,000 | 20,000 | ||||||
Payments on Federal Home Loan Bank advances | (70,071 | ) | (50,273 | ) | ||||
Net increase in agreements to repurchase securities | 332 | 1,749 | ||||||
Net (decrease) increase in other borrowed funds | (31,000 | ) | 26,000 | |||||
Decrease in advance payments by borrowers | (9 | ) | (9 | ) | ||||
Dividends paid | (1,288 | ) | (1,264 | ) | ||||
Proceeds from exercise of stock options | 108 | 839 | ||||||
Excess tax benefit from exercise of stock options | 22 | 57 | ||||||
Common stock repurchased | (154 | ) | — | |||||
Net cash provided by (used in) financing activities | 35,990 | (1,106 | ) | |||||
Net increase in cash and cash equivalents | 5,076 | 5,945 | ||||||
Cash and cash equivalents, beginning of period | 18,767 | 10,687 | ||||||
Cash and cash equivalents, end of period | $ | 23,843 | $ | 16,632 | ||||
Cash paid during the period for: | ||||||||
Interest on deposits | $ | 4,624 | $ | 3,247 | ||||
Interest on borrowed funds | 4,363 | 3,773 | ||||||
Income taxes | 863 | 891 |
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
June 30, 2007
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(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 insured by the Deposit Insurance Fund of the FDIC up to $100,000 per account, as defined by the FDIC (except for certain retirement accounts which are insured up to $250,000), 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 accruals for fair presentation. Certain amounts in prior periods have been 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 (loss) 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, 2006 filed with the Securities and Exchange Commission.
2. | EQUITY AWARDS |
At June 30, 2007, there were no shares available for grant under the 1986 Plan and 16,925 shares available for grant under the 1997 Plan due to stock option forfeitures by former participants. The available shares under the 1997 Plan expire in December 2007. Under all plans, the option exercise price equals the fair market value on the date of grant. All options granted under the 1986 and 1997 Plans vested over three years from the date of grant and have ten-year contractual terms. All currently outstanding options granted under these plans expire between 2007 and 2015. All options granted under the 2006 Plan vest over two years from the date of grant and have seven-year contractual terms. Options granted in 2006 under the 2006 Plan expire in 2013. Restricted stock awards were granted during 2006 representing 14,000 shares of stock granted with a transfer restriction of one year. These stock awards were fully vested upon grant and allow the receipt of dividends and voting rights on all shares. The Company issues shares for option exercises and restricted stock issuances from its pool of authorized but unissued shares.
Cash received from stock option exercises for the six months ended June 30, 2007 and 2006 was approximately $108,000 and $839,000, respectively. The actual tax benefit realized for the tax deductions from option exercises under all plans totaled $22,000 and $57,000, respectively, for the six months ended June 30, 2007 and 2006. No cash was used by the Company to settle equity instruments granted under share-based compensation arrangements during the six months ended June 30, 2007 and 2006.
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A summary of the status of the Company’s 2006 Plan, 1997 Plan and 1986 Plan for the six months ended June 30, 2007 is presented in the table below:
2007 | ||||||||||||
Weighted | Wtd. Avg. | |||||||||||
Average | Remaining | |||||||||||
Option | Exercise | Contractual | ||||||||||
Shares | Price ($) | Term (years) | ||||||||||
Balance, January 1 | 244,900 | $ | 14.07 | 5.4 | ||||||||
Granted | — | — | — | |||||||||
Exercised | (12,300 | ) | $ | 8.73 | 2.1 | |||||||
Forfeited | (2,000 | ) | $ | 16.41 | 6.5 | |||||||
Expired | (6,500 | ) | $ | 16.77 | 0.0 | |||||||
Balance, June 30 | 224,100 | $ | 14.27 | 5.7 | ||||||||
Options exercisable at June 30 | 203,600 | $ | 14.04 | 5.6 | ||||||||
Weighted average grant date fair value of options granted | n/a | n/a |
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the average of the high price and low price at which the Company’s common stock traded on June 30, 2007 of $561,000, which would have been received by the option holders had all option holders exercised their options as of that date.
A summary of the status of the Company’s nonvested stock awards and stock options as of June 30, 2007 and changes during the six months then ended is presented in the table below:
Nonvested Shares Issued Under the Plans | ||||||||||||||||
Stock Awards | Stock Options | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Grant Date | Grant Date | |||||||||||||||
Shares | Fair Value | Shares | Fair Value | |||||||||||||
Nonvested at January 1, 2007 | — | $ | — | 35,575 | $ | 16.59 | ||||||||||
Granted | — | — | — | — | ||||||||||||
Vested | — | — | (14,075 | ) | $ | 16.77 | ||||||||||
Forfeited | — | — | (1,000 | ) | $ | 16.41 | ||||||||||
Nonvested at June 30, 2007 | — | $ | — | 20,500 | $ | 16.48 | ||||||||||
3. | DEFINED BENEFIT PLAN |
The Company terminated the Savings Bank Employees’ Retirement Association defined benefit plan (the “Plan”) effective on December 31, 2006. All assets of the Plan will be applied to the payment of the accrued benefit obligations and plan expenses in connection with the plan’s termination. No pension benefits accrued under the Plan as of the termination date will be reduced or forfeited in connection with the plan termination. In connection with the termination of the Plan, the Company froze future pension benefits effective December 31, 2006. As a result of that cessation of future pension benefits, the Company recognized a curtailment gain of $602,000 pre-tax, due to the reversal of the accrued pension liability recorded on the financial statements.
Effective December 31, 2006, the Company adopted Statement of Financial Accounting Standards No. 158 which resulted in the recognition of the net gains or losses and prior service costs that had not yet been included in the net periodic benefits costs as components of the ending balance of accumulated other comprehensive income, net of tax. The Plan’s assets are distributed to Plan participants in the form of benefits. The Plan paid benefits of $2.0 million and $142,000 for the Plan years ended October 31, 2006 and 2005, respectively. The Company anticipates that the Plan will distribute all of its assets, or approximately $5.6 million in total, during the third and fourth quarter of 2007. Concurrent with the final distribution, the Company anticipates recording settlement gains of approximately $750,000.
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4. | COMMON STOCK REPURCHASE PROGRAM |
On April 26, 2007, the Company’s Board of Directors approved a common stock repurchase program. Under the program, which was effective immediately, the Company is authorized to repurchase up to 230,000 shares, or approximately 5% of the shares of Company common stock outstanding on that date. The Company expects to make open market or privately negotiated purchases from time to time and may use a plan that is intended to meet the requirements of SEC Rule 10b5-1 to enable stock repurchases to occur during periods when the trading window would otherwise be closed. The timing and amount of stock repurchases will depend upon market conditions, securities law limitations and other corporate considerations; the Company has placed no deadline on the duration of the repurchase program. The repurchase program may be modified, suspended, or terminated by the Board of Directors at any time.
During the quarter ended June 30, 2007, the Company repurchased 9,300 shares of common stock repurchased at a weighted average share price of $16.56.
5. | CONTINGENCIES |
The Bank is involved in various legal proceedings incidental to its business. During the quarter ended June 30, 2007, 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.
6. | RECENT ACCOUNTING PRONOUNCEMENTS |
In March 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 156, “Accounting for Servicing of Financial Assets — An Amendment of FASB Statement No. 140” (“SFAS 156”). SFAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The statement permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. SFAS 156 is effective for fiscal years that begin after September 15, 2006. The adoption of SFAS 156 did not have a material impact on the Company’s financial statements.
In June 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes- An Interpretation of FASB Statement No. 109” (“FIN 48”) which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and provides guidance on evaluating and measuring a company’s tax position and recognition of income tax assets and liabilities. Application for the provisions of this Interpretation will be effective for reporting periods beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on the Company’s financial statements.
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”) to provide consistency and comparability in determining fair value measurements and to provide for expanded disclosures about fair value measurements. The definition of fair value maintains the exchange price notion in earlier definitions of fair value but focuses on the exit price of the asset or liability. The exit price is the price that would be received to sell the asset or paid to transfer the liability adjusted for certain inherent risks and restrictions. Expanded disclosures are also required about the use of fair value to measure assets and liabilities. The effective date is for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not believe that adoption of SFAS 157 will have a material impact on the Company’s financial statements.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to measure certain financial assets and financial liabilities at fair value and amended FASB Statement No. 115, “Accounting for Investments in Debt and Equity Securities”. Unrealized gains and losses on items for which the fair value option is elected will be reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact of adopting this statement on the Company’s financial statements.
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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, regulatory considerations and competition. For more information about these factors, please see our 2006 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 & Estimates
The Company has not changed its significant accounting and reporting policies from those disclosed in its 2006 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 2006 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, deferred tax asset valuation 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 those estimates.
EXECUTIVE LEVEL OVERVIEW
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 commercial loan portfolios, which include construction, commercial real estate and commercial loans. Management’s efforts for funding are to increase core deposit accounts, which are lower interest-bearing 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.
The provision for loan losses was $215,000 for the six months ended June 30, 2007 based on management’s assessment of the adequacy of the allowance based on an evaluation of the Bank’s loan portfolio and the level of non-performing loans. During the comparable period of 2006, our provision for loan losses was $30,000. The increase in the provision during 2007 reflects management’s analysis of the growth in the loan portfolio.
Non-interest income includes gains and losses on sales of investment securities and various fees. 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.
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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.
Provisions for income taxes are 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 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 was able to achieve a 15% increase in the net interest income for the six months ended June 30, 2007 over the comparable period in 2006 due to the balance sheet restructuring undertaken in the second quarter of 2006 which resulted in a non-recurring charge of $2.4 million in that period as well as the continued emphasis on increasing loan originations instead of lower-yielding investment securities.
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 $579.1 million at June 30, 2007, compared to $543.0 million at December 31, 2006. The increase in asset size at June 30, 2007 from December 31, 2006 reflected strong loan growth of $45.0 million since year end 2006 partially offset by a decline of $18.5 million in the investment portfolio from December 31, 2006.
Investments:
The investment securities portfolio totaled $200.2 million or 34.6% of total assets at June 30, 2007, compared to $218.7 million or 40.3% of total assets at December 31, 2006, a decrease of $18.5 million from year-end.
During the first six months of 2007, $12.1 million of investments available for sale paid down while $5.0 million matured and the funds were reinvested in new loan originations. The Company intends to use the principal paydowns and maturities from the investment portfolio to fund future loan growth as a strategy to improve the Company’s net interest margin.
The net unrealized loss on securities available for sale as of June 30, 2007 totaled $4.4 million, or $2.3 million net of taxes. The unrealized losses are attributable to changes in interest rates and a corresponding decline in fair value and are not related to credit quality, nor are they deemed to be other than temporarily impaired.
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The following table reflects the components and carrying values of the investment securities portfolio at June 30, 2007 and December 31, 2006:
6/30/07 | 12/31/06 | |||||||||||||||||||||||||||||||
Amortized | Unrealized | Fair | Amortized | Unrealized | Fair | |||||||||||||||||||||||||||
Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | |||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||
Investment securities available for sale: | ||||||||||||||||||||||||||||||||
U.S. treasury obligations | $ | 5,597 | $ | — | $ | (424 | ) | $ | 5,173 | $ | 5,605 | $ | — | $ | (391 | ) | $ | 5,214 | ||||||||||||||
Federal agency bonds | 711 | 9 | (2 | ) | 718 | 839 | 10 | (2 | ) | 847 | ||||||||||||||||||||||
Government-sponsored entities | 30,396 | — | (345 | ) | 30,051 | 34,871 | 4 | (532 | ) | 34,343 | ||||||||||||||||||||||
U.S. treasury and Government sponsored entities | 36,704 | 9 | (771 | ) | 35,942 | 41,315 | 14 | (925 | ) | 40,404 | ||||||||||||||||||||||
Mortgage-backed securities | 90,518 | 47 | (2,111 | ) | 88,454 | 98,608 | 606 | (1,316 | ) | 97,898 | ||||||||||||||||||||||
Collateralized mortgage obligations | 68,531 | 37 | (1,513 | ) | 67,055 | 72,899 | 73 | (1,417 | ) | 71,555 | ||||||||||||||||||||||
Collateralized mortgage obligations and mortgage-backed securities | 159,049 | 84 | (3,624 | ) | 155,509 | 171,507 | 679 | (2,733 | ) | 169,453 | ||||||||||||||||||||||
Corporate obligations | 7,345 | 15 | (89 | ) | 7,271 | 7,316 | 50 | (2 | ) | 7,364 | ||||||||||||||||||||||
Mutual funds | 1,000 | — | (67 | ) | 933 | 1,000 | — | (53 | ) | 947 | ||||||||||||||||||||||
Equity securities | 512 | — | — | 512 | 514 | — | — | 514 | ||||||||||||||||||||||||
Corporate and other investment securities | 8,857 | 15 | (156 | ) | 8,716 | 8,830 | 50 | (55 | ) | 8,825 | ||||||||||||||||||||||
Total investment securities available for sale | $ | 204,610 | $ | 108 | $ | (4,551 | ) | $ | 200,167 | $ | 221,652 | $ | 743 | $ | (3,713 | ) | $ | 218,682 | ||||||||||||||
Loans:
Total loans increased $45.0 million to $333.2 million and represented 57.5% of total assets at June 30, 2007 versus $288.2 million and 53.1%, respectively, of total assets at December 31, 2006. Retail loans, comprised primarily of residential mortgage loans, increased $1.6 million during the first six months of 2007 while corporate loans, comprised mainly of construction and commercial real estate loans, increased $43.3 million during the same period. The increase is due to loan growth experienced in all corporate loan categories, residential mortgage loans and equity loans partially offset by a slight decline in consumer loans, and reflects the continued strategic preference toward loan originations rather than investment security purchases.
The following table reflects the loan portfolio at June 30, 2007 and December 31, 2006:
6/30/07 | 12/31/06 | |||||||
(In thousands) | ||||||||
Residential mortgage loans | $ | 71,422 | $ | 69,876 | ||||
Home equity lines and loans | 20,641 | 20,339 | ||||||
Consumer loans | 775 | 975 | ||||||
Total retail loans | 92,838 | 91,190 | ||||||
Construction loans | 54,166 | 43,283 | ||||||
Commercial real estate loans | 161,129 | 142,820 | ||||||
Commercial loans | 25,025 | 10,870 | ||||||
Total corporate loans | 240,320 | 196,973 | ||||||
Total loans | 333,158 | 288,163 | ||||||
Allowance for loan losses | (4,517 | ) | (4,309 | ) | ||||
Total loans, net | $ | 328,641 | $ | 283,854 | ||||
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Allowance For Loan Losses:
The following table summarizes changes in the allowance for loan losses for the three months and six months ended June 30, 2007 and 2006:
Three months ended | Six months ended | |||||||||||||||
6/30/07 | 6/30/06 | 6/30/07 | 6/30/06 | |||||||||||||
(In thousands) | ||||||||||||||||
Beginning balance | $ | 4,366 | $ | 4,160 | $ | 4,309 | $ | 4,126 | ||||||||
Provision charged to operations | 155 | 30 | 215 | 30 | ||||||||||||
Recoveries on loans previously charged-off | 2 | 2 | 7 | 40 | ||||||||||||
Loans charged-off | (6 | ) | (8 | ) | (14 | ) | (12 | ) | ||||||||
Ending balance | $ | 4,517 | $ | 4,184 | $ | 4,517 | $ | 4,184 | ||||||||
The allowance for loan losses increased modestly to $4.5 million at June 30, 2007 as compared to $4.3 million at December 31, 2006. However, the allowance for loan losses as a percent of total loans has decreased to 1.36% at June 30, 2007 down from 1.50% at December 31, 2006, due to an increase in total loans outstanding at June 30, 2007 compared to December 31, 2006. The Company considers the current level of the allowance for loan losses to be appropriate and adequate. The corporate loan portfolio did not have any loan charge-offs and delinquencies were low at March 31, 2007 and June 30, 2007.
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. The allowance for loan losses reflects information available to management at the end of each period.
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 is in doubt. Other real estate owned is comprised of foreclosed properties where the Company has formally received title or has possession of the collateral.
Total risk assets were $153,000 and $1.0 million, respectively, at June 30, 2007 and December 31, 2006. Impaired loans totaled $747,000 and $1.0 million, respectively, at June 30, 2007 and December 31, 2006. All of the $747,000 and $1.1 million in impaired loans at June 30, 2007 and December 31, 2006, respectively, had been measured using the fair value of the collateral method and did not require a related allowance. The decrease in non-performing loans since December 31, 2006 was primarily due to the resolution and payment in full of multiple loans to one borrower that were collateral dependent during the first quarter of 2007. The Company had no impaired loans at June 30, 2006.
The following table summarizes the Company’s risk assets at June 30, 2007, December 31, 2006 and June 30, 2006:
6/30/07 | 12/31/06 | 6/30/06 | ||||||||||
(Dollars in thousands) | ||||||||||||
Non-performing loans | $ | 153 | $ | 1,057 | $ | 92 | ||||||
Other real estate owned | — | — | — | |||||||||
Total risk assets | $ | 153 | $ | 1,057 | $ | 92 | ||||||
Risk assets as a percent of total loans | 0.05 | % | 0.37 | % | 0.04 | % | ||||||
Risk assets as a percent of total assets | 0.03 | % | 0.19 | % | 0.02 | % | ||||||
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Deposits:
Total interest-bearing deposits amounted to $282.7 million at June 30, 2007, compared to $264.2 million at December 31, 2006, an increase of $18.4 million due to an increase of $18.4 million in certificates of deposit. Non-interest bearing or demand deposit accounts increased slightly to $32.1 million at June 30, 2007, an increase of $635,000 from December 31, 2006. The increase in term certificates of deposit reflects the customers’ preference in achieving the highest yields possible as the rates paid on these accounts have increased in conjunction with the increases in interest rates coupled with an aggressive promotional campaign targeting new customers. Partially offsetting these increases was a decrease of $2.2 million in savings accounts. Money market accounts and NOW accounts increased $1.3 million and $853,000, respectively, from December 31, 2006.
The following table reflects the components of the deposit portfolio at June 30, 2007 and December 31, 2006:
6/30/07 | 12/31/06 | |||||||
(In thousands) | ||||||||
NOW and super NOW accounts | $ | 18,560 | $ | 17,707 | ||||
Demand deposit accounts | 32,059 | 31,424 | ||||||
Savings accounts | 31,487 | 33,676 | ||||||
Money market accounts | 74,484 | 73,163 | ||||||
Certificates of deposit | 158,122 | 139,692 | ||||||
Total deposits | $ | 314,712 | $ | 295,662 | ||||
Borrowings:
Borrowings consist of long-term and short-term Federal Home Loan Bank (FHLB) advances and securities sold under agreements to repurchase. Total borrowings amounted to $203.0 million at June 30, 2007, compared to $184.8 million at December 31, 2006, an increase of $18.3 million. While the total borrowings increased since year-end, the mix of borrowings has shifted from a heavier reliance on short-term borrowings to longer-term advances. Short-term borrowings decreased $31.0 million from December 31, 2006, while long-term FHLB advances increased $48.9 million due to the availability of more favorable, longer term rates. The Company believes its borrowing position leaves the Company less vulnerable to rate fluctuations in the coming year.
The following table reflects the components of borrowings at June 30, 2007 and December 31, 2006:
6/30/07 | 12/31/06 | |||||||
(In thousands) | ||||||||
FHLB long-term advances | $ | 192,448 | $ | 143,519 | ||||
FHLB short-term borrowings | 5,000 | 36,000 | ||||||
Customer repurchase agreements | 5,595 | 5,263 | ||||||
Total borrowings | $ | 203,043 | $ | 184,782 | ||||
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
SUMMARY
The Company reported net income of $832,000, or $0.18 per diluted share, as compared to a net loss of $1.9 million, or $(0.42) per diluted share, for the three months ended June 30, 2007 and 2006, respectively. The second quarter of 2007 experienced an increase in net income primarily due to the balance sheet restructuring in the second quarter of 2006 whereby $80 million of investment securities were sold at a pre-tax loss of $2.4 million (after tax charge of $1.6 million), or $0.35 per diluted share. Other non-recurring costs in 2006 relating to the name change of the Company’s subsidiary bank, the flood at the Corporation’s headquarters, and certain severance payments to employees recognized in 2006 also contributed to the increase in net income in 2007 as compared to 2006.
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Net Interest Income From Operations:
Net interest income for the three months ended June 30, 2007 increased by $541,000, or 16.4%, to $3.8 million from $3.3 million for the same period of 2006. The net interest rate spread increased to 2.24% for the three months ended June 30, 2007 versus 2.16% for the same period of 2006. Interest income for the three months ended June 30, 2007 increased $1.5 million primarily due to higher average loan balances and higher investment security and loan rates compared to the same period of 2006. Partially offsetting the increase in total interest income was an increase of $923,000 in total interest expense primarily due to higher rates paid on deposits and an increase in average deposit and borrowing balances. Another factor in the increase in the net interest margin to 2.81% versus 2.54% for the quarters ended June 30, 2007 and 2006, respectively, was due to the balance sheet restructuring undertaken in the second quarter of 2006.
Interest Income:
Interest income increased $1.5 million, or 20.8%, during the second quarter of 2007 versus the same quarter in 2006, primarily attributable to a rise in average loan balances coupled with higher investment security rates.
Average loan interest rates increased 27 basis points from 6.97% to 7.24% during the second quarters of 2006 and 2007, respectively, contributing $85,000 to interest income. Average loan balances rose $70.5 million from $246.0 million in 2006 to $316.4 million in 2007 contributing $1.3 million to interest income.
Average investment security interest rates increased 80 basis points during the second quarter of 2007 from 4.03% in 2006 to 4.83% in 2007 adding $397,000 to interest income. Average investment security balances declined $42.7 million from $275.5 million in 2006 to $232.8 million in 2007 reducing interest income by $365,000.
Interest Expense:
Interest expense increased $923,000, or 24.7%, during the second quarter of 2007 from $3.7 million in the second quarter of 2006 to $4.7 million in the second quarter of 2007, primarily due to the rise in overall market interest rates experienced by the deposit portfolio coupled with increases in average deposit and average borrowed funds volumes.
Average deposit interest rates increased 110 basis points from 2.39% to 3.49% in the second quarter of 2006 and 2007, respectively, contributing $546,000 to interest expense. Average interest-bearing deposit balances decreased by $9.2 million from $285.8 million in 2006 to $276.6 million in 2007, but a change in the mix resulting in a preference for higher costing certificates of deposit increased interest expense by $161,000.
Average borrowed funds interest rates increased 1 basis point from 4.67% in the second quarter of 2006 to 4.68% in the same quarter of 2007 resulting in a rise of $3,000 to interest expense. Average borrowed fund balances rose $18.3 million, or 10.4%, from $175.2 million in 2006 to $193.5 million in 2007. This increase resulted in additional interest expense of $213,000 due to an increase in longer term borrowed funds.
Provision for Loan Losses:
The provision for loan losses was $155,000 and $30,000 for the three months ended June 30, 2007 and 2006, respectively. The provisions in 2007 and 2006 reflect management’s analysis of loan growth during the second quarter of 2007 and 2006. The balance of the allowance for loan losses has grown to $4.5 million at June 30, 2007, from $4.2 million at June 30, 2006, respectively. The coverage of the allowance for loan losses has decreased to 1.36% at June 30, 2007 from 1.69% at June 30, 2006 due to the loan growth experienced during 2007 and 2006 which, combined with the low levels of non-performing and delinquent loans, led to management’s assessment of the allowance for loan losses being adequate as of June 30, 2007.
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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 June 30, 2007 and 2006. Average loans include non-performing loans.
Three months ended | Three months ended | |||||||||||||||||||||||
6/30/07 | 6/30/06 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Average | Interest | Average | Interest | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Investment securities: | ||||||||||||||||||||||||
Short-term investments | $ | 14,603 | $ | 190 | 5.22 | % | $ | 7,971 | $ | 101 | 5.08 | % | ||||||||||||
U. S. treasury and Government- sponsored entities | 37,732 | 370 | 3.93 | 81,359 | 673 | 3.32 | ||||||||||||||||||
Corporate and other investment securities | 18,876 | 280 | 5.95 | 25,092 | 153 | 2.45 | ||||||||||||||||||
Collateralized mortgage obligations and mortgage- backed securities | 161,599 | 1,962 | 4.87 | 161,109 | 1,843 | 4.59 | ||||||||||||||||||
Total investment securities | 232,810 | 2,802 | 4.83 | 275,531 | 2,770 | 4.03 | ||||||||||||||||||
Loans: | ||||||||||||||||||||||||
Residential real estate | 71,270 | 1,003 | 5.64 | 64,002 | 875 | 5.48 | ||||||||||||||||||
Equity | 20,187 | 322 | 6.40 | 11,081 | 173 | 6.26 | ||||||||||||||||||
Consumer | 849 | 14 | 6.61 | 550 | 9 | 6.56 | ||||||||||||||||||
Total retail loans | 92,306 | 1,339 | 5.82 | 75,633 | 1,057 | 5.61 | ||||||||||||||||||
Construction | 53,210 | 1,225 | 9.23 | 33,240 | 753 | 9.09 | ||||||||||||||||||
Commercial real estate | 152,448 | 2,770 | 7.29 | 128,832 | 2,301 | 7.16 | ||||||||||||||||||
Commercial | 18,465 | 375 | 8.15 | 8,259 | 166 | 8.06 | ||||||||||||||||||
Total corporate loans | 224,123 | 4,370 | 7.82 | 170,331 | 3,220 | 7.58 | ||||||||||||||||||
Total loans | 316,429 | 5,709 | 7.24 | 245,964 | 4,277 | 6.97 | ||||||||||||||||||
Total interest-earning assets | 549,239 | 8,511 | 6.22 | % | 521,495 | 7,047 | 5.42 | % | ||||||||||||||||
Allowance for loan losses | (4,401 | ) | (4,174 | ) | ||||||||||||||||||||
Other assets | 16,742 | 22,190 | ||||||||||||||||||||||
Total assets | $ | 561,580 | $ | 539,511 | ||||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
NOW and super NOW accounts | $ | 18,567 | $ | 8 | 0.17 | % | $ | 35,544 | $ | 11 | 0.12 | % | ||||||||||||
Regular savings accounts | 31,848 | 39 | 0.49 | 39,442 | 49 | 0.50 | ||||||||||||||||||
Money market investment accounts | 73,849 | 557 | 3.03 | 79,102 | 443 | 2.25 | ||||||||||||||||||
Certificates of deposit and escrow | 152,343 | 1,805 | 4.75 | 131,735 | 1,199 | 3.65 | ||||||||||||||||||
Total interest-bearing deposits | 276.607 | 2,409 | 3.49 | 285,823 | 1,702 | 2.39 | ||||||||||||||||||
Borrowed funds: | ||||||||||||||||||||||||
Short-term borrowed funds | 13,847 | 161 | 4.66 | 58,341 | 711 | 4.89 | ||||||||||||||||||
Long-term FHLB advances | 179,658 | 2,097 | 4.68 | 116,874 | 1,331 | 4.57 | ||||||||||||||||||
Total borrowed funds | 193,505 | 2,258 | 4.68 | 175,215 | 2,042 | 4.67 | ||||||||||||||||||
Total interest-bearing liabilities | 470,112 | 4,667 | 3.98 | % | 461,038 | 3,744 | 3.26 | % | ||||||||||||||||
Non-interest-bearing deposits | 29,809 | 17,202 | ||||||||||||||||||||||
Other liabilities | 2,873 | 4,512 | ||||||||||||||||||||||
Total liabilities | 502,794 | 482,752 | ||||||||||||||||||||||
Stockholders’ equity | 58,786 | 56,759 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 561,580 | $ | 539,511 | ||||||||||||||||||||
Net interest rate spread | 2.24 | % | 2.16 | % | ||||||||||||||||||||
Net interest income | $ | 3,844 | $ | 3,303 | ||||||||||||||||||||
Net interest margin on average earning assets | 2.81 | % | 2.54 | % | ||||||||||||||||||||
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Non-Interest Income (Loss):
Non-interest income increased $2.5 million for the three months ended June 30, 2007 compared to the same period in 2006, and totaled $434,000 in 2007 while amounting to a loss of $2.1 million in 2006. The increase was primarily attributable to the absence of a loss on sale of investment securities in 2007 versus a loss of $2.4 million in 2006 on low-yielding investment securities. Deposit account fees increased to $251,000 from $189,000 for the three months ended June 30, 2007 and 2006, respectively, due mainly to an increase of $62,000 in overdraft fees. Loan servicing fees increased to $56,000 from $34,000 for the three months ended June 30, 2007 and 2006, respectively. Other income increased to $127,000 from $117,000 for the three months ended June 30, 2007 and 2006, respectively. During the third and fourth quarters of 2007, it is anticipated that the Company will distribute the remaining assets of its defined benefit pension plan of approximately $5.6 million and record settlement gains of approximately $750.000.
Non-Interest Expense:
Non-interest expenses declined $1.3 million, or 30.7%, during the second quarter of 2007 to $2.9 million versus $4.1 million for the same period of 2006. The majority of the decrease was attributable to a decrease in salary and employee benefits expenses of $320,000, or 16.5%, to $1.6 million in the second quarter of 2007 from $1.9 million in the second quarter of 2006. The decrease resulted from primarily a reduction in the number of employees coupled with a reduction in benefit costs. Occupancy and equipment expense decreased $191,000, or 38.7%, to $303,000 in the second quarter of 2007 from $494,000 in the same period of 2006 due mainly to accelerated depreciation recognized in 2006 on obsolete fixed assets and damaged equipment resulting from a flood at the corporate headquarters. Data processing expenses decreased $19,000, or 7.2%, to $244,000 in the second quarter of 2007 from $263,000 in 2006 due to a decrease in computer repairs and maintenance. Marketing expenses decreased $225,000, or 54.0%, during the second quarter of 2007 to $192,000 from $417,000 in the second quarter of 2006 due to a decrease in name change expenses relating to the company’s subsidiary Bank. Professional fees decreased $90,000, or 44.8%, to $111,000 in the second quarter of 2007 from $201,000 in the second quarter of 2006 due primarily to a decrease in consulting fees. Other expenses decreased $430,000 to $408,000 in the second quarter of 2007 from $838,000 in the same period of 2006 due primarily to $250,000 in non-recurring name change expenses incurred in 2006.
Income Taxes:
The Company reported an income tax expense of $417,000 for the three months ended June 30, 2007, for an effective income tax rate of 33.4%. This compares to an income tax benefit of $1.0 million for the three months ended June 30, 2006 or an effective income tax rate of 34.2%. The increase in the effective tax rate in 2007 was due to a higher percentage of the taxable earnings being derived from the Bank. Subsidiaries within the consolidated group pay various state income tax rates and the mix of taxable earnings within the group can change.
SIX MONTHS ENDED JUNE 30, 2007 AND 2006
SUMMARY
The Company reported net income of $1.6 million, or $0.34 per diluted share, as compared to a net loss of $1.7 million, or $(0.37) per diluted share, for the six months ended June 30, 2007 and 2006, respectively. The second quarter of 2007 experienced an increase in net income primarily due to non-recurring expenses including the balance sheet restructuring in the second quarter of 2006, name change costs of the Company’s subsidiary bank, costs associated with the flood of the Company’s headquarters and severance payments to former executives, all of which were incurred in 2006.
Net Interest Income From Operations:
Net interest income for the six months ended June 30, 2007 increased by $1.0 million, or 15.4%, to $7.6 million from $6.6 million for the same period of 2006. The net interest rate spread increased to 2.26% for the six months ended June 30, 2007 versus 2.19% for the same period of 2006. Interest income for the six months ended June 30, 2007 increased $3.0 million, primarily due to higher average loan balances and higher investment security and loan
17
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rates from the same period of 2006. Partially offsetting the increase in total interest income was a corresponding increase of $2.0 million in total interest expense, primarily due to higher rates paid on deposits and borrowings and an increase in average deposit and borrowing balances. Another factor in the increase in the net interest margin to 2.84% versus 2.57% for the quarters ended June 30, 2007 and 2006, respectively, was due to the balance sheet restructuring undertaken in the second quarter of 2006.
Interest Income:
Interest income rose $3.0 million, or 22.2%, during the six months ended June 30, 2007 versus the same period in 2006, mainly attributable to a rise in average loan volumes coupled with higher investment security and loan rates.
Average loan interest rates increased 38 basis points from 6.86% to 7.24% during the six months ended June 30, 2006 and 2007, respectively, contributing $322,000 to interest income. Average loan balances rose $64.7 million from $241.7 million in 2006 to $306.4 million in 2007 contributing $2.5 million to interest income.
Average investment security interest rates increased 90 basis points during the first six months of 2007 from 3.92% in 2006 to 4.82% in 2007 adding $912,000 to interest income. Average investment security balances declined $41.4 million from $275.6 million in 2006 to $234.2 million in 2007 reducing interest income by $671,000.
Interest Expense:
Interest expense increased $2.0 million, or 28.7%, to $9.0 million during the first six months of 2007 from $7.0 million in the same period of 2006 primarily due to the rise in interest rates paid on average deposits coupled with higher average borrowed funds balances.
Average deposit interest rates rose 112 basis points from 2.29% to 3.41% in the first six months of 2006 and 2007, respectively, contributing $1.1 million to interest expense. Average interest-bearing deposit balances decreased by $11.8 million from $285.4 million in 2006 to $273.7 million in 2007, while interest expense increased by $278,000 due to a change in the deposit mix and customers’ preferences for higher yielding certificates of deposit.
Average borrowed funds interest rates increased 17 basis points from 4.51% in the six months ended of 2006 to 4.68% in the same quarter of 2007 resulting in a rise of $190,000 to interest expense, the majority of which, $137,000, related to longer-term borrowed funding. Average borrowed fund balances rose $20.6 million or 12.3% from $167.3 million in 2006 to $187.9 million in 2007. This increase contributed $436,000 to the interest expense primarily due to $984,000 longer-term borrowed funds interest expense which was partially offset by a reduction of $548,000 in short-term borrowed funds interest expense.
Provision for Loan Losses:
The provision for loan losses was $215,000 and $30,000 for the six months ended June 30, 2007 and 2006, respectively. The provisions in 2007 and 2006 reflect management’s assessment of the adequacy of the allowance based upon management’s analysis of the Bank’s loan portfolio, loan growth during 2007 and 2006 and the level of non-performing loans.
Non-Interest Income (Loss):
Non-interest income increased to $788,000 for the six months ended June 30, 2007 compared to a loss of $1.7 million in the same period of 2006. The increase was primarily attributable to a loss on sales of low yielding investments securities totaling $2.4 million due to the balance sheet restructuring recognized in 2006. Loan servicing fees increased to $114,000 from $41,000 in 2006 primarily due to a reduction in amortization on mortgage servicing rights (“MSR”) and additional fee income received on corporate loans. Deposit account fees increased to $437,000 from $398,000, respectively, in 2007 and 2006 primarily due to an increase in overdraft fees. Loss on sale of investment securities totaled $2.4 million in 2006 as low yielding investment securities were sold. Gains on sales of mortgage loans totaled $7,000 in 2006 and $0 in 2007 as the Bank retained all of its originated loans. Other income remained flat at $237,000 and $227,000, respectively in 2007 versus 2006.
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The following table presents the Company’s average balance sheet, net interest income and average interest rates for the six months ended June 30, 2007 and 2006. Average loans include non-performing loans.
Six months ended | Six months ended | |||||||||||||||||||||||
6/30/07 | 6/30/06 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Average | Interest | Average | Interest | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Investment securities: | ||||||||||||||||||||||||
Short-term investments | $ | 11,920 | $ | 312 | 5.28 | % | $ | 5,173 | $ | 126 | 4.91 | % | ||||||||||||
U. S. Treasury and Government- sponsored entities | 39,042 | 762 | 3.94 | 91,801 | 1,480 | 3.25 | ||||||||||||||||||
Corporate and municipal bonds and other securities | 18,869 | 552 | 5.90 | 25,435 | 390 | 3.09 | ||||||||||||||||||
Collateralized mortgage obligations and mortgage- backed securities | 164,319 | 3,972 | 4.87 | 153,141 | 3,361 | 4.43 | ||||||||||||||||||
Total investment securities | 234,150 | 5,598 | 4.82 | 275,550 | 5,357 | 3.92 | ||||||||||||||||||
Loans: | ||||||||||||||||||||||||
Residential real estate | 70,870 | 1,988 | 5.66 | 63,563 | 1,696 | 5.38 | ||||||||||||||||||
Equity | 20,110 | 629 | 6.31 | 10,862 | 333 | 6.18 | ||||||||||||||||||
Consumer | 880 | 30 | 6.87 | 541 | 17 | 6.34 | ||||||||||||||||||
Total retail loans | 91,860 | 2,647 | 5.81 | 74,966 | 2,046 | 5.50 | ||||||||||||||||||
Construction | 49,736 | 2,303 | 9.34 | 30,050 | 1,324 | 8.89 | ||||||||||||||||||
Commercial real estate | 148,733 | 5,402 | 7.32 | 128,036 | 4,518 | 7.12 | ||||||||||||||||||
Commercial | 16,041 | 654 | 8.22 | 8,656 | 338 | 7.87 | ||||||||||||||||||
Total corporate loans | 214,510 | 8,359 | 7.86 | 166,742 | 6,180 | 7.47 | ||||||||||||||||||
Total loans | 306,370 | 11,006 | 7.24 | 241,708 | 8,226 | 6.86 | ||||||||||||||||||
Total interest-earning assets | 540,520 | 16,604 | 6.19 | % | 517,258 | 13,583 | 5.30 | % | ||||||||||||||||
Allowance for loan losses | (4,364 | ) | (4,160 | ) | ||||||||||||||||||||
Other assets | 16,513 | 19,686 | ||||||||||||||||||||||
Total assets | $ | 552,669 | $ | 532,784 | ||||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
NOW and Super NOW accounts | $ | 18,178 | $ | 16 | 0.18 | % | $ | 35,963 | $ | 22 | 0.12 | % | ||||||||||||
Regular savings accounts | 32,368 | 80 | 0.50 | 40,223 | 99 | 0.50 | ||||||||||||||||||
Money market investment accounts | 73,628 | 1,082 | 2.96 | 79,473 | 873 | 2.22 | ||||||||||||||||||
Certificates of deposit and escrow | 149,497 | 3,446 | 4.65 | 129,765 | 2,254 | 3.50 | ||||||||||||||||||
Total interest bearing deposits | 273,671 | 4,624 | 3.41 | 285,424 | 3,248 | 2.29 | ||||||||||||||||||
Borrowed funds: | ||||||||||||||||||||||||
Short-term borrowed funds | 23,590 | 581 | 4.97 | 45,962 | 1,076 | 4.72 | ||||||||||||||||||
Long-term FHLB Advances | 164,291 | 3,782 | 4.64 | 121,300 | 2,661 | 4.42 | ||||||||||||||||||
Total borrowed funds | 187,881 | 4,363 | 4.68 | 167,262 | 3,737 | 4.51 | ||||||||||||||||||
Total interest bearing liabilities | 461,552 | 8,987 | 3.93 | % | 452,686 | 6,985 | 3.11 | % | ||||||||||||||||
Non-interest bearing deposits | 29,449 | 17,320 | ||||||||||||||||||||||
Other liabilities | 3,290 | 4,494 | ||||||||||||||||||||||
Total liabilities | 494,291 | 474,500 | ||||||||||||||||||||||
Stockholders’ equity | 58,378 | 58,284 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 552,669 | $ | 532,784 | ||||||||||||||||||||
Net interest rate spread | 2.26 | % | 2.19 | % | ||||||||||||||||||||
Net interest income | $ | 7,617 | $ | 6,598 | ||||||||||||||||||||
Net interest margin on average earning assets | 2.84 | % | 2.57 | % | ||||||||||||||||||||
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Non-Interest Expense:
Non-interest expenses declined $1.6 million, or 22.3%, during 2007 to $5.7 million in the first six months of 2007 versus $7.4 million for the same period of 2006. Contributing to this increase were costs associated with the name change of the Company’s subsidiary bank to River Bank and severance payments to former employees incurred in 2006. There was a decrease of $624,000, or 15.6%, in salaries and employee benefits to $3.4 million from $4.0 million primarily due to costs incurred in 2006 of $582,000 incurred with former employee severance payments and $64,000 in conjunction with the adoption of SFAS 123R by the Company on stock options as well as decreases in the number of Bank employees in 2007 combined with increased employee contributions towards their medical insurance coverage in 2007. Occupancy and equipment expenses decreased $233,000, or 28.3%, to $590,000 in the first six months of 2007 from $823,000 in the same period of 2006 primarily due to costs incurred in 2006 relating to accelerated deprecation of $197,000 on damaged property and equipment and obsolete fixed assets and an increase of $115,000 in repairs and maintenance. The majority of the repairs pertain to costs of $81,000 incurred in the remediation of a small environment issue at one of the Bank’s branch locations. Data processing expenses increased to $525,000 in 2007 from $496,000 in 2006 due to an increase of $49,000 in computer software and license fees and $30,000 in service bureau charges partially offset by a decrease of $43,000 in computer repairs and maintenance. Marketing expenses decreased $235,000, or 51.6%, during 2007 due to $335,000 in marketing and promotional expenses relating to the name change of the Company’s subsidiary bank incurred in 2006. Professional fees decreased $144,000 to $220,000 in 2007 from $364,000 in 2006’s first six months due to a decrease in consulting, audit and tax preparation fees due to the name change and tax reporting year-end changes during 2006. Other expenses decreased $435,000, or 35.3%, to $796,000 from $1.2 million, respectively, for the six months ended 2007 and 2006 due to costs incurred in 2006 associated with the subsidiary bank name change of $250,000, costs of $71,000 incurred as a result of the flood of the corporate headquarters in May 2006 and an increase of $80,000 in stockholder’s related expenses resulting from the adoption of the shareholder rights plan as well as the 2006 Stock Option Plan.
Income Taxes:
The Company reported an income tax expense of $863,000 for the six months ended June 30, 2007, resulting in an effective income tax benefit rate of 35.0%. This compares to an income tax benefit of $867,000 for the six months ended June 30, 2006 or an effective income tax rate of 34.0%. Income tax expense increased $1.7 million for the first six months of 2007 versus the same period of 2006 primarily due to an increase in taxable earnings within the consolidated group. Subsidiaries within the consolidated group pay various state income tax rates and the mix of taxable income within the group can change.
LIQUIDITY AND CAPITAL RESOURCES:
The Company’s primary source of funds is cash dividends from its wholly-owned subsidiary, River Bank. The Bank paid $750,000 in dividends to the Company in the first six months of 2007. The Bank did not pay a dividend to the Company in the first six months of 2006.
The Bank’s primary sources of funds include collections of principal payments and repayments on outstanding loans, increases in deposits, advances from the Federal Home Loan Bank of Boston (“FHLB”) and securities sold under agreements to repurchase. The Bank has a line of credit of $6.8 million with the FHLB. The Bank currently has a $5.0 million unsecured Federal funds line of credit with another financial institution. At June 30, 2007, the entire $11.8 million in available lines of credit was available.
The FHLB requires member banks to maintain qualified collateral for its advances. Collateral is comprised of the Bank’s residential mortgage portfolio and the portion of the investment portfolio that meets FHLB qualifying collateral requirements and has been designated as such. The Bank’s borrowing capacity at the FHLB at June 30, 2007 was $223.5 million, of which $197.4 million had been borrowed.
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On April 26, 2007, the Company announced a common stock repurchase program to purchase up to 230,000 shares of Company stock. As of June 30, 2007, the Company had purchased 9,300 shares of Company stock at a weighted average price per share of $16.56, for a total cost of $154,000. Subsequently, the Company purchased an additional 10,700 shares of Company stock in July, 2007, at a weighted average price per share of $16.62, for a total cost of $178,000.
At June 30, 2007, the Company’s stockholders’ equity was $58.0 million as compared to $58.5 million at December 31, 2006. The change during the first six months of 2007 occurred due to net income of $1.6 million, tax benefits associated with the exercise of stock options of $22,000, proceeds of $108,000 from the exercise of stock options and compensation expense relating to stock options of $16,000. Stockholders’ equity was reduced by the declaration of cash dividends to shareholders of $1.3 million and an $872,000 decrease in the fair value of investment securities available for sale, net of taxes.
The Company’s leverage ratio at June 30, 2007 and December 31, 2006 was 10.69% and 11.18%, respectively. The Company’s and the Bank’s total risk based capital ratios were 15.46% and 15.09% at June 30, 2007, respectively, compared with 16.86% and 16.35% at December 31, 2006, respectively. The total risk based capital ratios declined from December 31, 2006 due to an increase in the total loan balance portfolio and in the total loan commitments. The Company exceeds all regulatory minimum capital ratio requirements set forth by the FRB, and the Bank exceeds all minimum capital ratio requirements as defined by the FDIC.
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 2006 Annual Report on Form 10-K which is incorporated by reference.
ITEM 4: 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 reasonable likely to materially affect, the Company’s internal controls over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Bank is involved in various legal proceedings incidental to its business. During the six months ended June 30, 2007, 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.
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, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) — (b) None.
(c) | The following table sets forth information with respect to any purchase made by or on behalf of LSB Corporation or any “affiliated purchaser,” as defined in 204.10b-18(a)(3) under the Securities Exchange Act of 1934, of shares of LSB Corporation common stock during the indicated periods: |
Issuer Purchases of Equity Securities | ||||||||||||||||
Total number of shares | Maximum number of | |||||||||||||||
Weighted | purchased as part of | shares that may yet be | ||||||||||||||
Total number of | Average price paid | publicly announced | purchased under the | |||||||||||||
2007 | Shares purchased | per share | plans or programs | plans or program (1) | ||||||||||||
April 1 — April 30 | None | |||||||||||||||
May 1 — May 31 | None | |||||||||||||||
June 1 — June 30 | 9,300 | $ | 16.56 | 9,300 | 220,700 | |||||||||||
Total | ||||||||||||||||
Second quarter | 9,300 | $ | 16.56 | 9,300 | 220,700 | |||||||||||
(1) | On April 26, 2007, the Company announced a common stock repurchase program to repurchase up to 230,000 shares. The Company has placed no deadline on the duration of the repurchase program. There were no shares purchased other than through a publicly announced plan or program. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company’s Annual Meeting of Stockholders was held on May 1, 2007. Disclosure regarding the vote of the stockholders at that meeting was included in Part II, Item 4 of the Company’s Quarterly Report of Form 10-Q filed on May 11, 2007, which Item is incorporated herein by reference.
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS
Number | Description | |
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. | |
32.3 | 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 | ||||
August 13, 2007 | /s/ Gerald T. Mulligan | |||
Gerald T. Mulligan | ||||
President and Chief Executive Officer | ||||
August 13, 2007 | /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 six months ended June 30, 2007
Quarterly Report on Form 10-Q for the six months ended June 30, 2007
EXHIBIT INDEX
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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