EXHIBIT 13
LSB CORPORATION
[COVER GRAPHIC]
2001 ANNUAL REPORT
LETTER TO THE STOCKHOLDERS
LSB Corporation reported net income for the year ended December 31, 2001 of
$3,357,000 or $0.74 diluted earnings per share as compared to $4,323,000 or
$0.97 diluted earnings per share for the prior year ended 2000. The decrease in
net income and earnings per share was attributable to a favorable impact to
earnings during the year 2000, including income taxes of $854,000 for the year
2000 compared to $1,953,000 for the year 2001. The favorable outcome of an
income tax matter led to a lower effective income tax rate for the Company
during 2000. Although the difference in income taxes had the greatest impact on
earnings for the year, several other items are worth noting. During the year
2001 net interest income increased, when the banking industry was operating in a
declining interest rate environment, by $502,000 or 4% from the year 2000;
earnings before income taxes increased in 2001 from 2000 even after the
recognition of expenses associated with the establishment of the holding
company, and the Company has increased dividends paid to shareholders in each of
the past three years to $0.40 per share for the year 2001, a 54% increase from
$0.26 per share in 2000, which in turn was a 73% increase from $0.15 per share
in 1999.
Net interest income increased to $13,181,000 in 2001 from $12,679,000 in 2000.
The Company's net interest margin on average earning assets decreased slightly
to 3.21% in 2001 from 3.22% in 2000. Lower interest expense on FHLB advances and
other borrowed funds and higher average loan balances helped net interest income
increase despite declining yields on interest earning assets during 2001. The
Company increased the average loan portfolio by $26,940,000 to $230,618,000 in
2001 from $203,678,000 in 2000, a 13% increase.
The Company continued to maintain a low level of risk assets during the past
several years. Non-performing loans were $951,000 at December 31, 2001 and
$10,000 at December 31, 2000. Risk assets as a percentage of total assets has
remained below 1.00% for the last six years and is currently at 0.22% and 0.01%
for December 31, 2001 and 2000, respectively.
Provisions for loan losses were $175,000 and $250,000 for the years ended
December 31, 2001 and 2000, respectively. The Company continues to look for
quality assets as it grows the loan portfolio with construction, commercial real
estate and commercial business loan types. The Company has not acquired property
through foreclosure in the past four years.
Non-interest income increased to $1,426,000 for the year 2001 compared to
$1,124,000 during 2000. This increase was primarily due to gains on sales of
mortgage loans of $249,000 and $47,000 in 2001 and 2002, respectively. Increases
in other accounts such as deposit account fees also contributed to the increase
in non-interest income.
Non-interest expense totaled $9,122,000 and $8,376,000 for the years ended
December 31, 2001 and 2000, respectively. A major part of this increase was
attributed to the reorganization of Lawrence Savings Bank into a holding company
form effective on July 1, 2001. Professional expenses, which includes legal
expenses, increased to $671,000 in 2001, up from $496,000 in 2000. Shareholder
expense also increased due to the reorganization.
Total assets increased to $438,267,000 at December 31, 2001 from $413,090,000 at
December 31, 2000. The increase in asset size during 2001 is primarily
attributed to both loan growth of $14,352,000 and a $22,935,000 increase in the
investment securities portfolio funded by Federal Funds and borrowed funds.
Gross loans at December 31, 2001 were $236,397,000 up 6% from $222,045,000 at
December 31, 2000. The allowance for loan losses was $4,070,000 at December 31,
2001 and $3,685,000 at December 31, 2000.
1
LETTER TO THE STOCKHOLDERS
(CONTINUED)
Total deposits at December 31, 2001 were $268,450,000 down, from $270,548,000 at
December 31, 2000. The decrease in deposits was primarily due to a decrease in
certificates of deposit accounts partially offset by increases in both savings
and money market accounts.
The Company exceeds all regulatory minimum capital ratio requirements as defined
by the FDIC. The leverage ratio was 11.46% and 11.71% at December 31, 2001 and
December 31, 2000, respectively.
The financial highlights show that over the past five years the Company has
continued to grow the loan portfolio. The Company's loan balances show the most
growth in commercial real estate, construction and commercial business loan
types. Management continues to concentrate on asset quality and improving net
interest margin to enhance the Company's earnings.
The Company's 24 hour e-branch at LawrenceSavings.com continues to provide a
convenient and useful delivery system of banking products to our customers.
Customers can do their banking anytime, anywhere, using our website. During the
coming year, our Board of Directors, management and staff will continue to work
to further improve the earnings of the Company and shareholder value.
/s/ Paul A. Miller
- -----------------------------------------
Paul A. Miller
President and Chief Executive Officer
LSB Corporation
2
FINANCIAL TABLE OF CONTENTS
4 FINANCIAL HIGHLIGHTS
5 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
16 REPORT OF MANAGEMENT RESPONSIBILITY
17 INDEPENDENT AUDITORS' REPORT
18 CONSOLIDATED BALANCE SHEETS
19 CONSOLIDATED STATEMENTS OF
OPERATIONS
20 CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
21 CONSOLIDATED STATEMENTS OF
CASH FLOWS
22 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
37 STOCKHOLDER INFORMATION
3
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------------------------------------------
December 31, 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
BALANCE SHEET DATA:
Total assets $ 438,267 $ 413,090 $ 404,172 $ 340,041 $ 360,845
Loans, gross 236,397 222,045 198,098 197,110 164,500
Allowance for loan losses 4,070 3,685 3,381 3,272 3,144
Other real estate owned 22 32 519 556 809
Federal funds sold 5,705 15,427 -- 5,629 --
U.S. Treasury, Government
agency and Corporate obligations 160,337 125,542 151,358 87,006 153,421
Municipal obligations 2,062 60 113 1,265 --
Other securities 11,369 25,231 26,301 25,216 23,685
Deposits 268,450 270,548 246,040 253,501 254,462
Borrowed funds 111,099 86,161 104,167 34,214 63,396
Equity 54,092 52,313 48,408 46,713 37,610
Year Ended December 31, 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
OPERATING DATA:
Interest income $ 28,792 $ 29,037 $ 26,097 $ 25,060 $ 25,416
Interest expense 15,611 16,358 13,183 13,257 14,288
--------- --------- --------- --------- ---------
Net interest income 13,181 $ 12,679 12,914 11,803 11,128
Provision (credit) for loan losses 175 250 75 450 (300)
Non-interest income 1,426 1,124 844 1,380 1,451
Non-interest expense 9,122 8,376 9,347 8,725 7,767
--------- --------- --------- --------- ---------
Income before income taxes 5,310 5,177 4,336 4,008 5,112
Income tax expense (benefit) 1,953 854 1,582 (4,800) (3,000)
--------- --------- --------- --------- ---------
Net income $ 3,357 $ 4,323 $ 2,754 $ 8,808 $ 8,112
====================================================================================================================
Basic earnings per share $ .77 $ .99 $ .63 $ 2.04 $ 1.90
Diluted earnings per share $ .74 $ .97 $ .61 $ 1.95 $ 1.82
====================================================================================================================
OTHER DATA:
Interest rate spread 2.64% 2.66% 3.05% 2.97% 2.77%
Net interest margin on average earning
assets 3.21 3.22 3.55 3.54 3.26
Return on average assets (net income /
average assets) 0.79 1.05 0.72 2.52 2.31
Return on average equity (net income /
average stockholders' equity) 6.35 8.72 5.77 21.09 25.64
Dividend payout ratio (dividends declared per
share divided by net income per share) 51.95 26.26 23.81 -- --
Cash dividends declared and paid per
common share $ 0.40 $ 0.26 $ 0.15 $ -- $ --
Average stockholders' equity to average
assets ratio 12.39% 12.06% 12.47% 11.96% 9.00%
- --------------------------------------------------------------------------------------------------------------------
Book value per share at year end $ 12.35 $ 11.99 $ 11.11 $ 10.78 $ 8.77
- --------------------------------------------------------------------------------------------------------------------
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND FACTORS WHICH MAY AFFECT FUTURE RESULTS
This Annual Report contains 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.
Forward-looking statements include information concerning possible or assumed
future results of operations of LSB Corporation (the "Corporation" or the
"Company"). Also, when verbs in the present tense such as "believes," "expects,"
"anticipates," "continues," "attempts" or similar expressions are used,
forward-looking statements are being made. Stockholders should note that many
factors, some of which are discussed elsewhere in this document and in the
documents which we incorporate by reference, could affect the future financial
results of the Corporation and could cause results to differ materially from
those expressed in or incorporated by reference in this document. Those factors
include fluctuations in interest rates, inflation, government regulations and
economic conditions and competition in the geographic and business areas in
which the Corporation conducts its operations. As a result of such risks and
uncertainties, the Corporation's actual results may differ materially from such
forward-looking statements. The Corporation does not undertake, and specifically
disclaims any obligation to publicly release revisions to any such
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
SUMMARY
The Corporation is a one bank-holding company principally conducting business
through Lawrence Savings Bank (the "Bank"). The Corporation became the holding
company for the Bank on July 1, 2001 pursuant to a plan of reorganization in
which each share of Bank common stock then outstanding (and accompanying
preferred stock purchase rights) was converted into and exchanged for one share
of the Corporation's common stock (and accompanying preferred stock purchase
rights). The Corporation's common stock is currently traded on the Nasdaq Stock
Market under the symbol "LSBX". Prices of the common stock are reported in the
Wall Street Journal as "LSB Corp".
The Bank was established as a Massachusetts savings bank in 1868; the Bank
converted from mutual to stock form on May 9, 1986. Prior to July 1, 2001, the
Bank's common stock traded on the Nasdaq Stock Market under the symbol "LSBX".
Prices of the Bank's common stock were reported in the Wall Street Journal as
"LawrenceSvg".
The Corporation is subject to regulation and supervision by the Board of
Governors of the Federal Reserve Bank ("FRB"), and Massachusetts Division of
Banks. The Bank is subject to supervision and regulation of, and periodic
examination by, the Federal Deposit Insurance Corporation ("FDIC") and the
Massachusetts Division of Banks.
The Bank has four wholly-owned subsidiaries at December 31, 2001. Shawsheen
Security Corporation and Shawsheen Security Corporation II engage exclusively in
buying, selling, dealing in and holding securities for their own accounts.
Pemberton Corporation and Spruce Wood Realty Trust, respectively, hold
foreclosed real estate and real estate used in the ordinary course of the Bank's
business.
The Bank offers various financial products to the general public. These products
include loans for residential real estate, commercial real estate, construction,
consumer and commercial businesses. The Bank offers various deposit accounts
including savings, checking, money market, certificates of deposit and
individual retirement accounts. The Bank invests a portion of its funds in
federal funds and investment securities.
The principal source of funds for the Corporation is dividends from its Bank
subsidiary.
The principal sources of funds for the Bank's lending and investment activities
are deposits, loan payments and prepayments, investment securities payments and
maturities, advances from the Federal Home Loan Bank, federal funds purchased
and securities sold under agreements to repurchase.
MARKET AREA
The Bank's primary market area is the Merrimack Valley of Massachusetts and
southern New Hampshire. The Bank has five banking offices in the communities of
Andover, Lawrence, Methuen (2), and North Andover, Massachusetts.
LENDING ACTIVITIES
The Bank's loan portfolio consists of commercial real estate, commercial
business, construction, residential mortgage, home equity and consumer loans.
The Bank has been aggressive in seeking loans from creditworthy customers while
competition on both pricing and underwriting terms have been strong in the
Bank's market area. Gross loans at December 31, 2001 were $236.4 million, up
from $222.0 million at December 31, 2000.
COMMERCIAL REAL ESTATE. The Bank originates loans secured by real estate other
than 1-4 family residential properties. These loans are generally secured by
various types of commercial real estate including income properties, commercial
facilities (including retail, manufacturing, office and office condominiums) and
small businesses. The interest rates on these loans are fixed or variable. The
interest rates are based on a margin over the Treasury note rate or another
index (such as the Prime Rate as published in the Wall Street Journal ) for a
similar term. The margin is determined by the Bank based on the creditworthiness
of the borrower, relationship profitability and competitive factors.
COMMERCIAL BUSINESS. The Bank originates loans secured by business assets which
are not real estate. These loans are based on the creditworthiness, security
offered and future cash flows of the borrower. The Bank has "Preferred Lender"
status from the U.S. Small Business Administration ("SBA"). The interest rates
on the loans are fixed or variable in nature. The rates are primarily based on a
margin over the Prime Rate as published in the Wall Street Journal or the Base
Rate determined by the Bank. The margin is determined based on the
creditworthiness of the borrower, security offered and competitive factors.
CONSTRUCTION. These loans are generally short-term in nature and are for land
development, construction of residential homes built on speculation,
construction of homes for homeowners with permanent financing, and for
construction of commercial facilities (including retail, manufacturing and
office space). These loans are generally priced to yield the Wall Street Journal
Prime Rate plus a margin. Construction loans may involve additional risk due to
uncertainty of estimated cost of completion of a project, or ultimate sale of
the property to an end buyer. The Bank attempts to reduce these risks by lending
to contractors with pre-arranged buyers or having financing commitments upon
completion, or to businesses that are expanding and will occupy the completed
project.
RESIDENTIAL MORTGAGES. The Bank originates fixed and adjustable rate residential
mortgage loans which are underwritten to be eligible for sale in the secondary
market. These loans are secured primarily by owner occupied 1-4 family primary
residential properties. Adjustable
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
rate mortgage loans are generally held by the Bank in the loan portfolio as a
means to manage interest rate risk. Fixed rate mortgages are sold into the
secondary market unless management believes they represent a good long-term
asset based on various factors such as loan-to-value ratios, interest rates and
management's expectations of a loan's duration.
SECONDARY MORTGAGE MARKET. The Bank is an approved seller and servicer for the
Federal Home Loan Mortgage Corporation ("FHLMC") and the Massachusetts Housing
Finance Agency ("MHFA"). Sales of mortgage loans may be made at a premium or
discount resulting in gains or losses on the transaction. Based on the structure
of the sale, loans sold in the secondary market provide the Bank with service
fee income over the life of the loan.
HOME EQUITY. The Bank makes second mortgage and home equity loans. Home equity
loans can be accessed by the borrower by an account established with the Bank.
These loans carry interest rates that are either fixed or variable based on the
Prime Rate published in the Wall Street Journal plus or minus a margin above or
below this rate depending on the particular product selected by the borrower.
CONSUMER. The Bank offers a variety of consumer loan products including
overdraft lines of credit, collateral loans, and secured and unsecured personal
loans. These loans are generally fixed rate in nature. The Bank adjusts these
interest rates from time-to-time based on competitive factors in the
marketplace.
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS.
Deposits and borrowings are the primary source of funds for funding loans and
purchasing investment securities. The mix of deposits and borrowings is
dependent on many factors, such as loan demand, competition, the economy,
interest rates, and capital resources. Deposits are obtained from the general
public through the Bank's branch offices by additions to various deposit
accounts, including checking, savings, money market, certificates of deposit and
individual retirement accounts. The interest rates on these accounts generally
are competitive with other local financial institutions. The Bank's core deposit
products (savings, checking and money market accounts) allow customers more
flexibility and access and generally earn lower interest rates than other types
of accounts due to the Bank's operating costs to service these accounts.
Certificates of deposit provide customers with higher interest rates, but less
flexibility and access to deposits. Increasing and decreasing interest rates on
certificates of deposit allows the Bank to adjust its sources of funds while
providing a competitive interest rate. In addition to deposit accounts, other
sources of funds include advances from the Federal Home Loan Bank of Boston
("FHLB"), federal funds purchased and securities sold under agreements to
repurchase.
The Bank is a member of the FHLB. As a member, the Bank is required to hold FHLB
stock equal to at least 1% of residential mortgage loans or 5% of outstanding
FHLB advances, whichever is higher. All FHLB advances are secured by a blanket
lien on the Bank's qualifying collateral. These FHLB advances may be used to
fund loans and investment securities or meet other cash needs of the Bank. The
terms of FHLB advances can be short or long-term with interest rates based on
U.S. Treasury obligations with similar maturities.
COMPETITION.
The Bank competes with local, regional and national financial service providers
in its lending and deposit activities. The Bank competes in the local market
against other local and branch offices of regional financial institutions such
as banks, thrifts and credit unions. In addition, less regulated national
companies such as mortgage companies, securities brokerage firms, insurance
companies and mutual funds offer services competitive with those of the Bank.
Bank mergers and recent legislation permitting interstate and cross-industry
expansion may increase competition. The Bank competes on the basis of interest
rates, deposit and loan terms, fees, office location, product and service
arrays, customer convenience and technological advantages. Competition in the
Bank's deposit taking and lending activities is affected by movements in
interest rates, national and local market developments, economic trends and the
Bank's ability to adjust to change.
SUPERVISION AND REGULATION.
The Corporation is subject to regulation and supervision by the FRB pursuant to
the Bank Holding Company Act of 1956, as amended, and files with the FRB an
annual report and such additional reports as the FRB may require. The
Corporation is also subject to the jurisdiction of the Massachusetts Division of
Banks. As a bank holding company, the Company's activities are limited to the
business of banking and activities closely related or incidental to banking. The
Corporation may not directly or indirectly acquire the ownership or control of
more than five percent of any class of voting shares or substantially all of the
assets of any company that is not engaged in activities closely related to
banking and also generally must provide notice to or obtain approval of the FRB
in connection with any such acquisition. The Bank is a state-chartered savings
bank subject to the regulations and supervisory authority of, and periodic
examinations by, both the FDIC and the Massachusetts Division of Banks. These
examinations test the Bank's safety and soundness and compliance with various
statutory and regulatory requirements. The Bank is subject to federal and state
taxation authorities. The Bank is subject to certain reserve and reporting
requirements as a non-member bank of the Federal Reserve System. Federal and
state bank regulatory agencies have authority to issue cease and desist orders,
assess civil money penalties, remove officers and directors, issue capital
directives and impose prompt corrective action restrictions or requirements to
address safety and soundness and compliance issues of the Bank. In addition, the
Bank must obtain prior regulatory approvals to undertake certain banking
transactions and initiatives, including establishment, relocation or termination
of a banking office, and merger or acquisition transactions with other banks or
non-banking entities. The supervision and regulation of the Bank are intended
primarily for the protection of depositors and non-business borrowers.
The results of examinations provide regulators with a means of measuring and
assessing each institution and taking prompt corrective actions to address any
safety and soundness or compliance issues.
USA PATRIOT ACT. On October 26, 2001, President Bush signed into law the
"Uniting and Strengthening America by providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001" (or USA Patriot Act). Title III of
the USA Patriot Act, known as "The International Money Laundering Abatement and
Anti-Terrorist Financing Act of 2001" (the Act) is intended to make it more
difficult for terrorists to launder money in the United States. In addition, the
Act also makes it easier for law enforcement and regulatory officials to share
information and identify illegal money laundering activity.
Section 326 of the Act requires the Secretary of the Treasury to promulgate
regulations effective no later than October 25, 2002 that would substantially
increase the identification and verification requirements for customers of
financial institutions. The regulations may require, at a minimum, financial
institutions to develop procedures for verifying the identity of a person
opening an account, maintaining records of such information, and, consulting
lists of suspected
6
terrorists "to determine whether a person seeking to open an account appears on
any such list."
In addition, under Section 311 of the Act the Secretary of the Treasury may
require, by regulation or by order, that financial institutions take certain
"special measures" for all institutions, accounts or transactions that the
Secretary deems to be a "primary money laundering concern." Most significant
among these are requirements to maintain records and report information which
identify the participants in a transaction involving a primary money laundering
concern (also known as "know your customer"), and to maintain information
relative to the beneficiary of such a transaction.
Section 352 of the Act amends the Bank Secrecy Act to require all financial
institutions to establish anti-money laundering programs. These must include, at
a minimum: "(A) the development of internal policies, procedures, and controls;
(B) the designation of a compliance officer; (C) an ongoing employee training
program; and (D) an independent audit function to test programs." The Secretary
of the Treasury may prescribe minimum standards for such programs effective
April 24, 2002.
Under Section 314 of the USA Patriot Act, the Secretary of the Treasury must
promulgate regulations by February 23, 2002 to encourage cooperation among
financial institutions, their regulators, and law enforcement officials. The
purpose is to help provide financial institutions with information regarding
suspected terrorist or money laundering activity. The regulations may require
each financial institution to designate one or more individuals to receive such
information and may establish procedures for the protection of such information.
RESULTS OF OPERATIONS.
The Company's net earnings amounted to $3.4 million during 2001, $4.3 million
during 2000 and $2.8 million during 1999. The Company's earnings decreased by
22% or $966 thousand in 2001 impacted by an increase in income taxes coupled
with a rise in non-interest expenses, offset by increases in net interest
income, non-interest income and a reduction in the provision for loan losses.
During 2000, net earnings increased by 57% or $1.6 million from 1999 due to
several factors having a favorable impact on earnings including an increase in
non-interest income and decreases in non-interest expense and provisions for
income taxes.
The Company's net interest income, which is the difference between interest
earned on assets and interest paid on liabilities, totaled $13.2 million in
2001, $12.7 million in 2000 and $12.9 million in 1999. The increase in 2001
versus 2000 resulted from average earning assets growing faster than interest
bearing liabilities. The slight decrease in net interest income in 2000 from
1999 is due to higher funding costs due to rising interest rates. The Company's
net interest margin remained flat in 2001 and 2000 at 3.21% and 3.22%,
respectively, versus an increase in 1999 to 3.55%. The decrease in 2001 resulted
primarily from lower average rates earned on interest earning assets. The
decrease in the net interest margin during 2000 was primarily due to higher
average rates paid on interest bearing liabilities.
The provision for loan losses was a charge of $175 thousand in 2001, $250
thousand in 2000 and $75 thousand in 1999. The provision for loan losses was
made to maintain an appropriate allowance for loan losses.
Non-interest income amounted to $1.4 million, $1.1 million and $894 thousand in
2001, 2000 and 1999, respectively. The increase in 2001 and 2000 was primarily
due to gains on sales of mortgage loans of $249 thousand and $47 thousand,
respectively, compared to losses on sales of mortgage loans of $205 thousand in
1999.
Non-interest expense totaled $9.1 million in 2001, $8.4 million in 2000 and $9.3
million in 1999. Expenses attributable to the establishment of the holding
company totaled $188 thousand in 2001 of which $107 thousand were professional
fees. Professional expenses increased during 2001 to $671 thousand and decreased
to $496 thousand in 2000 from $1.4 million in 1999.
The Company recognized an income tax expense of $2.0 million in 2001, $854
thousand in 2000 and $1.6 million in 1999. The lower provision for taxes in 2000
as compared with 2001 resulted from a favorable outcome of an income tax matter
that led to a lower effective income tax rate for the year 2000.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
AVERAGE BALANCES, NET INTEREST INCOME AND AVERAGE INTEREST RATES
The table below presents the Company's average balance sheet, net interest
income and average interest rates for the years ended December 31. Average real
estate, commercial business, and consumer loans include non-performing loans.
2001 2000
-------------------------------------- --------------------------------------
AVERAGE Average
AVERAGE INTEREST Average Interest
BALANCE INTEREST RATE Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
ASSETS
Loans:
Residential $ 97,982 $ 7,123 7.27% $ 92,547 $ 6,875 7.43%
Commercial 112,021 9,577 8.55 93,683 8,644 9.23
Commercial business 19,379 1,490 7.69 16,111 1,512 9.38
Consumer 1,236 105 8.50 1,337 108 8.08
----------- ----------- ----------- -----------
Total loans 230,618 18,295 7.93 203,678 17,139 8.41
----------- ----------- ----------- -----------
Investment securities:
U.S. Treasury and Government
Agency obligations 67,293 4,189 6.23 94,353 5,640 5.98
Other bonds and equity securities 76,789 4,237 5.52 61,421 4,039 6.58
Mortgage-backed securities 26,290 1,618 6.15 32,423 2,077 6.41
Short-term investments 10,236 453 4.43 2,334 142 6.08
----------- ----------- ----------- -----------
Total investment securities 180,608 10,497 5.81 190,531 11,898 6.24
----------- ----------- ----------- -----------
Total interest earning assets 411,226 28,792 7.00% 394,209 29,037 7.37%
----------- ----------- ----------- -----------
Allowance for loan losses (3,864) (3,491)
Cash and due from banks 5,950 5,124
Other real estate owned 28 189
Other assets 13,432 15,338
----------- -----------
Total assets $ 426,772 $ 411,369
===============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Regular savings accounts $ 40,938 $ 720 1.76% $ 39,045 $ 770 1.97%
NOW and Super NOW accounts 31,187 155 0.50 27,084 142 0.52
Money market accounts 54,266 1,664 3.07 48,199 1,935 4.01
Certificates of deposit 136,952 7,390 5.40 130,976 7,083 5.41
----------- ----------- ----------- -----------
Total interest bearing deposits 263,343 9,929 3.77 245,304 9,930 4.05
Borrowed funds 95,089 5,682 5.98 101,913 6,428 6.31
----------- ----------- ----------- -----------
Total interest bearing liabilities 358,432 15,611 4.36% 347,217 16,358 4.71%
----------- ----------- ----------- ----------- ----------- -----------
Non-interest bearing deposits 12,015 9,877
Other liabilities 3,469 4,672
----------- -----------
Total liabilities 373,916 361,766
Stockholders' equity 52,856 49,603
----------- -----------
Total liabilities and stockholders' equity $ 426,772 $ 411,369
===============================================================================================================================
Net interest rate spread 2.64% 2.66%
===============================================================================================================================
Net interest income $ 13,181 $ 12,679
===============================================================================================================================
Net interest margin on average earning assets 3.21% 3.22%
===============================================================================================================================
1999
--------------------------------------
Average
Average Interest
Balance Interest Rate
- --------------------------------------------------------------------------------------
(Dollars in Thousands)
ASSETS
Loans:
Residential $ 98,777 $ 7,183 7.27%
Commercial 84,592 7,597 8.98
Commercial business 11,995 1,071 8.93
Consumer 1,534 122 7.95
----------- -----------
Total loans 196,898 15,973 8.11
----------- -----------
Investment securities:
U.S. Treasury and Government
Agency obligations 82,972 4,997 6.02
Other bonds and equity securities 45,769 2,782 6.08
Mortgage-backed securities 36,021 2,249 6.24
Short-term investments 1,812 96 5.30
----------- -----------
Total investment securities 166,574 10,124 6.08
----------- -----------
Total interest earning assets 363,472 26,097 7.18%
----------- -----------
Allowance for loan losses (3,393)
Cash and due from banks 4,923
Other real estate owned 537
Other assets 16,875
-----------
Total assets $ 382,414
======================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Regular savings accounts $ 39,385 $ 772 1.96%
NOW and Super NOW accounts 25,000 131 0.52
Money market accounts 43,838 1,424 3.25
Certificates of deposit 131,385 6,548 4.98
----------- -----------
Total interest bearing deposits 239,608 8,875 3.70
Borrowed funds 79,379 4,308 5.43
----------- -----------
Total interest bearing liabilities 318,987 13,183 4.13%
----------- ----------- -----------
Non-interest bearing deposits 10,719
Other liabilities 5,017
-----------
Total liabilities 334,723
Stockholders' equity 47,691
-----------
Total liabilities and stockholders' equity $ 382,414
======================================================================================
Net interest rate spread 3.05%
======================================================================================
Net interest income $ 12,914
======================================================================================
Net interest margin on average earning assets 3.55%
======================================================================================
8
RATE-VOLUME ANALYSIS
The effect on net interest income of changes in interest rates and in the
amounts of interest earning assets and interest bearing liabilities is shown in
the following table. Information is provided on changes for the years indicated
and is attributable to (i) changes in volume (change in average balance
multiplied by prior year rate), (ii) changes in interest rate (change in rate
multiplied by prior year average balance) and (iii) the combined effects of
changes in interest rates and volume (change in rate multiplied by change in
average balance).
2001 VS. 2000
--------------------------------------------
TOTAL RATE/
CHANGE VOLUME RATE VOLUME
- -----------------------------------------------------------------------------------------------
(In Thousands)
INTEREST INCOME:
Loans:
Residential $ 248 $ 404 $ (147) $ (9)
Commercial 933 1,692 (635) (124)
Commercial business (22) 307 (273) (56)
Consumer (3) (8) 6 (1)
------- ------- ------- -------
Total loans 1,156 2,395 (1,049) (190)
------- ------- ------- -------
Investment securities:
U.S. Treasury and Government Agency obligations (1,451) (1,618) 233 (66)
Other bonds and equity securities 198 1,011 (650) (163)
Mortgage-backed securities (459) (393) (82) 16
Short-term investments 311 481 (39) (131)
------- ------- ------- -------
Total investments (1,401) (519) (538) (344)
------- ------- ------- -------
Total interest income (245) 1,876 (1,587) (534)
------- ------- ------- -------
INTEREST EXPENSE:
Deposits:
Regular savings accounts (50) 37 (83) (4)
NOW and Super NOW accounts 13 22 (7) (2)
Money market accounts (271) 244 (457) (58)
Certificates of deposit 307 323 (15) (1)
------- ------- ------- -------
Total interest bearing deposits (1) 626 (562) (65)
Borrowed funds (746) (430) (338) 22
------- ------- ------- -------
Total interest expense (747) 196 (900) (43)
------- ------- ------- -------
Net interest income $ 502 $ 1,680 $ (687) $ (491)
===============================================================================================
2000 vs. 1999
--------------------------------------------
Total Rate/
Change Volume Rate Volume
- -----------------------------------------------------------------------------------------------
(In Thousands)
INTEREST INCOME:
Loans:
Residential $ (308) $ (453) $ 155 $ (10)
Commercial 1,047 816 208 23
Commercial business 441 368 55 18
Consumer (14) (16) 2 --
------- ------- ------- -------
Total loans 1,166 715 420 31
------- ------- ------- -------
Investment securities:
U.S. Treasury and Government Agency obligations 643 685 (37) (5)
Other bonds and equity securities 1,257 951 228 78
Mortgage-backed securities (172) (225) 58 (5)
Short-term investments 46 28 14 4
------- ------- ------- -------
Total investments 1,774 1,439 263 72
------- ------- ------- -------
Total interest income 2,940 2,154 683 103
------- ------- ------- -------
INTEREST EXPENSE:
Deposits:
Regular savings accounts (2) (7) 5 --
NOW and Super NOW accounts 11 11 -- --
Money market accounts 511 142 336 33
Certificates of deposit 535 (20) 557 (2)
------- ------- ------- -------
Total interest bearing deposits 1,055 126 898 31
Borrowed funds 2,120 1,223 699 198
------- ------- ------- -------
Total interest expense 3,175 1,349 1,597 229
------- ------- ------- -------
Net interest income $ (235) $ 805 $ (914) $ (126)
===============================================================================================
Net interest income
[BAR CHART]
1997 1998 1999 2000 2001
$11.1M $11.8M $12.9M $12.7M $13.2M
NET INTEREST INCOME
Net interest income is the difference between the interest income earned on
earning assets and the interest expense paid on interest bearing liabilities.
Interest income and interest expense are affected by changes in earning assets
and interest bearing liabilities balances in addition to changes in interest
rates.
The Company's net interest income was $13.2 million in 2001, $12.7 million in
2000 and $12.9 million in 1999. Interest income from earning assets was $28.8
million, $29.0 million, and $26.1 million in 2001, 2000 and 1999, respectively.
The increase in interest income during 2001 versus 2000 resulted from loan
growth funded by an increase in deposits. The increase in interest income in
2000 from 1999 was due to loan growth and the purchase of investment securities
funded by an increase in deposits and borrowed funds.
Interest expense on interest bearing deposits was $9.9 million in both 2001 and
2000 compared to $8.9 million in 1999. Average deposit balances increased in
both 2001 and 2000 from 1999 with the largest increase in the money market
category in both years; however, interest expense on total deposits remained
flat resulting from a decrease in the rate paid on that deposit category in
2001. Average rates paid on money market accounts decreased to 3.07% in 2001
from 4.01% in 2000 which resulted in $271 thousand decrease in interest expense.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Average rates paid on certificates of deposit remained stable at 5.40% in 2001
and 5.41% in 2000 from 4.98% in 1999; however, average balances of certificates
of deposit increased $6.0 million causing interest expense to also rise $307
thousand. Interest expense on borrowed funds decreased to $5.7 million in 2001
compared to an increase to $6.4 million in 2000 from $4.3 million in 1999. The
decrease of $746 thousand in 2001 resulted from a decrease in average balances
coupled with a decrease in the rate paid. The increase of $2.1 million in
interest expense in 2000 was due to higher average balances and to higher
average rates paid on borrowings. Interest expense on total interest bearing
liabilities totaled $15.6 million, $16.4 million and $13.2 million during 2001,
2000 and 1999, respectively.
The average yield on earning assets in 2001 was down 37 basis points at 7.00%
from 7.37% in 2000 which was an increase of 19 basis points from 7.18% in 1999.
The average rate paid on interest bearing liabilities in 2001 was 4.36%, a
decrease of 35 basis points from 4.71% in 2000 and was 4.13% in 1999. The net
interest rate spread in 2001 was 2.64% down 2 basis points from 2.66% in 2000
which was a decrease of 39 basis points from 3.05% in 1999. The decrease in 2001
was due to interest rates on earning assets falling before interest rates on
earning liabilities.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained through the provision for loan
losses which is a charge to operations. The allowance balance reflects
management's assessment of losses 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 value 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 the
allowance. The allowance for loan losses reflects all information available at
the end of each year. The Company considers the year end 2001 level of the
allowance for loan losses to be appropriate. The allowance as a percentage of
total loans was 1.7% at December 31, 2001, 2000 and 1999. See Note 1 to the
financial statements for further details on establishing the allowance for loan
losses.
"Impaired loans" are commercial, commercial real estate and individually
significant residential mortgage and consumer loans for which 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 are not the same as
"non-accrual loans," although the two categories overlap. Non-accrual loans
include impaired loans and are those on which the accrual of interest is
discontinued when principal or interest has become contractually past due 90
days. The Company may choose to place a loan on non-accrual status due to
payment delinquency or the uncertainty of collectibility, while not classifying
the loan as impaired, if (i) it is probable that the Company will collect all
amounts due in accordance with the contractual terms of the loan or (ii) the
loan is not a commercial, commercial real estate or an individually significant
residential mortgage or consumer loan. Factors considered by management in
determining impairment include payment status and collateral value. The amount
of impairment is determined by the difference between the present value of the
expected cash flows related to the loan, using the original contractual interest
rate, and its recorded value, or, as a practical expedient in the case of
collateralized loans, the difference between the fair value of the collateral
and the recorded amount of the loans. When foreclosure is probable, impairment
is based on the fair value of the collateral.
The provision for loan losses for the years 2001, 2000 and 1999 was a charge of
$175 thousand, $250 thousand and $75 thousand, respectively. The Company had net
recoveries of $210 thousand in 2001, $54 thousand in 2000, and $34 thousand in
1999.
The following table summarizes changes in the allowance for loan losses for the
years ended December 31:
2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Balance at beginning of year $ 3,685 $ 3,381 $ 3,272 $ 3,144 $ 3,633
Charge-offs by loan type:
Residential mortgage -- -- (17) (224) (150)
Commercial (3) -- -- -- (1)
Commercial real estate -- (27) -- (215) (483)
Consumer -- (1) -- (16) (25)
------- ------- ------- ------- -------
Total charge-offs (3) (28) (17) (455) (659)
------- ------- ------- ------- -------
Recoveries by loan type:
Residential mortgage 2 6 28 10 33
Commercial -- 5 3 60 59
Commercial real estate 201 62 13 49 370
Consumer 10 9 7 14 8
------- ------- ------- ------- -------
Total recoveries 213 82 51 133 470
------- ------- ------- ------- -------
Net recoveries (charge-offs) 210 54 34 (322) (189)
Provision (credit) for loan losses 175 250 75 450 (300)
------- ------- ------- ------- -------
Ending balance $ 4,070 $ 3,685 $ 3,381 $ 3,272 $ 3,144
===================================================================================================================================
Ratio of net recoveries (charge-offs) to average loans outstanding
during the period 0.09% 0.03% 0.02% (0.18)% (0.12)%
===================================================================================================================================
10
The following table sets forth the breakdown of the allowance for loan losses by
loan category for the years ended December 31. The allocation of the allowance
to each category is not necessarily indicative of future losses and does not
restrict the use of the allowance to absorb losses in any category.
2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) PERCENT Percent Percent Percent Percent
OF LOANS of loans of loans of loans of loans
IN EACH in each in each in each in each
CATEGORY category category category category
TO TOTAL to Total to Total to Total to Total
AMOUNT LOANS Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Construction, commercial and
commercial real estate $3,251 58.9% $2,711 57.1% $1,933 52.3% $1,787 48.4% $1,715 48.5%
Residential mortgage
and home equity 397 40.7 436 42.3 526 46.8 634 50.8 830 50.3
Consumer 41 0.4 49 0.6 55 0.9 55 0.8 65 1.2
Unallocated 381 N/A 489 N/A 867 N/A 796 N/A 534 N/A
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$4,070 100.0% $3,685 100.0% $3,381 100.0% $3,272 100.0% $3,144 100.0%
=================================================================================================================================
In determining the adequacy of the allowance for loan losses, the Company
aggregates the estimated credit loss on individual loans, pools of loans and
other pools of risk having geographic, industry or other common exposures where
inherent losses are identified or anticipated.
All loans classified as "Substandard" or "Doubtful" are evaluated for
collectibility and an allocation is made based on an assessment of the net
realizable value of any collateral.
The Company categorizes each commercial loan into different pools of risk. Each
risk level allocation factor has been determined based upon the Company's review
of common practices within the industry, its estimate of expected loss for loans
with similar credit characteristics based upon historical experience and
migration analysis, the losses experienced by the Company in the most recent 36
months, together with the Company's assessment of future economic trends,
conditions and other relevant factors that may have an impact on or may affect
repayment of loans in these pools.
Residential mortgages, home equity loans, equity lines of credit, second
mortgages and all other small consumer loans are considered in the aggregate and
an allocation factor is assessed based upon the Company's most recent 24-month
historical loss experience together with an assessment of future economic
trends, conditions and other relevant factors that may have an impact on, or may
affect repayment of, the loans in these pools.
On a quarterly basis, the Company evaluates all allocation factors for
appropriateness, considering (i) significant changes in the nature and volume of
the loan portfolio, (ii) the Company's assessment of local and national economic
business conditions, and (iii) any other relevant factor that it considers may
have an impact on loan portfolio risk.
Based upon these evaluations, changes to the reserve provision may be made to
maintain the overall level of the reserve at a level that the Company deems
appropriate to cover the estimated credit losses inherent in the Company's loan
portfolio including unfunded binding commitments to lend.
POTENTIAL PROBLEM LOANS
The Company has a loan review and grading system. During the loan review
process, deteriorating conditions of certain loans come to management's
attention in which erosion of the borrower's ability to comply with the original
terms of the loan agreement could potentially result in the classification of
the loan as a risk asset. This may result from deteriorating conditions such as
cash flows, collateral values or creditworthiness of the borrower.
At December 31, 2001 and 2000, there were $941 thousand and $623 thousand,
respectively, identified as potential problem loans.
NON-INTEREST INCOME
Non-interest income increased 26.9% and totaled $1.4 million versus $1.1 million
for the years ended 2001 and 2000, respectively, compared to $844 thousand in
1999. The increase in 2001 was attributable to net gains of $249 thousand on the
sale of mortgage loans compared to net gains of $47 thousand in 2000. Net gains
on sales of investments available for sale amounted to $38 thousand in 2001
compared to net losses of $41 thousand in 2000. Increases in deposit account
fees were offset by a reduction in loan servicing fees during 2001.
The increase in 2000 is primarily due to a net gain on the sale of mortgage
loans of $47 thousand in 2000 compared to a net loss on the sale of mortgage
loans of $205 thousand in 1999. Increases in deposit account fees and official
check income also contributed to the increase in non-interest income during
2000.
NON-INTEREST EXPENSE
Non-interest expense increased to $9.1 million in 2001 while decreasing to $8.4
million in 2000 from $9.3 million in 1999. The increase in 2001 is mainly
attributable to an increase in professional fees associated with the formation
of the holding company. The decrease in 2000 resulted from lower legal fees
incurred during 2000 versus 1999. Professional fees, which include legal
expenses, totaled $671 thousand in 2001, $496 thousand in 2000 compared to $1.4
million in 1999.
Salaries and employee benefits expense was $5.3 million in 2001, $5.0 million in
2000 and $5.1 million in 1999. Full-time equivalent employees were 102 at
December 31, 2001, 100 at December 31, 2000 and 97 at December 31, 1999.
Increases in normal merit raises offset by reduced pension expense accounted for
the increase between 2001, 2000 and 1999. The Company continually evaluates
staffing levels in order to control salaries and employee benefits while
managing business volumes.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Data processing expenses increased to $705 thousand during 2001 and remained
level at $590 thousand and $550 thousand in 2000 and 1999, respectively. This
includes the Company's service contract to provide on-line deposit accounting,
loan accounting and item processing services. This contract is effective through
November 12, 2003.
Occupancy and equipment expenses increased to $872 thousand in 2001 from $763
thousand and $769 thousand in 2000 and 1999, respectively. Insurance expenses
remained level at $146 thousand, $139 thousand and $117 thousand in 2001, 2000
and 1999, respectively, and other expenses remained level at $1.4 million in
2001, 2000 and 1999, respectively.
INCOME TAXES
The Company reported income tax expense of $2.0 million in 2001, $854 thousand
in 2000 and $1.6 million in 1999. The increase in the provision for taxes was
due to a favorable outcome of an income tax matter that led to a lower effective
income tax rate for the year 2000. The effective income tax rate for the year
2001 was 36.8% compared to 16.5% in 2000 and 36.5% in 1999. There is a slight
increase in the effective income tax rate in 2001 as compared to 1999 partially
due to organization costs attributable to the establishment of the holding
company, which are not tax effected.
The Company's deferred tax asset was $5.7 million at December 31, 2001 compared
to $7.5 million at December 31, 2000. The deferred tax asset was recognized in
prior years due to the Company's sustained earnings for the past several years
and management's expectations of future earnings. Factors supporting the
recognition of the deferred tax asset include increased asset quality, higher
capital levels, economic conditions and the low level of non-performing assets.
For the past three years, the deferred tax asset has been declining as the
Company recognizes deferred income tax expense. See Note 8 to the financial
statements for further information regarding income taxes.
FINANCIAL CONDITION AND EARNING ASSETS
The Company manages its earning assets by utilizing available capital resources
in a manner consistent with the Company's credit, investment and leverage
policies. Loans, U.S. Treasury and Government Agency obligations,
mortgage-backed securities, other investment securities, and short-term
investments comprise the Company's earning assets. Total earning assets averaged
$411.2 million in 2001, an increase of $17.0 million or 4% from 2000. Average
earning assets in 2000 totaled $394.2 million which was a $30.7 million or 8.5%
increase from $363.5 million in 1999.
One of the Company's primary objectives continues to be the origination of loans
that are soundly underwritten and collateralized. The Company's loan portfolios
for commercial real estate and commercial loans increased in both 2001 and 2000.
Loan growth in these portfolios caused the average balance of the loan portfolio
to increase in 2001 and 2000 by $26.9 million and $6.8 million, respectively, to
$230.6 million and $203.7 million, respectively, from $196.9 million in 1999.
The components of the loan portfolio at December 31, follow:
2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE PERCENT Balance Percent Balance Percent Balance Percent Balance Percent
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Residential real estate loans:
Fixed rate $ 40,861 17.3% $ 44,350 20.0% $ 49,825 25.1% $ 47,887 24.3% $ 38,221 23.2%
Adjustable rate 37,744 16.0 33,576 15.1 30,232 15.3 31,845 16.2 33,672 20.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
78,605 33.3 77,926 35.1 80,057 40.4 79,732 40.5 71,893 43.7
-------- -------- -------- -------- --------
Home equity loans:
Fixed rate 10,155 4.3 12,367 5.6 8,716 4.4 7,652 3.9 5,326 3.2
Adjustable rate 3,238 1.4 3,630 1.6 3,890 2.0 3,805 1.9 4,861 3.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
13,393 5.7 15,997 7.2 12,606 6.4 11,457 5.8 10,187 6.2
-------- -------- -------- -------- --------
Commercial real estate loans:
Fixed rate 16,447 7.0 10,247 4.6 10,898 5.5 9,206 4.7 8,861 5.4
Adjustable rate 83,663 35.3 76,882 34.6 69,995 35.3 62,052 31.4 52,196 31.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
100,110 42.3 87,129 39.2 80,893 40.8 71,258 36.1 61,057 37.1
-------- -------- -------- -------- --------
Construction loans 20,593 8.7 17,148 7.7 9,666 4.9 11,550 5.9 5,781 3.5
Loans held for sale 4,156 1.8 -- 0.0 -- 0.0 8,950 4.5 682 0.4
Commercial loans 18,549 7.8 22,602 10.2 13,143 6.6 12,558 6.4 12,942 7.9
Consumer loans 991 0.4 1,243 0.6 1,733 0.9 1,605 0.8 1,958 1.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans 236,397 100.0% 222,045 100.0% 198,098 100.0% 197,110 100.0% 164,500 100.0%
===== ===== ===== ===== =====
Allowance for loan losses 4,070 3,685 3,381 3,272 3,144
-------- -------- -------- -------- --------
Loans, net $232,327 $218,360 $194,717 $193,838 $161,356
===================================================================================================================================
12
The Company increases the investment portfolio through funds obtained from the
FHLB, repurchase agreements and other borrowings when it is profitable to do so.
The average balance of investment securities, including U.S. Treasury and
Government Agency securities, mortgage-backed securities, other equity
securities, and short-term investments amounted to $180.6 million in 2001 as
compared to $190.5 million in 2000 and $166.6 million in 1999. These securities
represent 42.3% of the Company's average assets at December 31, 2001 versus
46.3% and 43.6%, respectively, of average assets at December 31, 2000 and 1999.
INTEREST BEARING LIABILITIES
The Company's earning assets are primarily funded with deposits, securities sold
under agreements to repurchase, FHLB advances and stockholders' equity. The
Company manages its interest bearing liabilities to maintain a stable source of
funds while providing competitively priced deposit accounts. Interest bearing
deposits include regular savings accounts, NOW and Super NOW accounts, money
market accounts, and certificates of deposit.
In 2001 total average interest bearing liabilities were $358.4 million which was
an $11.2 million or 3.2% increase from $347.2 million in 2000. Average total
interest bearing deposits of $263.3 million comprised 73.5% of interest bearing
liabilities in 2001 while in 2000 such deposits totaling $245.3 million
comprised 70.6% of interest bearing liabilities.
Changing interest rates can affect the mix and level of various deposit
categories. The lower average interest rate paid on money market accounts had an
impact on the overall interest rate paid on deposits and caused a decrease of 28
basis points in 2001. The average balance of certificates of deposit increased
by $6.0 million to $137.0 million in 2001. The average balance of money market
investment accounts increased by $6.1 million to $54.3 million in 2001 and the
average balance of NOW and Super NOW accounts increased by $4.1 million to $31.2
million in 2001.
Average borrowed funds in 2001, 2000 and 1999 were $95.1 million, $101.9 million
and $79.4 million, respectively, including advances from the FHLB and other
borrowed funds. The decrease in 2001 resulted from a shift in the mix of earning
liabilities to take advantage of a lower cost of funds to fund loan growth. The
increase in 2000 from 1999 is the result of the Company using borrowed funds to
purchase investment securities and fund loan growth.
RISK ASSETS
Risk assets consist of non-performing loans, OREO, and restructured loans. The
following paragraphs define each of these categories.
The components of risk assets at December 31, for the years indicated are as
follows:
2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Risk assets:
Non-performing loans:
Residential real estate $ 10 $ 10 $ -- $ 66 $ 428
Commercial real estate 730 -- -- -- 624
Commercial business 211 -- -- -- --
Consumer -- -- -- -- 1
------- ------- ------- ------- -------
Total non-performing loans 951 10 -- 66 1,053
------- ------- ------- ------- -------
Other real estate owned:
One to four family residential properties -- -- -- -- 177
Condominiums -- -- -- -- 61
Land 67 77 87 89 104
Commercial real estate -- -- 477 512 512
OREO valuation allowance (45) (45) (45) (45) (45)
------- ------- ------- ------- -------
Total other real estate owned 22 32 519 556 809
------- ------- ------- ------- -------
Total risk assets $ 973 $ 42 $ 519 $ 622 $ 1,862
================================================================================================================
Risk assets as a percent of total loans and OREO 0.4% 0.0% 0.3% 0.3% 1.1%
================================================================================================================
Risk assets as a percent of total assets 0.2% 0.0% 0.1% 0.2% 0.5%
================================================================================================================
Non-performing loans consist of both (i) loans 90 days or more past due, and
(ii) loans placed on a non-accrual status because full collection of the
principal balance is in doubt. Non-performing loans at December 31, 2001 were
$951 thousand, an increase from $10 thousand at December 31, 2000 and zero at
December 31, 1999.
The Company actively monitors risk assets. attempts to work with delinquent
borrowers in order to bring loans current. If the borrower is not able to bring
the loan current, the Company commences collection efforts. Valuation of
property at foreclosure, and periodically thereafter, is based upon appraisals
and management's best estimates of fair value less selling costs. The Company's
policy is to sell such property as quickly as possible at fair value.
ASSET/LIABILITY MANAGEMENT
Managing interest rate risk is fundamental to banking. The Company has continued
to manage its liquidity, capital, and GAP position so as to control its exposure
to interest rate risk.
As of December 31, 2001, the Company had interest rate sensitive assets which
repriced or matured within one year of $179.0 million and interest rate
sensitive liabilities which repriced or matured within one year of $174.1
million. As of December 31, 2000, the Company had interest rate sensitive assets
which matured or repriced within one year of $178.4 million and interest rate
sensitive liabilities which repriced or matured within one year of $182.2
million.
INTEREST RATE SENSITIVITY
The Company actively manages its interest rate sensitivity position. The
objectives of interest rate risk management are to control exposure of net
interest income to risks associated with interest rate movements and to achieve
a stable and rising flow of net interest income. The Asset/Liability Committee
("ALCO") using policies approved by the Board of Directors, is responsible for
managing the Bank's rate sensitivity position.
The asset/liability management policy establishes guidelines for acceptable
exposure to interest rate risk, liquidity, and capital. The objective of ALCO is
to manage earning assets and liabilities to produce results which are consistent
with the Company's policy for net interest income, liquidity and capital and
identify acceptable levels of
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
growth, risk and profitability. ALCO establishes and monitors origination and
pricing strategies consistent with ALCO policy. ALCO meets regularly to review
the current economic environment, income simulation model and GAP analysis and
implements appropriate changes in strategy that will manage the Company's
exposure to interest rate risk, liquidity and capital.
ALCO manages the Company's interest rate risk using both income simulation and
GAP analysis. Income simulation is used to quantify interest rate risk inherent
in the Company's consolidated balance sheet by showing the effect of a change in
net interest income over a 24 month period. The income simulation model uses
parallel interest rate shocks of up and down 200 basis points (bp) for earning
assets and liabilities in the first year of the model. Interest rates are not
shocked in the second year of the model. The composition of the Company's
consolidated balance sheet at December 31, 2001 remains relatively well matched
over the 24 month horizon with a slight bias towards asset sensitivity in the
first year. The simulation takes into account the dates for repricing, maturing,
prepaying and call options assumptions of various financial categories which may
vary under different interest rate scenarios. Prepayment speeds are estimates
for the loans and are adjusted according to the degree of rate changes. Call
options and prepayment speeds for investment securities are estimates using
industry standards for pricing and prepayment assumptions. The assumptions of
financial instrument categories are reviewed before each simulation by ALCO in
light of current economic trends. As of December 31, 2001, the income simulation
model indicated some negative exposure of net interest income to declining
interest rates to a degree that remains within tolerance levels established by
the Company's policy. The interest rate scenario used does not necessarily
reflect ALCO's view of the "most likely" change in interest rates over the
model's period. Furthermore, the model assumes a static consolidated balance
sheet. These results do not reflect the anticipated future net interest income
of the Company for the same periods.
The following table summarizes the net interest income for the 24 month period
of the Company's consolidated balance sheet for earning assets and liabilities
for the years ended December 31;
Net Interest Income Simulation Model Results:
INTEREST RATE SHOCK
---------------------------
DOWN UP
2001 FLAT RATES 200 BP 200 BP
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Year One $14,478 $14,274 $14,858
Year Two 14,648 13,103 15,862
------- ------- -------
Total net interest income for 2 year period $29,126 $27,377 $30,720
=====================================================================================================================
Interest Rate Shock
---------------------------
Down Up
2000 Flat Rates 200 bp 200 bp
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Year One $12,917 $12,770 $13,048
Year Two 13,130 13,111 12,580
------- ------- -------
Total net interest income for 2 year period $26,047 $25,881 $25,628
=====================================================================================================================
The income simulation model reflects negative exposure to net interest income in
a declining interest rate environment of 200 bp, which would result from shorter
asset lives due to prepayment or refinancing of assets. Margins would narrow as
deposits and borrowings are slower to reprice to lower interest rates.
The Company's primary measure of interest rate risk is GAP analysis. GAP
measurement attempts to analyze any mismatches in the timing of interest rate
repricing between assets and liabilities. It identifies those balance sheet
sensitivity areas which are vulnerable to unfavorable interest rate movements.
As a tool of asset/liability management, the GAP position is compared with
potential changes in interest rate levels in an attempt to measure the favorable
and unfavorable effect such changes would have on net interest income. For
example, when the GAP is positive, (i.e., assets reprice faster than
liabilities) a rise in interest rates will increase net interest income; and,
conversely, if the GAP is negative, a rise in interest rates will decrease net
interest income. The accuracy of this measure is limited by unpredictable loan
prepayments and the lags in the interest rate indices used for repricing
variable rate loans or investment securities.
14
The Company's one-year cumulative GAP to total assets increased from (1)% at
December, 2000, to 1% at December, 2001. The table below shows the interest rate
sensitivity gap position as of December 31, 2001. The table excludes
non-performing loans and assumes that all deposits except savings and NOWs will
be withdrawn within the legal time period for withdrawal. This withdrawal of
deposit assumption is not likely to occur.
RATE SENSITIVITY GAP POSITION
- ------------------------------------------------------------------------------------------------------------------------------------
POSITION/VOLUME
Time interval from December 31, 2001 0-3 MO. 4-6 MO. 7-12 MO. 13-36 MO. 37-60 MO. +60 MO.
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
EARNING ASSETS:
Investment securities held to maturity $ 38,772 $ 8,562 $ 11,942 $ 52,252 $ 19,093 $ 4,381
Investments securities available for sale 3,118 2,711 4,863 27,533 26 347
Federal Home Loan Bank Stock and other earning assets 11,973 -- -- -- -- 168
Fixed rate mortgages loans 3,515 2,463 4,577 15,179 10,934 17,624
Adjustable rate mortgages loans 9,397 3,094 7,062 13,916 8,196 187
Consumer loans 552 176 194 69 -- --
Fixed rate commercial real estate loans 1,860 419 1,445 3,530 2,501 5,961
Adjustable rate commercial real estate loans 13,871 3,946 10,600 41,262 13,985 --
Construction loans 17,122 251 36 3,184 -- --
Fixed rate commercial loans 509 490 648 1,344 335 16
Adjustable rate commercial loans 11,186 40 3,567 203 -- --
--------- --------- --------- --------- --------- ---------
Total earning assets 111,875 22,152 44,934 158,472 55,070 28,684
--------- --------- --------- --------- --------- ---------
INTEREST BEARING LIABILITIES:
Savings and escrow accounts -- -- -- -- -- 43,104
NOW and Super NOW accounts -- -- -- -- -- 30,080
Money market accounts 57,575 -- -- -- -- --
Certificates of deposit and retirement accounts 24,747 45,184 23,827 24,536 6,566 --
FHLB advances and other borrowed funds 7,343 125 15,256 32,195 10,591 45,589
--------- --------- --------- --------- --------- ---------
Total interest bearing liabilities 89,665 45,309 39,083 56,731 17,157 118,773
--------- --------- --------- --------- --------- ---------
INTEREST SENSITIVITY GAP $ 22,210 $ (23,157) $ 5,851 $ 101,741 $ 37,913 $ (90,089)
====================================================================================================================================
CUMULATIVE GAP $ 22,210 $ (947) $ 4,904 $ 106,645 $ 144,558 $ 54,469
====================================================================================================================================
CUMULATIVE GAP AS A PERCENT OF TOTAL ASSETS 5% 0% 1% 24% 33% 12%
====================================================================================================================================
LIQUIDITY
Managing liquidity involves planning to meet anticipated funding needs at a
reasonable cost, as well as contingency plans to meet unanticipated funding
needs or a loss of funding sources. The following factors are considered in
managing liquidity; marketability of assets, the sources and stability of
funding and the level of unfunded commitments. The Company's primary source of
funds is dividends from its Bank subsidiary. The Bank's loans and investments
are primarily funded by deposits, Federal Home Loan Bank advances, securities
sold under agreements to repurchase and stockholders' equity.
The investment portfolio is one of the primary sources of liquidity for the
Bank. Maturities of securities provide a flow of funds which are available for
cash needs such as loan originations and net deposit outflows. In addition, the
investment portfolio includes high quality, and, therefore, readily marketable,
U.S. Treasury and Government Agency obligations. At December 31, 2001, the
Bank's investment securities and mortgage-backed securities available for sale
totaled $38.8 million which is available to meet the Bank's liquidity needs.
Loan maturities and amortization as well as deposit growth provide for a
constant flow of funds. In addition, the Bank has two overnight lines of credit
totaling $11.8 million to meet short-term liquidity needs. The Bank did not
utilize these overnight lines at December 31, 2001 and had the full $11.8
million available.
CAPITAL ADEQUACY
The Company and the Bank are required to maintain a leverage capital ratio of 5%
and risk-based capital ratios of at least 10% in order to be categorized as
"well capitalized" in accordance with definitions in regulatory guidelines
promulgated by the FDIC. At December 31, 2001 and 2000, the Company's and the
Bank's leverage and risk-based capital ratios exceeded the required levels for
the category of "well-capitalized" as defined by their regulatory agencies. The
Company and the Bank may not declare or pay cash dividends on its shares of
common stock if the effect thereof would cause its stockholders' equity to be
reduced below applicable capital requirements or if such declaration and
payments would otherwise violate regulatory requirements. See note 9 to the
financial statements for further information regarding capital adequacy.
IMPACT OF INFLATION AND CHANGING PRICES
A Company's asset and liability structure is substantially different from that
of an industrial company in that virtually all assets and liabilities of the
Company are monetary in nature. Management believes the impact of inflation on
financial results depends upon the Company's ability to react to changes in
interest rates and by such reaction reduce the inflationary impact on
performance. Interest rates do not necessarily move in the same direction, or at
the same magnitude, as the prices of other goods and services. As discussed
previously, management seeks to manage the relationship between
interest-sensitive assets and liabilities in order to protect against wide net
interest income fluctuations, including those resulting from inflation.
Various information shown elsewhere in this Annual Report will assist in the
understanding of how well the Company is positioned to react to changing
interest rates and inflationary trends. In particular, the summary of net
interest income, the maturity distributions, the compositions of the loan and
security portfolios and the data on the interest rate sensitivity of loans and
deposits should be considered.
15
REPORT OF MANAGEMENT RESPONSIBILITY
The management of LSB Corporation (the "Corporation" or the "Company") is
responsible for the preparation and integrity of the financial statements and
other financial information contained in this annual report. The financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America and prevailing practices of the banking
industry and, accordingly, include amounts based on management's best estimates
and judgments.
Management has established and is responsible for maintaining internal
accounting controls designed to provide reasonable assurance as to the integrity
and reliability of the financial statements, the protection of assets, and the
prevention and detection of irregularities. The concept of reasonable assurance
recognizes that the cost of a system of internal accounting controls should not
exceed the benefits derived. The internal accounting control system is augmented
by written policies and guidelines, careful selection and training of qualified
personnel, a written program of internal audits, appropriate review by
management, and a written code of professional conduct for directors and
officers.
The Corporation's Board of Directors has an Audit Committee composed solely of
independent directors. The Committee meets periodically with management, the
internal auditors and KPMG LLP ("KPMG") to review the work of each and to
inquire of each as to their assessment of the performance of the others in their
work relating to the Company's financial statements. Both the independent and
internal auditors have, at all times, the right of full access to the Audit
Committee, without management present, to discuss any matter they believe should
be brought to the attention of the Committee.
Management recognizes that there are inherent limitations in the effectiveness
of any internal control system. However, management believes that as of December
31, 2001 the Company's internal accounting controls provide reasonable assurance
as to the integrity and reliability of the financial statements and related
financial information.
The independent auditors, KPMG, are recommended to the Board of Directors by the
Audit Committee, appointed by the Board of Directors, and ratified by the
stockholders. KPMG's audits include reviews and tests of the Company's internal
controls to the extent they believe necessary to determine and conduct the audit
procedures that support their report. Members of that firm also have the right
of full access to each member of management in conducting their audits. The
report of KPMG appears on the next page.
/s/ Paul A. Miller
- -----------------------------
Paul A. Miller
President and
Chief Executive Officer
/s/ John E. Sharland
- -----------------------------
John E. Sharland
Senior Vice President and
Chief Financial Officer
December 31, 2001
16
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
LSB CORPORATION:
We have audited the accompanying consolidated balance sheets of LSB Corporation
and subsidiary as of December 31, 2001 and 2000 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LSB Corporation and
its subsidiary as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
------------
KPMG LLP
Boston, Massachusetts
January 18, 2002
17
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------
December 31, 2001 2000
- ---------------------------------------------------------------------------------------------------
(In Thousands)
ASSETS:
Cash and due from banks $ 7,457 $ 7,086
Fed funds sold 5,705 15,427
--------- ---------
Total cash and cash equivalents 13,162 22,513
Investment securities held to maturity
market value of $137,886 in 2001 and $118,393 in 2000 (notes 2 and 7) 135,002 117,806
Investment securities available for sale
amortized cost of $38,480 in 2001 and $32,840 in 2000 (notes 2 and 7) 38,766 33,027
Federal Home Loan Bank stock, at cost (note 3) 5,950 5,950
Loans, net of allowance for loan losses of $4,070 in 2001
and $3,685 in 2000 (notes 4 and 7) 232,327 218,360
Bank premises and equipment (note 5) 3,167 3,337
Accrued interest receivable 2,604 2,969
Other real estate owned 22 32
Deferred income tax asset (note 8) 5,737 7,511
Other assets 1,530 1,585
--------- ---------
Total assets $ 438,267 $ 413,090
===================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Interest bearing deposits (note 6) $ 255,046 $ 259,325
Non-interest bearing deposits (note 6) 13,404 11,223
Federal Home Loan Bank advances (note 7) 102,992 82,283
Other borrowed funds (note 7) 8,107 3,878
Advance payments by borrowers for taxes and insurance 573 513
Other liabilities 4,053 3,555
--------- ---------
Total liabilities 384,175 360,777
--------- ---------
Commitments and contingencies (notes 5, 11 and 12):
Stockholders' equity (notes 9 and 10):
Preferred stock, $.10 par value; 5,000,000
shares authorized, none issued -- --
Common stock, $.10 par value; 20,000,000
shares authorized; 4,379,550 and 4,364,800
shares issued and outstanding at December 31,
2001 and 2000, respectively 438 436
Additional paid-in capital 57,813 57,711
Accumulated deficit (4,348) (5,956)
Accumulated other comprehensive (loss) income 189 122
--------- ---------
Total stockholders' equity 54,092 52,313
--------- ---------
Total liabilities and stockholder's equity $ 438,267 $ 413,090
===================================================================================================
The accompanying notes are an integral part of these financial statements.
18
CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
Year Ended December 31, 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
(In Thousands, Except Share Data)
Interest and dividend income:
Loans $ 18,295 $ 17,139 $ 15,973
Investment securities held to maturity 8,166 8,089 6,968
Investment securities available for sale 1,514 3,202 2,715
Federal Home Loan Bank stock 364 454 334
Other interest income 453 153 107
----------- ----------- -----------
Total interest and dividend income 28,792 29,037 26,097
- -----------------------------------------------------------------------------------------------------
Interest expense:
Deposits (note 6) 9,929 9,930 8,875
Borrowed funds 5,278 4,525 3,041
Securities sold under agreements to repurchase and
other borrowed funds 404 1,903 1,267
----------- ----------- -----------
Total interest expense 15,611 16,358 13,183
- -----------------------------------------------------------------------------------------------------
Net interest income 13,181 12,679 12,914
Provision for loan losses (note 4) 175 250 75
----------- ----------- -----------
Net interest income after provision for loan losses 13,006 12,429 12,839
- -----------------------------------------------------------------------------------------------------
Non-interest income:
Deposit account fees 594 500 490
Loan servicing fees 155 281 319
Gains (losses) on sales of mortgage loans, net 249 47 (205)
Gains (losses) on sale of investment securities 38 (41) --
Other income 390 337 240
----------- ----------- -----------
Total non-interest income 1,426 1,124 844
- -----------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 5,264 5,033 5,116
Occupancy and equipment expenses 872 763 769
Data processing expenses 705 590 550
Professional expenses 671 496 1,401
Insurance expenses 146 139 117
Other expenses 1,464 1,355 1,394
----------- ----------- -----------
Total non-interest expense 9,122 8,376 9,347
- -----------------------------------------------------------------------------------------------------
Income before income taxes 5,310 5,177 4,336
Income tax expense (note 8) 1,953 854 1,582
----------- ----------- -----------
Net income $ 3,357 $ 4,323 $ 2,754
=====================================================================================================
Average shares outstanding 4,374,195 4,360,415 4,353,286
Average diluted shares outstanding 4,535,305 4,434,645 4,468,529
=====================================================================================================
Basic earnings per share $ 0.77 $ 0.99 $ 0.63
Diluted earnings per share $ 0.74 $ 0.97 $ 0.61
=====================================================================================================
The accompanying notes are an integral part of these financial statements.
19
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Net Unrealized
Additional Gains (Losses) Total
Common Paid-in Accumulated on Securities Stockholders'
Years Ended Stock Capital Deficit Available for Sale Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Balance at December 31, 1998 $ 433 $ 57,395 $(11,246) $ 131 $ 46,713
Net income -- -- 2,754 -- 2,754
Other comprehensive income
unrealized gain (loss) on securities
available for sale (tax effect $348) -- -- -- (682) (682)
--------
Total comprehensive income 2,072
Exercise of stock options 3 273 -- -- 276
Dividends declared and paid ($0.15 per share) -- -- (653) -- (653)
-------- -------- -------- -------- --------
Balance at December 31, 1999 436 57,668 (9,145) (551) 48,408
Net income -- -- 4,323 -- 4,323
Other comprehensive income
unrealized gain (loss) on securities
available for sale (tax effect $346) -- -- -- 673 673
--------
Total comprehensive income 4,996
Exercise of stock options -- 43 -- -- 43
Dividends declared and paid ($0.26 per share) -- -- (1,134) -- (1,134)
-------- -------- -------- -------- --------
Balance at December 31, 2000 436 57,711 (5,956) 122 52,313
Net income -- -- 3,357 -- 3,357
Other comprehensive income
unrealized gain (loss) on securities
available for sale (tax effect $34) -- -- -- 67 67
--------
Total comprehensive income -- -- -- 3,424
Exercise of stock options 2 102 -- -- 104
Dividends declared and paid ($0.40 per share) -- -- (1,749) -- (1,749)
-------- -------- -------- -------- --------
Balance at December 31, 2001 $ 438 $ 57,813 $ (4,348) $ 189 $ 54,092
====================================================================================================================================
2001 2000
- --------------------------------------------------------------------------------
Disclosure of reclassification amount:
Gross unrealized appreciation arising
during the period $ 124 $ 980
Tax effect (42) (333)
----- -----
Unrealized holding appreciation
net of tax 82 647
----- -----
Less: reclassification adjustment for gains (losses)
included in net income 22 (41)
Tax effect (7) 15
----- -----
Unrealized appreciation on securities,
net of reclassification $ 67 $ 673
================================================================================
The Bank had no sales of investment securities during 1999.
The accompanying notes are an integral part of these financial statements.
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Cash flow from operating activities:
Net income $ 3,357 $ 4,323 $ 2,754
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 175 250 75
(Gains) losses on sales of mortgage loans and mortgage-backed securities (249) (47) 205
(Gains) losses on investment securities available for sale (22) 41 --
Gains on calls of investment securities held to maturity (29) -- --
Gains on sale of OREO -- (39) --
Depreciation and amortization of premises and equipment, investments and other assets 447 762 820
Loans originated for sale (25,301) (2,485) (7,694)
Proceeds from sales of mortgage loans and mortgage-backed securities 21,394 2,532 16,439
(Increase) decrease in accrued interest receivable 365 (148) (725)
Decrease (increase) in deferred income tax asset 1,742 1,999 1,141
Decrease (increase) in other assets 55 18 (569)
(Decrease) increase in advance payments by borrowers 60 (137) 110
(Decrease) increase in other liabilities 498 (1,352) (166)
----------- ----------- -----------
Net cash provided by operating activities 2,492 5,717 12,390
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of investment securities held to maturity 642,579 8,611 15,765
Proceeds from maturities of investment securities available for sale 6,532 -- 4,000
Purchases of investment securities held to maturity (678,882) (16,430) (65,357)
Purchases of investment securities available for sale (26,037) -- (29,433)
Purchases of mortgage-backed securities held to maturity (4,335) -- (8,368)
Purchases of mortgage-backed securities available for sale -- -- (4,905)
Proceeds from sales of investment securities available for sale 6,119 21,899 --
Principal payments of securities held to maturity 23,557 10,748 16,498
Principal payments of securities available for sale 7,765 2,775 6,219
Purchase of Federal Home Loan Bank stock -- -- (1,650)
Purchase of other equity securities (46) -- (122)
Increase in loans, net (9,986) (23,893) (9,904)
Proceeds from sales or payments on OREO 10 526 37
Purchases of Bank premises and equipment (314) (448) (346)
----------- ----------- -----------
Net cash provided by (used in) investing activities (33,038) 3,788 (77,566)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits (2,098) 24,508 (7,461)
Additions to Federal Home Loan Bank advances 48,120 695,950 1,123,600
Payments on Federal Home Loan Bank advances (27,411) (683,163) (1,086,104)
Net increase in agreements to repurchase securities 4,220 -- --
(Decrease) increase in other borrowed funds 9 (30,793) 32,457
Dividends paid (1,749) (1,134) (653)
Proceeds from exercise of stock options 104 43 276
----------- ----------- -----------
Net cash provided by financing activities 21,195 5,411 62,115
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (9,351) 14,916 (3,061)
Cash and cash equivalents, beginning of year 22,513 7,597 10,658
----------- ----------- -----------
Cash and cash equivalents, end of year $ 13,162 $ 22,513 $ 7,597
==================================================================================================================================
Cash paid during the year for:
Interest on deposits and borrowed funds $ 15,603 $ 16,098 $ 13,135
Income taxes 188 179 366
Supplemental Schedule of non-cash activities:
Change in valuation of investment securities available for sale 99 1,019 1,030
==================================================================================================================================
The accompanying notes are an integral part of these financial statements.
21
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: A BASIS OF PRESENTATION - The
LSB 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 operations.
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 and the deferred tax asset.
LSB Corporation (the "Corporation" or the "Company") is a Massachusetts
corporation and the holding company of the wholly-owned subsidiary Lawrence
Savings Bank (the "Bank") a state-chartered Massachusetts savings bank. 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 consolidated
financial statements presented herein reflect the accounts of the Corporation
and its predecessor, Lawrence Savings 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 Bank Insurance Fund of the FDIC up to
$100,000 per account, as defined by the FDIC, and the Depositors Insurance Fund,
Inc. ("DIF") for customer deposit amounts in excess of $100,000.
The consolidated financial statements include the accounts of LSB Corporation
and its wholly-owned consolidated subsidiary, Lawrence Savings Bank, and its
wholly-owned subsidiaries, Shawsheen Security Corporation, Shawsheen Security
Corporation II, Pemberton Corporation, and Spruce Wood Realty Trust. All
inter-company balances and transactions have been eliminated in consolidation.
The Company has one reportable operating segment. Certain amounts in prior
periods have been re-classified to conform to the current presentation.
INVESTMENT AND MORTGAGE-BACKED SECURITIES - Debt securities that the Company has
the intent and ability to hold to maturity are classified as "held to maturity"
and reported at amortized cost; debt, mortgage-backed and equity securities that
are bought and held principally for the purpose of selling in the near term are
classified as "trading" and reported at fair value, with unrealized gains and
losses included in earnings; and debt, mortgage-backed and equity securities not
classified as either held to maturity or trading are classified as "available
for sale" and reported at fair value, with unrealized gains and losses excluded
from earnings and reported as other comprehensive income, net of estimated
income taxes.
Premiums and discounts on investments and mortgage-backed securities are
amortized or accreted into income by use of the interest method. If a decline in
fair value below the amortized cost basis of an investment or mortgage-backed
security is judged to be other than temporary, the cost basis of the investment
is written down to fair value and the amount of the write-down is included as a
charge to earnings. Gains and losses on the sale of investment and
mortgage-backed securities are recognized at the time of sale on a specific
identification basis.
EQUITY SECURITIES - Includes Northeast Retirement Services ("NRS") stock. NRS
stock is closely held and not publicly traded and is carried at cost. Dividend
income is recorded when dividends are declared.
INTEREST ON LOANS - Interest on loans is accrued as earned. Loans on which the
accrual of interest has been discontinued are designated as non-accrual loans.
It is management's policy to discontinue the accrual of interest on a loan when
there is a reasonable doubt as to its collectibility. Interest on loans 90 days
or more contractually delinquent is generally excluded from interest income.
When a loan is placed on non-accrual status, all interest previously accrued but
not collected is reversed against current period interest income. Interest
accruals are resumed on loans that have been 90 days or more past due only when
they are brought fully current with respect to interest and principal and when,
in the judgment of management, the loans are expected to be fully collectible as
to both principal and interest.
ALLOWANCE FOR LOAN LOSSES - Losses on loans are provided for under the allowance
method of accounting. The allowance is increased by provisions charged to
operations on the basis of many factors including the risk characteristics of
the portfolio, current economic conditions and trends in loan delinquencies and
charge-offs. When management believes that the collection of a loan's principal
balance is unlikely, the principal amount is charged against the allowance.
Recoveries on loans which have been previously charged off are credited to the
allowance as received.
Management's methodology for assessing the appropriateness of the allowance
consists of several key elements, which include a formula allowance, specific
allowances for identified problem loans and an unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans, in each case based on the internal risk grade of such loans. Changes in
risk grades affect the amount of the formula allowance. Loss factors are based
on the Bank's historical loss experience as well as regulatory guidelines.
Specific allowances are established in cases where management has identified
significant conditions related to a credit such that management believes it
probable that a loss has been incurred in excess of the amount determined by the
application of the formula allowance.
The unallocated allowance recognizes the model and estimation risk associated
with the formula allowance and specific allowances as well as management's
evaluation of various conditions, the effects of which are not directly measured
in the determination of the formula and specific allowances. The evaluation of
the inherent loss with respect to these conditions is subject to a higher degree
of uncertainty because they are not identified with specific problem credits.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance for
loan losses based on judgments different from those of management.
Impaired loans are commercial, commercial real estate, and individually
significant residential mortgage and consumer loans for which it is probable
that the Bank will not be able to collect all amounts due according to the
contractual terms of the loan agreement. Impaired loans, except those loans that
are accounted for at fair value or at lower of cost or fair value, are accounted
for at the present value of the expected future cash flows discounted at the
loan's effective interest rates.
22
LOAN FEES - Loan origination fees, net of direct loan acquisitions costs, are
deferred and recognized over the contractual life of the loan as an adjustment
of the loan's yield using a basis, which approximates the interest method.
Amortization of loan fees is discontinued once a loan is designated as
non-accrual status. When loans are sold or paid-off, the unamortized portion of
net fees and costs is credited to income.
MORTGAGE BANKING ACTIVITIES - Loans held for sale are valued at the lower of
their amortized cost or market value. The Bank, from time-to-time, enters into
forward commitments to sell loans or mortgage-backed securities for the purpose
of reducing interest rate risk associated with the origination of loans for
sale. Unrealized gains and losses on contracts used to hedge the Bank's closed
loans and the pipeline of loans expected to close are considered in adjusting
carrying values of loans and mortgage-backed securities held for sale. Gains or
losses on sales of loans are recognized to the extent that the sale proceeds
exceed or are less than the carrying amount of the loans. Gains and losses are
determined using the specific identification method.
When loans are sold with servicing rights retained, the Bank allocates the
carrying amount of the loans between the underlying asset sold and the rights
retained, based on their relative fair values. The resulting mortgage servicing
rights are amortized over the period of estimated net servicing income using a
method which approximates the interest method. Actual prepayment experience is
reviewed periodically. When actual prepayments exceed estimated prepayments, the
balance of the mortgage servicing rights is adjusted accordingly. Periodically,
the mortgage servicing rights are assessed for impairment based on the fair
value of such rights using market prices.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
allowances for depreciation and amortization. Depreciation and amortization are
computed principally on the straight-line method over the estimated useful lives
of the assets or the terms of the leases, if shorter.
OTHER REAL ESTATE OWNED - Other real estate owned (OREO) is comprised of
foreclosed properties where the Bank has formally received title or has
possession of the collateral. Properties are carried at the lower of the
investment in the related loan or the estimated fair value of the property or
collateral less selling costs.
INCOME TAXES - Deferred tax assets and liabilities are recognized for estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred assets and liabilities are measured using enacted
tax rates in effect for the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax valuation allowances are established
and based on management's judgment as to whether it is more likely than not that
all or some portion of the future tax benefits of prior operating losses will be
realized.
PENSION EXPENSE - The Bank is a participant in a multiple employer defined
benefit pension plan. Pension expense is recorded as the liability is incurred.
The method recognizes the compensation cost of an employee's pension benefit
over the employee's appropriate service period. Funding is provided as
determined by the Savings Banks Employees' Retirement Association.
EARNINGS PER SHARE - Basic EPS is calculated based on the weighted average
number of common shares outstanding during each period. Stock options
outstanding, accounted for under the Treasury Stock Method, have a dilutive
effect to the computation of diluted EPS.
23
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(2) INVESTMENT SECURITIES
Proceeds from sales, realized gains and losses on investments available for sale
for the years ended December 31, follow:
2001 2000 1999
- --------------------------------------------------------------------------------
(In Thousands)
Proceeds from sales $ 6,119 $ 21,899 $ --
Realized gains on sales 38 52 --
Realized losses on sales -- (93) --
The amortized cost and market value of investment securities at December 31,
follows:
2001 2000
-------------------------------------------- -------------------------------------------
AMORTIZED UNREALIZED MARKET AMORTIZED UNREALIZED MARKET
COST GAIN (LOSS) VALUE COST GAIN (LOSS) VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Investment securities held to maturity:
US Treasury obligations $ 6,022 $ 244 $ -- $ 6,266 $ 6,041 $ 86 $ -- $ 6,127
US Government
Agency obligations 15,966 1,111 -- 17,077 38,705 600 (116) 39,189
Mortgage-backed securities 16,633 310 (8) 16,935 18,868 82 (122) 18,828
Asset-backed securities 40,337 694 (22) 41,009 31,220 257 (96) 31,381
Corporate obligations 53,982 542 -- 54,524 22,912 134 (238) 22,808
Municipal obligations 2,062 13 -- 2,075 60 -- -- 60
--------- --------- --------- --------- --------- --------- --------- ---------
$ 135,002 $ 2,914 $ (30) $ 137,886 $ 117,806 $ 1,159 $ (572) $ 118,393
====================================================================================================================================
Investment securities available for sale:
US Treasury obligations $ -- $ -- $ -- $ -- $ 6,091 $ -- $ (35) $ 6,056
US Government
Agency obligations 20,126 37 (37) 20,126 5,999 -- (12) 5,987
Mortgage-backed securities 5,629 67 (7) 5,689 9,439 55 (13) 9,481
Asset-backed securities 8,077 20 (8) 8,089 8,269 94 (3) 8,360
Corporate obligations 4,480 217 (3) 4,694 2,920 101 -- 3,021
Equity securities 168 -- -- 168 122 -- -- 122
--------- --------- --------- --------- --------- --------- --------- ---------
$ 38,480 $ 341 $ (55) $ 38,766 $ 32,840 $ 250 $ (63) $ 33,027
====================================================================================================================================
24
The following table is a summary of the contractual maturities of investment
securities held to maturity and available for sale at December 31, 2001. These
amounts exclude equity securities, which have no contractual maturities.
Mortgage-backed securities consist of FHLMC, FNMA, and GNMA certificates.
Mortgage-backed and asset-backed securities are shown at their final contractual
maturity date but are expected to have shorter average lives.
HELD TO MATURITY AVAILABLE FOR SALE
--------------------------------------- ---------------------------------------
AMORTIZED MARKET WEIGHTED AMORTIZED MARKET WEIGHTED
DECEMBER 31, 2001 COST VALUE AVG. YIELD COST VALUE AVG. YIELD
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
US Treasury & Agencies obligations
1 to 2 years $ 9,022 $ 9,390 5.77% $ 10,090 $ 10,127 3.14%
2 to 3 years 3,000 3,035 5.78 10,036 9,999 3.79
3 to 5 years 9,966 10,918 7.25 -- -- --
-------- -------- -------- --------
21,988 23,343 6.44 20,126 20,126 3.47
-------- -------- -------- --------
Mortgage-backed securities:
Within 1 year 55 56 6.64 -- -- --
1 to 2 years 670 687 6.00 -- -- --
2 to 3 years 3,085 3,142 5.66 -- -- --
3 to 5 years -- -- -- 253 259 6.57
5 to 10 years 9,359 9,557 6.22 -- -- --
After 10 years 3,464 3,493 6.79 5,376 5,430 6.85
-------- -------- -------- --------
16,633 16,935 6.23 5,629 5,689 6.83
-------- -------- -------- --------
Asset-backed securities:
2 to 3 years 5,163 5,153 5.42 -- -- --
3 to 5 years 12,765 12,872 5.85 -- -- --
5 to 10 years 12,028 12,412 6.40 3,287 3,302 6.24
After 10 years 10,381 10,572 6.54 4,790 4,787 3.12
-------- -------- -------- --------
40,337 41,009 6.14 8,077 8,089 4.39
-------- -------- -------- --------
Corporate obligations:
Within 1 year 32,993 33,030 2.55 1,538 1,536 2.83
1 to 2 years 12,585 12,831 5.53 -- -- --
2 to 3 years 5,154 5,286 5.82 2,942 3,158 7.28
3 to 5 years 1,750 1,865 7.42 -- -- --
After 10 years 1,500 1,512 11.00 -- -- --
-------- -------- -------- --------
53,982 54,524 3.95 4,480 4,694 5.75
-------- -------- -------- --------
Municipal obligations:
1 to 2 years 2,062 2,075 3.96 -- -- --
-------- -------- -------- --------
$135,002 $137,886 5.29% $ 38,312 $ 38,598 4.42%
===========================================================================================================================
Issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. This right may cause actual maturities and yields to
differ from the contractual maturities summarized above. As of December 31,
2001, the Company had callable investment securities with an amortized cost and
market value of $3.0 million in the held to maturity portfolio. There were no
callable investment securities in the available for sale portfolio.
(3) FEDERAL HOME LOAN BANK STOCK
The Bank is required to own stock of the Federal Home Loan Bank of Boston
("FHLB"). The minimum investment is 5% of outstanding FHLB advances, or 1% of
outstanding residential mortgages, whichever is largest. The Bank receives an
amount equal to the par value of the stock when excess stock is redeemed.
25
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(4) LOANS
The components of the loan portfolio at December 31, follow:
2001 2000
- --------------------------------------------------------------------------------
(In Thousands)
Residential mortgage $ 82,761 $ 77,926
Home equity 13,393 15,997
Construction 20,593 17,148
Commercial real estate 100,110 87,129
Commercial 18,549 22,602
Consumer 991 1,243
--------- ---------
Total loans 236,397 222,045
Allowance for loan losses (4,070) (3,685)
--------- ---------
$ 232,327 $ 218,360
================================================================================
The amounts above include deferred loan origination fees totaling $160 thousand
at December 31, 2001 and $221 thousand at December 31, 2000.
Mortgage loans serviced by the Company for others amounted to $68.1 million and
$65.4 million at December 31, 2001 and 2000, respectively.
Non-performing loans at December 31, 2001 and 2000 amounted to $1.0 million and
$10 thousand, respectively. At December 31, 2001 impaired loans totaled $941
thousand, of which $210 thousand was allocated to the allowance for loan losses.
There were no impaired loans at December 31, 2000.
In the ordinary course of business, the Bank makes loans to its Directors and
Officers and their associates and affiliated companies ("related parties") at
substantially the same terms and conditions as those prevailing at the time of
origination for comparable transactions with other borrowers.
An analysis of total related party loans for the year ended December 31, 2001
follows:
BALANCE AT BALANCE AT
JANUARY 1, 2001 ADDITIONS REPAYMENTS DECEMBER 31, 2001
- --------------------------------------------------------------------------------
(In Thousands)
$1,999 $808 $775 $2,032
================================================================================
The activity in the allowance for loan losses for the years ended December 31,
follows:
2001 2000 1999
- --------------------------------------------------------------------------------
(In Thousands)
Balance at beginning of year $ 3,685 $ 3,381 $ 3,272
Total charge-offs (3) (28) (17)
Total recoveries 213 82 51
------- ------- -------
Net recoveries 210 54 34
Provision for loan losses 175 250 75
------- ------- -------
Balance at end of year $ 4,070 $ 3,685 $ 3,381
================================================================================
(5) BANK PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, follow:
2001 2000
- --------------------------------------------------------------------------------
(In Thousands)
Premises $3,572 $3,486
Equipment 2,245 2,017
Leasehold improvements 336 336
------ ------
6,153 5,839
Less accumulated depreciation and amortization 2,986 2,502
------ ------
$3,167 $3,337
================================================================================
26
Depreciation and amortization expense for the years ended December 31, 2001,
2000, and 1999 amounted to $484,000, $448,000, and $435,000, respectively.
Rent expense for leased premises for the years ended December 31, 2001, 2000 and
1999 amounted to $144,000, $143,000 and $140,000, respectively.
The Company is obligated, under non-cancelable leases for premises and
equipment, for minimum payments in future periods of $154,000 in the year 2002,
$112,000 in 2003, and $90,000 for each of the years 2004, 2005, and 2006,
respectively.
(6) DEPOSITS
The following table shows the components of deposits at December 31, 2001 and
2000 and the range of interest rates paid as of December 31, 2001.
RATES AS OF
DECEMBER 31,
2001 2001 2000
- ----------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest bearing accounts:
NOW and Super NOW accounts 0.40-0.75% $ 30,080 $ 29,731
Savings accounts 0.50-1.00% 42,531 38,813
Money market investment accounts 0.25-2.00% 57,575 51,344
Certificates of deposit 2.00-6.85% 97,828 112,239
Retirement accounts 2.00-7.00% 27,032 27,198
-------- --------
Total interest bearing deposits 255,046 259,325
Non-interest bearing demand deposit accounts -- 13,404 11,223
-------- --------
$268,450 $270,548
========================================================================================
The components of interest expense on deposits for the years ended December 31,
follow:
2001 2000 1999
- --------------------------------------------------------------------------------
(In Thousands)
Now and Super NOW accounts $ 150 $ 138 $ 126
Savings accounts 725 774 777
Money market investment accounts 1,664 1,935 1,424
Certificates of deposit 5,908 5,623 5,002
Retirement accounts 1,482 1,460 1,546
------ ------ ------
$9,929 $9,930 $8,875
================================================================================
The amount and weighted average interest rate on certificates of deposit,
including retirement accounts, by periods to maturity at December 31, 2001 are
summarized as follows:
EQUAL TO WEIGHTED
LESS AND GREATER AVERAGE
THAN THAN INTEREST
$100,000 $100,000 TOTAL RATE
- ------------------------------------------------------------------------------------
(Dollars in Thousands)
3 months or less $ 18,872 $ 5,874 $ 24,746 3.81%
From three to six months 34,808 10,382 45,190 4.40
From six to twelve months 19,963 3,863 23,826 3.68
From one to two years 16,024 4,489 20,513 4.05
From two to three years 3,336 685 4,021 4.93
Three years and thereafter 5,503 1,061 6,564 4.94
-------- -------- -------- --------
$ 98,506 $ 26,354 $124,860 4.13%
====================================================================================
27
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(7) FEDERAL HOME LOAN BANK ADVANCES SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE AND OTHER BORROWED FUNDS
The FHLB permits member institutions to borrow funds for various purposes.
Outstanding advances at December 31, 2001 are collateralized by a blanket lien
against residential mortgages and other qualifying collateral.
Advances outstanding at December 31, follow:
2001 2000
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE Weighted Average
MATURITY AMOUNT INTEREST RATE Amount Interest Rate
- --------------------------------------------------------------------------------
(Dollars In Thousands)
2001 $ -- --% $ 24,000 6.60%
2002 18,000 6.40 18,000 6.40
2003 16,941 4.99 10,000 6.14
2004 20,000 4.73 -- --
2005 5,000 6.23 5,000 6.23
2006 5,000 4.69 -- --
2007 5,000 6.20 5,000 6.20
2009 270 6.42 283 6.42
2010 20,000 6.03 20,000 6.03
2011 10,000 4.93 -- --
2021 2,781 6.26 -- --
-------- --------
$102,992 5.52% $ 82,283 6.31%
================================================================================
Issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. This right may cause actual maturities to differ from the
contractual maturities summarized above. As of December 31, 2001 the Company had
callable advances totaling $43.0 million and amortizing advances totaling $6.5
million.
The Company may enter into agreements to repurchase securities sold.
These agreements are treated as secured borrowings and the obligations to
repurchase securities sold are reflected as liabilities and the securities
collateralized by the agreements remain as assets.
Generally, the outstanding collateral consists of U.S. Treasury and Government
Agency obligations and is held by third party custodians. Repurchase agreements
totaled $4.2 million at December 31, 2001 at a rate of 0.31%. There were no
repurchase agreements outstanding at December 31, 2000.
Other borrowed funds at both December 31, 2001 and 2000 consisted of secured
borrowings of $3.9 million, bearing an average interest rate of 7.46% and 9.53%,
respectively.
(8) INCOME TAXES
An analysis of income tax expense for the years ended December 31, follows:
2001 2000 1999
- ------------------------------------------------------------------------------------
(In Thousands)
Current expense:
Federal $ 65 $ 69 $ 375
State 146 76 66
------- ------- -------
Total current expense 211 145 441
------- ------- -------
Deferred expense:
Federal 1,730 1,462 1,166
State (11) 83 142
Change in valuation reserve 23 15 (167)
------- ------- -------
Total deferred expense 1,742 1,560 1,141
------- ------- -------
Change in estimate for tax contingencies -- (851) --
------- ------- -------
Total income tax expense $ 1,953 $ 854 $ 1,582
====================================================================================
28
A reconciliation of the difference between the expected federal income tax
expense computed by applying the federal statutory rate of 34% to the amount of
actual income tax expense for the years ended December 31, follows:
2001 2000 1999
- -----------------------------------------------------------------------------------
(In Thousands)
Expected federal income tax expense $ 1,805 $ 1,760 $ 1,474
Items affecting expected tax:
State income tax, net of federal benefit 89 105 137
Other 36 (175) 138
Change in valuation reserve 23 15 (167)
Change in estimate for tax contingencies -- (851) --
------- ------- -------
Total income tax expense $ 1,953 $ 854 $ 1,582
===================================================================================
The tax effects of temporary differences (the difference between financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis that give rise to deferred tax assets and liabilities for
the years ended December 31, follow:
2001 2000
- ------------------------------------------------------------------------------------------
(In Thousands)
Deferred tax assets:
Allowance for loan losses $ 2,464 $ 2,416
Net operating loss carryforward 2,094 3,969
Alternative minimum tax carryforward 347 236
Pension costs 443 517
Deferred compensation 367 310
Loan origination fees 50 32
Depreciation 299 300
Other 274 220
------- -------
Gross deferred tax asset 6,338 8,000
Valuation reserve (38) (15)
------- -------
Net deferred tax asset 6,300 7,985
------- -------
Deferred tax liabilities:
Unrealized gains on investment securities available for sale (97) (65)
Other (466) (409)
------- -------
Net deferred income tax asset $ 5,737 $ 7,511
==========================================================================================
Operating losses in the early 1990's resulted in available tax loss
carry-forwards. A deferred tax valuation allowance is required to reduce the
potential deferred tax asset when it is more likely than not that all or some
portion of the potential deferred tax asset will not be realized due to the lack
of sufficient taxable income in the carryforward period. At December 31, 2001,
the Bank has $6.2 million of tax loss carryforwards available that expire
between 2011 and 2019.
At December 31, 2001, the Bank would need to generate approximately $16.8
million of future net taxable income to realize the net deferred income tax
asset. Management believes that it is more likely than not that the net deferred
income tax asset at December 31, 2001 will be realized based upon recent
operating results.
It should be noted, however, that factors beyond Management's control, such as
the general state of the economy and real estate values, can affect future
levels of taxable income and that no assurance can be given that sufficient
taxable income will be generated to fully absorb gross deductible temporary
differences.
The unrecaptured base year tax reserves as of October 31, 1998 will not be
subject to recapture as long as the institution continues to carry on the
business of banking. In addition, the balance of the pre-1988 bad debt tax
reserves continue to be subject to a provision of the current law that requires
recapture in the case of certain excess distribution to shareholders. The tax
effect of pre-1988 bad debt tax reserves subject to recapture in the case of
certain excess distributions is approximately $1.1 million.
29
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(9) STOCKHOLDERS' EQUITY
The Company and the Bank are regulated by federal and state regulatory agencies.
Failure by the Company or the Bank to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
federal or state regulators that, if undertaken, could have a direct material
effect on the Company's consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Total
and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average
assets (Leverage ratio). There are two categories of capital under the
guidelines. Tier 1 capital as it applies to the Company and the Bank, includes
stockholders' equity exclusive of the net unrealizable gains/losses on
investment securities available for sale and the deferred tax asset is
disallowed. Tier 2 capital includes the allowance for loan losses, subject to
guideline limitations.
At December 31, 2001 and 2000, the Company and the Bank not only exceeded each
of the minimum capital requirements but also met the definition of "well
capitalized" as defined by the FDIC under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized" the Company or the
Bank must maintain Tier 1 Total, and Leverage ratios as set forth in the table
below. There are no conditions or events that management believes have changed
the Company's or the Bank's classification as "well capitalized."
The Company's and the Bank's actual capital ratios and amounts at December 31,
2001 and 2000, follow:
Risk-Based Ratios
--------------------------------------------------------------------------------------
Tier 1 Capital Total Capital Leverage Capital
-------------------------- -------------------------- --------------------------
2001 2000 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Capital Ratios:
Adequately capitalized 4.00% 4.00% 8.00% 8.00% 4.00% 4.00%
Well capitalized 6.00% 6.00% 10.00% 10.00% 5.00% 5.00%
LSB Corporation 15.74% -- 16.97% -- 11.46% --
Lawrence Savings Bank 15.15% 15.67% 16.39% 16.86% 11.46% 11.71%
Capital Amounts:
Adequately capitalized
LSB Corporation $ 13,236 $ -- $ 26,472 $ -- $ 17,392 $ --
Lawrence Savings Bank 13,155 12,381 26,310 24,762 17,390 16,567
Well capitalized
LSB Corporation 19,854 -- 33,090 -- 21,740 --
Lawrence Savings Bank 19,733 18,572 32,888 30,953 21,737 20,709
Actual Amounts:
LSB Corporation 52,081 -- 56,151 -- 52,081 --
Lawrence Savings Bank 49,824 48,516 53,894 52,201 49,824 48,516
=================================================================================================================
STOCKHOLDERS' RIGHTS PLAN
In 1996, the Board of Directors adopted a stockholder rights plan declaring a
dividend of one preferred stock purchase right for each share of outstanding
common stock. The rights will remain attached to the common stock and are not
exercisable except under limited circumstances relating to (i) acquisition of
beneficial ownership of more than 10% of the outstanding shares of common stock,
or (ii) a tender offer or exchange offer that would result in a person or group
beneficially owning more than 10% of the outstanding share of common stock. The
rights are not exercisable until those aforementioned circumstances occur. The
rights expire in 2006. Until a right is exercised, the holder has no rights to
vote or to receive dividends. The rights are not taxable to stockholders until
exercisable.
(10) EMPLOYEE BENEFITS
The Company provides pension benefits for its employees through membership in
the Savings Bank Employees' Retirement Association (the "Plan"). The Plan is a
multiple-employer, non-contributory, defined benefit plan. Bank employees become
eligible after attaining age 21 and completing one year of service.
Additionally, benefits become fully vested after three years of eligible
service. The Company's annual contribution to the Plan is based upon standards
established by the Employee Retirement Income Security Act. The contribution is
based on an actuarial method intended to provide not only for benefits
attributable to service to date, but also for those expected to be earned in the
future.
30
The following table sets forth the Plan's funded status and amounts recognized
in the Company's consolidated financial statements through the Plan's latest
valuation dates which were October 31, 2001 and 2000.
2001 2000
- --------------------------------------------------------------------------------
(In Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 4,640 $ 4,317
Service cost 280 258
Interest cost 360 334
Actuarial (gain) loss 195 (117)
Benefits paid (79) (152)
------- -------
Benefit obligation at end of year $ 5,396 $ 4,640
================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 6,478 $ 5,570
Actual return on plan assets (704) 799
Employer contribution 21 261
Benefits paid (79) (152)
------- -------
Fair value of plan assets at end of year $ 5,716 $ 6,478
================================================================================
Funded status $ 320 $ 1,838
Unrecognized net actuarial gain (1,386) (3,043)
Unrecognized prior service cost (36) (40)
------- -------
Accrued benefit cost included in other liabilities $(1,102) $(1,245)
================================================================================
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation were
7.00% and 7.75% for 2001 and 2000.
Net pension cost components for the years ended October 31, follow:
2001 2000 1999
- --------------------------------------------------------------------------------
(In Thousands)
Service cost $ 280 $ 258 $ 305
Interest cost 360 334 317
Expected return on plan assets (518) (416) (349)
Amortization of net (gains) losses (240) (228) (112)
Net amortization and deferrals (4) (4) (4)
----- ----- -----
Net periodic pension cost $(122) $ (56) $ 157
================================================================================
Assumptions used to develop the net periodic pension cost were:
2001 2000 1999
- ----------------------------------------------------------------------------------------
Discount rate 7.75% 7.75% 6.75%
Rate of increase in compensation levels 4.50 4.50 4.50
Expected long-term rate of return on assets 8.00 8.00 8.00
========================================================================================
The Company provides an employee savings plan (the "Savings Plan") through the
Savings Banks Employees' Retirement Association. The Savings Plan qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, employees may defer a portion of their pretax earnings,
up to the Internal Revenue Service annual contribution limit. Employees are
eligible to participate in the Savings Plan immediately upon employment with the
Company provided they have attained 21 years of age. Company employees become
eligible for matching contributions after completing one year of service with
1,000 hours or more. On an annual basis, the Company determines whether or not
to contribute to the Savings Plan. The Company contributed $91 thousand and $80
thousand on behalf of the employees who were in the Savings Plan in 2001 and
2000, respectively.
31
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The Board offers options on its common stock to Directors, Management and
Officers to purchase unissued common stock of the Company at a price equal to
the fair market value of the Company's common stock on the date of grant. All
options expire ten years from the date of grant. The Company applies APB Opinion
No. 25 and related interpretations in accounting for its Stock Option Plan. Had
compensation cost for the Company's Stock Option Plan been determined consistent
with SFAS 123, the Company's net income and earnings per share would have been
reduced to the proforma amounts for the years ended December 31, and are
presented in the table which follows:
2001 2000 1999
- ------------------------------------------------------------------------------------
(In Thousands except per share data)
Net Income:
As Reported $ 3,357 $ 4,323 $ 2,754
Pro forma 3,086 4,167 2,604
Basic earnings per share
As Reported $ 0.77 $ 0.99 $ 0.63
Pro forma 0.71 0.96 0.60
Diluted earnings per share
As Reported $ 0.74 $ 0.97 $ 0.61
Pro forma 0.68 0.94 0.58
====================================================================================
Under the 1986 and 1997 Stock Option Plans, the Bank may grant options to
Directors, Officers or employees up to 859,100 of which 151,970 shares have been
exercised. As of December 31, 2001, 601,030 options were outstanding with
105,100 available for future use. The vesting schedule provided for 50% of
options granted are vested after the first year and an additional 25% vest each
year thereafter. Options are fully vested three years after the grant date.
The summary of the status of the Stock Option Plan as of December 31, and
changes during the years ended follow:
2001 2000 1999
------------------- ------------------- -------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
NUMBER OF EXERCISE Number of Exercise Number of Exercise
OPTIONS PRICE Options Price Options Price
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 452,030 $ 6.67 463,030 $ 6.66 326,030 $ 5.32
Granted 165,000 13.87 -- -- 162,000 9.06
Exercised (14,750) 7.00 (8,000) 5.50 (25,000) 4.70
Canceled (1,250) 9.13 (3,000) 9.13 -- --
-------- -------- --------
Outstanding at end of year 601,030 8.63 452,030 6.67 463,030 6.66
======== ======== ========
Options exercisable end of year 397,530 6.42 372,530 6.16 301,030 5.37
Weighted average fair value of options granted during the year $ 5.47 $ -- $ 3.18
=============================================================================================================================
The following table summarizes information about the Stock Option Plans based on
a range of exercise prices as of December 31, 2001.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE REMAINING NUMBER OF EXERCISE
Range of Exercise Price OPTIONS PRICE LIFE OPTIONS PRICE
- -----------------------------------------------------------------------------------------------------
$2.00 to $5.00 107,530 $ 4.38 2.1 YEARS 107,530 $ 4.38
$5.01 to $8.00 185,000 6.05 4.4 YEARS 183,500 6.04
$8.01 to $11.00 143,500 9.13 7.6 YEARS 106,500 9.13
$11.01 to $14.00 165,000 13.87 9.6 YEARS -- --
------- -------
Outstanding at end of year 601,030 8.63 6.2 YEARS 397,530 6.42
=====================================================================================================
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
2001 2000 1999
- --------------------------------------------------------------------------------
Expected volatility 35.00% -- 29.50%
Risk-free interest rate 5.12% -- 6.07%
Expected dividend yield 3.37% -- 2.30%
Expected life in years 10 -- 8
================================================================================
32
In addition to the Company's defined benefit pension plan, the Company sponsors
a defined benefit post-retirement plan that provides limited post-retirement
medical benefits to certain full-time employees who retire before age 65 and
life insurance benefits to full-time employees who retire after age 62 and after
completing 10 years of service. The plan is non-contributory. The Company's
policy is to fund the cost of postretirement benefits in amounts determined at
the discretion of management.
The amounts of accrued postretirement benefit cost reported on the Company's
consolidated balance sheet were $262 thousand and $234 thousand as of December
31, 2001 and 2000, respectively.
(11) CONTINGENCIES
The Bank is involved in various legal proceedings incidental to its business.
After review with legal counsel, management does not believe resolution of such
litigation will have a material adverse effect on the financial condition and
operating results of the Bank.
In one litigation matter, the Bank was awarded a $4.2 million judgment in 1997.
The Bank expects to prevail on this appeal. The Bank expects to collect this
judgment, at least in substantial part, which would have a material favorable
impact to the Bank's financial statements. Post judgment interest accrues from
the date of this judgment and approximates $1.9 million at December 31, 2001.
However, collectibility of post-judgment interest in addition to the $4.2
million award has not yet been determined.
In another litigation matter, the Bank was awarded $1.1 million by a jury
verdict, during the fourth quarter 1999, in a legal case where the Bank sought
to recover damages from loans previously charged off.
In 2000, the court entered final judgment for approximately $1.8 million, which
includes accrued interest. This award has been appealed by defendants and
collectibility of this award is subject to this appeal and other contingencies.
It is management's opinion the timing and final amount to be collected cannot be
determined at this time. Accordingly, no recognition of these judgments has been
recorded in the financial statements.
(12) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk.
These instruments, in the form of commitments to extend credit and financial and
standby letters of credit, are offered in the normal course of business to meet
the financing needs of customers. The company is exposed to varying degrees of
credit and interest rate risk in excess of amounts recognized in the
consolidated financial statements as a result of such transactions. Commitments
to extend credit are agreements to lend to a customer as long as there is
compliance with conditions established in the agreement. These extensions of
credit are based upon traditional underwriting standards and generally have a
fixed expiration date of less than five years.
Letters of credit are documents issued by the Company on behalf of its customers
in favor of third parties, who can present requests for drafts from the Company
within specified terms and conditions. Letters of credit are secured by cash
deposits. Standby letters of credit are conditional commitments issued by the
Company to guarantee payment to a third party. Outstanding letters of credit
generally expire within one year. The credit risk involved with these
instruments is similar to the risk of extending loans and, accordingly, the
underwriting standards are also similar. It is expected that most letters of
credit will not require cash disbursements.
The components of financial instruments with off-balance sheet risk at December
31, follow:
FIXED VARIABLE
2001 RATE RATE TOTAL
- ---------------------------------------------------------------------------------------------------------
(In Thousands)
Financial instruments with contract amounts represent credit risk:
Unused commitments to extend credit:
Residential mortgages $ 2,918 $ 1,707 $ 4,625
Home equity lines of credit 2,355 6,706 9,061
Personal lines of credit 225 -- 225
Commercial real estate mortgage 5,682 13,848 19,530
Construction -- 16,635 16,635
Commercial loans 250 29,030 29,280
------- ------- -------
Total unused commitments $11,430 $67,926 $79,356
=========================================================================================================
Letters of credit and standby letters of credit $ -- $ 1,978 $ 1,978
=========================================================================================================
Forward commitments to sell mortgage loans $ 7,475 $ -- $ 7,475
=========================================================================================================
33
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------------
Fixed Variable
2000 Rate Rate Total
- ---------------------------------------------------------------------------------------------------------
(In Thousands)
Financial instruments with contract amounts represent credit risk:
Unused commitments to extend credit:
Residential mortgages $ 666 $ 1,517 $ 2,183
Home equity lines of credit 2,059 5.454 7,513
Personal lines of credit 237 -- 237
Commercial real estate mortgage 56 4,522 4,578
Construction -- 13,097 13,097
Commercial loans 3,105 30,480 33,585
------- ------- -------
Total unused commitments $ 6,123 $55,070 $61,193
=========================================================================================================
Standby and financial letters of credit $ -- $ 2,357 $ 2,357
=========================================================================================================
Forward commitments to sell mortgage loans $ 165 $ -- $ 165
=========================================================================================================
Forward commitments to sell mortgage loans are contracts which the Company
enters into for the purpose of reducing the interest rate risk associated with
originating loans held for sale. Risk may arise from the possible inability of
the Company to originate loans to fulfill the contracts. Unrealized gains or
losses on contracts used to hedge the Company's closed loans and pipeline of
loans expected to close are considered in determining the lower of cost or
market value of loans held for sale.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND DUE FROM BANKS, SHORT-TERM INVESTMENTS, STOCK IN FEDERAL HOME LOAN BANK
OF BOSTON, ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE.
The carrying amount of each of these assets and liabilities is a reasonable
estimate of fair value.
INVESTMENT SECURITIES
For investment securities, fair values are based on quoted market prices or
dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
real estate, residential mortgage, and other consumer. Each loan category is
further segmented into fixed and adjustable rate interest terms and by
classified and non-classified categories.
The fair value of non-classified loans is calculated by discounting scheduled
cash flows through the expected maturity using current rates at which similar
loans would be made to borrowers with similar credit ratings. For non-classified
residential mortgage loans, maturity estimates are based on secondary market
sources.
Fair value for significant classified loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are discounted
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific borrower
information.
DEPOSITS AND MORTGAGORS' ESCROW ACCOUNTS
The fair value of demand deposits, NOW accounts, money market deposit accounts,
savings accounts, and mortgage escrow accounts of borrowers is the amount
payable on demand at the balance sheet date. The fair value of certificates of
deposit is based on the discounted value of contractual cash flows. The discount
rate is estimated using the rates currently offered for deposits of similar
remaining maturities.
BORROWED FUNDS
The fair value of borrowed funds is determined as the cost of extinguishing the
debt inclusive of any and all prepayment penalties. The prepayment penalties are
determined by the Federal Home Loan Bank of Boston.
34
The estimated fair values of the Bank's financial instruments at December 31,
follow:
2001 2000
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------
(In Thousands)
Financial assets:
Cash and due from banks $ 7,457 $ 7,457 $ 7,086 $ 7,086
Short-term investments 5,705 5,705 15,427 15,427
Investment securities 173,768 176,652 150,833 151,420
Federal Home Loan Bank stock 5,950 5,950 5,950 5,950
Accrued interest receivable 2,604 2,604 2,969 2,969
Loans, net 232,327 238,512 218,360 221,197
Financial liabilities:
Deposits $268,450 $269,533 $270,548 $270,873
Borrowed funds 111,099 113,381 86,161 86,673
Mortgagors' escrow accounts 573 573 513 513
Accrued interest payable 498 498 460 460
======================================================================================
FAIR VALUE OF FINANCIAL INSTRUMENTS OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Off-balance-sheet financial instruments generally have interest rates which
reflect current market rates. Management has determined that the difference
between the carrying and fair value of these instruments is not material.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular financial instrument. Because
no active market exists for a portion of the Company's financial instruments,
fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision.
Changes in assumptions and market conditions could significantly affect these
estimates.
Fair value estimates are based on existing on and off-balance-sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets that are not considered
financial assets include other real estate acquired, banking premises and
equipment, and core deposit and other intangibles. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of the estimates.
- -----------------------------------------------------------------------------
(14) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
The condensed financial statements for LSB Corporation, referred to as the
"Parent Company" for purposes of this Note only at and for the year ended
December 31, follow:
Balance Sheet 2001
- --------------------------------------------------------------------------------
(In Thousands)
Assets:
Cash deposits in subsidiaries $ 248
Investment securities held to maturity at amortized cost 1,999
Investment in subsidiary, at equity 51,817
Other assets 44
-------
Total assets $54,108
-------
Liabilities and Stockholders' Equity:
Liabilities:
Accrued income taxes $ 11
Accrued expenses 5
-------
Total liabilities 16
-------
Total stockholders' equity 54,092
-------
Total liabilities and stockholders' equity $54,108
================================================================================
35
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Statement of Operations 2001
- --------------------------------------------------------------------------------
(In Thousands)
Dividends from bank subsidiary $ 3,320
-------
Total operating income 3,320
Non-interest expenses 188
-------
Income before income taxes and undistributed earnings 3,132
Income tax benefit (7)
-------
Income before undistributed earnings of subsidiary 3,139
Equity in undistributed earnings of subsidiary 218
-------
Net income $ 3,357
================================================================================
The Parent Company's statements of changes in stockholders' equity are identical
to the consolidated statements of changes in stockholders' equity and therefore
are not presented here.
- --------------------------------------------------------------------------------
(15) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
2001
-------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
31 30 30 31
- ----------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
Interest and dividend income $7,398 $7,282 $7,237 $6,875
Interest expense 4,196 4,007 3,928 3,480
------ ------ ------ ------
Net interest income 3,202 3,275 3,309 3,395
Provision for loan losses -- 50 125 --
------ ------ ------ ------
Net interest income after provision for loan losses 3,202 3,225 3,184 3,395
Non-interest income 281 298 354 493
Non-interest expense 2,208 2,303 2,312 2,299
------ ------ ------ ------
Income before income tax 1,275 1,220 1,226 1,589
Income tax 484 430 472 567
------ ------ ------ ------
Net income $ 791 $ 790 $ 754 $1,022
====================================================================================================
Basic earnings per share $ 0.18 $ 0.18 $ 0.17 $ 0.23
Diluted earnings per share $ 0.18 $ 0.17 $ 0.17 $ 0.22
====================================================================================================
2000
-------------------------------------------
March June September December
31 30 30 31
- ----------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
Interest and dividend income $7,015 $7,106 $7,330 $7,586
Interest expense 3,778 4,001 4,224 4,355
------ ------ ------ ------
Net interest income 3,237 3,105 3,106 3,231
Provision for loan losses -- -- 125 125
------ ------ ------ ------
Net interest income after provision for loan losses 3,237 3,105 2,981 3,106
Non-interest income 288 296 246 294
Non-interest expense 2,128 2,049 2,085 2,114
------ ------ ------ ------
Income before income tax (benefit) 1,397 1,352 1,142 1,286
Income tax (benefit) 497 456 (185) (i) 86 (i)
------ ------ ------ ------
Net income $ 900 $ 896 $1,327 $1,200
====================================================================================================
Basic earnings per share $ 0.21 $ 0.21 $ 0.30 $ 0.27
Diluted earnings per share $ 0.20 $ 0.20 $ 0.30 $ 0.27
====================================================================================================
(i) Included tax benefits of $639 thousand and $213 thousand in the third and
fourth quarters of 2000, respectively.
36
STOCKHOLDER INFORMATION
The Company's stock trades on the Nasdaq Stock Market under the symbol "LSBX".
Sales prices of the stock are reported in the Wall Street Journal as "LSBCorp".
Prior to July 1, 2001, the Bank's common stock traded on the Nasdaq Stock Market
under the symbol "LSBX". Prices of the Bank's common stock were reported in the
Wall Street Journal as "LawrenceSvg".
The following table sets forth for the fiscal periods indicated certain
information with respect to the sales prices of the Company's common stock.
Price
-----------------------
Fiscal Year High Low
- --------------------------------------------------------------------------------
2001
First Quarter $ 11.86 $ 9.81
Second Quarter 13.65 10.50
Third Quarter 14.00 9.81
Fourth Quarter 13.10 10.11
2000
First Quarter $ 7.625 $ 6.750
Second Quarter 7.500 6.813
Third Quarter 9.313 6.625
Fourth Quarter 10.875 8.000
1999
First Quarter $ 12.94 $ 9.50
Second Quarter 10.50 8.25
Third Quarter 9.50 7.50
Fourth Quarter 8.50 7.13
The Company declared and paid a cash dividend of $0.40 per share ($0.10 in each
quarter) during 2001. The Company expects to pay dividends during 2002.
On December 31, 2001 there were approximately 1,104 holders of common stock.
This number does not reflect the number of persons or entities who hold their
stock in nominee or "street" name through various brokerage firms.
The Annual Meeting of the stockholders of LSB Corporation will be held at 10:00
a.m. on Tuesday, May 7, 2002 at the Andover Country Club, Canterbury Street,
Andover, Massachusetts.
CORPORATE HEADQUARTERS
LSB Corporation
30 Massachusetts Avenue
North Andover, MA 01845-3460
MAILING ADDRESS
30 Massachusetts Avenue
North Andover, MA 01845-3460
INVESTOR RELATIONS
Barbara Biondo
Telephone (978) 725-7556
Fax (978) 725-7593
A COPY OF THE COMPANY'S FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO THE SECURITIES AND EXCHANGE ACT OF 1934, IS AVAILABLE
WITHOUT CHARGE UPON WRITTEN REQUEST TO INVESTOR RELATIONS.
TRANSFER AGENT
EquiServe Trust Company
150 Royall Street
Canton, MA 02021
INDEPENDENT AUDITORS
KPMG LLP
99 High Street
Boston, MA 02110
LEGAL COUNSEL
Goulston & Storrs, P.C.
400 Atlantic Avenue
Boston, MA 02110-3333
Book Value Per Share vs Stock Price
[BAR CHART]
1997 1998 1999 2000 2001
Book Value $ 8.77 $ 10.78 $ 11.11 $ 11.99 $ 12.35
Stock Price $ 16.38 $ 12.81 $ 7.63 $ 10.50 $ 12.69
37
DIRECTORS OF
LSB CORPORATION AND
LAWRENCE SAVINGS BANK
EUGENE A. BELIVEAU, D.D.S.
Dentist
KATHLEEN I. BOSHAR
Sales Manager
DeWolfe Companies
MALCOLM W. BRAWN
Executive Vice President & Secretary
The Andover Companies
THOMAS J. BURKE
Chairman of the Board
LSB Corporation and
Lawrence Savings Bank
Register of Deeds
Attorney
BYRON R. CLEVELAND, JR.
President
J. H. Horne & Sons
NEIL H. CULLEN
Chief Financial Officer
Phillips Academy
RICHARD HART HARRINGTON, CPA
Chairman
Gordon, Harrington & Osborn, P.C.
ROBERT F. HATEM
Executive Assistant to the President
Northern Essex Community College
MARSHA A. MCDONOUGH
Regional Education Offices
U.S. Department of State
PAUL A. MILLER
President and
Chief Executive Officer
LSB Corporation and
Lawrence Savings Bank
OFFICERS OF
LSB CORPORATION
PAUL A. MILLER
President and Chief Executive Officer
JOHN E. SHARLAND
Senior Vice President, Treasurer and
Chief Financial Officer
ROBERT P. PERREAULT
Executive Vice President,
Clerk and Secretary
RICHARD J. D'AMBROSIO
Assistant Treasurer
TIMOTHY L. FELTER
Assistant Treasurer
JEFFREY W. LEEDS
Assistant Treasurer
38
OFFICERS OF
LAWRENCE SAVINGS BANK
PAUL A. MILLER
President and
Chief Executive Officer
CARLA M. FRIEDRICH
Vice President and
Human Resources Officer
ROBYN K. LEBUFF
Vice President and
Marketing Officer
BRENDA MISKINIS
Assistant Vice President
Marketing Officer
LENDING DIVISION
JEFFREY W. LEEDS
Executive Vice President and
Chief Lending Officer
COMMERCIAL BANKING
JACOB KOJALO
Senior Vice President and
Senior Lending Officer
ROBERT J. DELUCA
Vice President
STEVEN K. VENTRE
Vice President
COMMERCIAL REAL ESTATE LENDING
FREDERICK P. MALOOF
Vice President
JOHN P. TEOLI
Vice President
PAUL M. VALLACE
Vice President
CREDIT POLICY AND ADMINISTRATION
LEE D. DICKEY
Senior Vice President
JOHN P. MALYNN
Vice President and
Collections Manager
LINDA A. BAILEY
Assistant Vice President and
Credit Administration Officer
CONSUMER LENDING
MAUREEN MCCARTHY
Vice President and
Compliance/CRA Officer
RESIDENTIAL MORTGAGE LENDING
ROBERT P. PERREAULT
Executive Vice President
Residential Mortgage Lending and Clerk
SUSAN M. CAIN
Assistant Vice President and
Senior Mortgage Underwriter
LYNETTE S. KIMBALL
Assistant Vice President and
Loan Closing Coordinator
FINANCE DIVISION
JOHN E. SHARLAND
Senior Vice President, Treasurer and
Chief Financial Officer
LINDA M. CHASE BORRELLI
Vice President and
Controller
PERSONAL BANKING DIVISION
TIMOTHY L. FELTER
Executive Vice President and
Investment Officer
SHARON S. PRIVITERA
Vice President and
Branch Administrator/Security Officer
GAYLE M. FILI
Vice President and
Branch Manager
CHERYL A. PARENT
Vice President and
Branch Manager
ANNA CURRAO
Assistant Vice President and
Branch Manager
SUSAN M. DANCAUSE
Assistant Vice President and
Retirement Services Officer
LINDA BUELL
Branch Manager
PAUL M. FRANK
Branch Manager
SUPPORT SERVICE DIVISION
RICHARD J. D'AMBROSIO
Senior Vice President
CARMELA CUTULI
Vice President and
Loan Servicing Manager
CHERYL A. VINING
Vice President and
Deposit Servicing Manager
STANLEY R. WARD, JR.
Assistant Vice President
LAURA LAVOIE
Assistant Vice President
Computer Network Engineer
39
CORPORATE HEADQUARTERS OF
LSB CORPORATION
30 Massachusetts Avenue
North Andover, MA 01845-3460
(978) 725-7500
BANKING OFFICES OF
LAWRENCE SAVINGS BANK
MAIN OFFICE:
30 Massachusetts Avenue
North Andover, MA 01845-3460
(978) 725-7500
Fax: (978) 725-7607
BRANCH OFFICES:
342 North Main Street
Andover, MA 01810
(978) 725-7590
300 Essex Street
Lawrence, MA 01840
(978) 725-7530
20 Jackson Street
Methuen, MA 01844
(978) 725-7545
148 Lowell Street
Methuen, MA 01844
(978) 725-7570
Lawrence Savings Bank
24 Hour Information
Phone:(978) 725-7700
www.LawrenceSavings.com
Member
FDIC
Member
DIF
[RECYCLED LOGO]
This Annual Report is printed on recycled paper. LSBCM-AR-02