SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20529
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the transition period from ___ to ___
Commission File Number 000-32955
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LSB CORPORATION
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(Exact name of Registrant as specified in its Charter)
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MASSACHUSETTS 04-3557612
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
30 MASSACHUSETTS AVENUE, NORTH ANDOVER, MA 01845
- ------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
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(978) 725-7500
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(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding as of September 30, 2002
- ----- ------------------------------------
Common Stock, par value $.10 per share 4,305,205 shares
LSB CORPORATION
INDEX
PART I -- FINANCIAL INFORMATION
PAGE
----
ITEM 1 FINANCIAL STATEMENTS:
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in Stockholders Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS:
FINANCIAL CONDITION:
Investment Portfolio 8
Loan Portfolio 9
Loan Interest Income 9
Allowance for Loan Losses 9
Risk Assets 10
Deposit Portfolio 11
Deposit Interest Expense 11
Liquidity and Capital Resources 11
RESULTS OF OPERATIONS:
Three Months ended September 30, 2002 and 2001 11-13
Nine Months ended September 30, 2002 and 2001 13-15
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 15
ITEM 4 CONTROLS AND PROCEDURES 15
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 16
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS 16
ITEM 3 DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5 OTHER INFORMATION 16
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
CERTIFICATIONS 18-19
EXHIBIT INDEX 20
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LSB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2002 2001
------------ -----------
(In Thousands)
ASSETS
Assets:
Cash and due from banks $ 7,462 $ 7,457
Federal funds sold 8,687 5,705
-------- --------
Total cash and cash equivalents 16,149 13,162
Investment securities held to maturity (market value of
$118,608 in 2002 and $137,886 in 2001) 115,144 135,002
Investment securities available for sale (amortized cost of
$53,275 in 2002 and $38,480 in 2001) 54,474 38,766
Federal Home Loan Bank stock, at cost 5,950 5,950
Loans, net of allowance for loan losses 232,496 232,327
Bank premises and equipment 3,062 3,167
Accrued interest receivable 2,638 2,604
Other real estate owned 14 22
Deferred income tax asset 4,188 5,737
Other assets 1,694 1,530
-------- --------
Total assets $435,809 $438,267
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Interest bearing deposits $263,714 $255,046
Non-interest bearing deposits 13,212 13,404
Federal Home Loan Bank advances 94,688 102,992
Securities sold under agreements to repurchase 2,450 4,220
Other borrowed funds 3,421 3,887
Advance payments by borrowers for taxes and insurance 611 573
Other liabilities 3,201 4,053
-------- --------
Total liabilities 381,297 384,175
-------- --------
Stockholders' equity:
Preferred stock, $.10 par value per share:
5,000,000 shares authorized, none issued -- --
Common stock, $.10 par value per share;
20,000,000 shares authorized;
4,387,705 and 4,379,550 shares issued and 4,305,205 and
4,379,550 shares outstanding at September 30, 2002 and
December 31, 2001, respectively 439 438
Additional paid-in capital 57,827 57,813
Accumulated deficit (3,465) (4,348)
Treasury stock, at cost (82,500 shares in 2002) (1,080) --
Accumulated other comprehensive income 791 189
-------- --------
Total stockholders' equity 54,512 54,092
-------- --------
Total liabilities and stockholders' equity $435,809 $438,267
======== ========
The accompanying note is an integral part of these unaudited financial
statements.
3
LSB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In Thousands except share data)
Interest and dividend income:
Loans $ 4,268 $ 4,653 $ 12,700 $ 13,733
Investment securities held to maturity 1,381 2,073 4,763 6,256
Investment securities available for sale 410 382 1,325 1,229
Federal Home Loan Bank stock 56 84 167 283
Other interest and dividend income 43 45 104 416
---------- ---------- ---------- ----------
Total interest and dividend income 6,158 7,237 19,059 21,917
---------- ---------- ---------- ----------
Interest expense:
Deposits 1,433 2,499 4,510 7,981
Borrowed funds 1,417 1,309 4,218 3,845
Other borrowed funds 73 120 234 305
---------- ---------- ---------- ----------
Total interest expense 2,923 3,928 8,962 12,131
---------- ---------- ---------- ----------
Net interest income 3,235 3,309 10,097 9,786
---------- ---------- ---------- ----------
Provision for loan losses -- 125 -- 175
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 3,235 3,184 10,097 9,611
---------- ---------- ---------- ----------
Non-interest income:
Loan servicing fees (102) 76 (14) 162
Deposit account fees 172 157 491 430
Gains on sales of mortgage loans 147 52 323 90
Other income 106 69 301 251
---------- ---------- ---------- ----------
Total non-interest income 323 354 1,101 933
---------- ---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits 1,507 1,340 4,526 3,941
Occupancy and equipment expenses 182 232 595 655
Professional expenses 170 199 537 509
Data processing expenses 200 179 566 515
Other expenses 470 362 1,365 1,203
---------- ---------- ---------- ----------
Total non-interest expenses 2,529 2,312 7,589 6,823
---------- ---------- ---------- ----------
Income before income tax expense 1,029 1,226 3,609 3,721
Income tax expense 334 472 1,279 1,386
---------- ---------- ---------- ----------
Net income $ 695 $ 754 $ 2,330 $ 2,335
========== ========== ========== ==========
Average shares outstanding 4,343,045 4,376,052 4,369,759 4,372,390
Average diluted shares outstanding 4,515,517 4,553,049 4,544,412 4,534,072
========== ========== ========== ==========
Basic earnings per share $ 0.16 $ 0.17 $ 0.53 $ 0.53
Diluted earnings per share $ 0.15 $ 0.17 $ 0.51 $ 0.52
========== ========== ========== ==========
The accompanying note is an integral part of these unaudited financial
statements.
4
LSB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
Accumulated
Additional Other Total
Common Paid-In Accumulated Treasury Comprehensive Stockholders'
Stock Capital Deficit Stock Income Equity
------- ---------- ----------- --------- ------------- ------------
(In Thousands except share data)
Balance at December 31, 2000 $ 436 $ 57,711 $ (5,956) $ -- $ 122 $52,313
Net income -- -- 2,335 -- -- 2,335
Other comprehensive income:
Unrealized gain on securities
available for sale (tax effect $63) -- -- -- -- 127 127
-------
Total comprehensive income 2,462
Exercise of stock options 2 102 -- -- -- 104
Dividends declared and paid
($0.30 per share) -- -- (1,312) -- -- (1,312)
------- -------- -------- -------- -------- -------
Balance at September 30, 2001 $ 438 $ 57,813 $ (4,933) $ -- $ 249 $53,567
======= ======== ======== ======== ======== =======
Accumulated
Additional Other Total
Common Paid-In Accumulated Treasury Comprehensive Stockholders'
Stock Capital Deficit Stock Income Equity
------- ---------- ----------- --------- ------------- ------------
(In Thousands except share data)
Balance at December 31, 2001 $ 438 $ 57,813 $ (4,348) $ -- $ 189 $54,092
Net income -- -- 2,330 -- -- 2,330
Other comprehensive income:
Unrealized gain on securities
available for sale (tax effect $310) -- -- -- -- 602 602
-------
Total comprehensive income 2,932
Exercise of stock options 1 14 -- -- -- 15
Dividends declared and paid
($0.33 per share) -- -- (1,447) -- -- (1,447)
Purchase of 82,500 shares of Treasury
Stock, at cost -- -- -- (1,080) -- (1,080)
------- -------- -------- -------- -------- -------
Balance at September 30, 2002 $ 439 $ 57,827 $ (3,465) $ (1,080) $ 791 $54,512
======= ======== ======== ======== ======== =======
The accompanying note is an integral part of these unaudited financial
statements.
5
LSB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
September 30,
------------------------
2002 2001
--------- ---------
(In Thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 2,330 $ 2,335
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses -- 175
Gains on sales of mortgage loans (323) (90)
Gains on investment securities held to maturity -- (13)
Gains on investment securities available for sale -- (1)
Depreciation and amortization of premises and equipment,
investments and other assets 1,359 319
Loans originated for sale (22,401) (8,157)
Proceeds from sales of mortgage loans and
mortgage-backed securities 24,164 6,715
(Increase) decrease in accrued interest receivable (34) 481
Decrease in deferred income tax asset 1,239 1,238
(Increase) decrease in other assets (164) 74
Increase in advance payments by borrowers 38 148
Decrease in other liabilities (852) (35)
--------- ---------
Net cash provided by operating activities 5,356 3,189
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities held to maturity 287,818 437,625
Proceeds from maturities of investment securities available for sale 5,493 --
Proceeds from sales of investment securities available for sale -- 6,119
Purchases of investment securities held to maturity (291,463) (477,492)
Purchases of mortgage-backed securities held to maturity (2,967) (4,335)
Purchases of investment securities available for sale (29,189) --
Principal payments of securities held to maturity 25,811 17,066
Principal payments of securities available for sale 8,541 6,388
Purchase of other equity securities -- (46)
Increase in loans, net (1,609) (19,422)
Proceeds from payments on OREO 8 8
Purchases of Bank premises and equipment (236) (234)
--------- ---------
Net cash provided by (used in) investing activities 2,207 (34,323)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 8,476 4,509
Proceeds from issuance of Federal Home Loan Bank advances 11,000 41,120
Payments of Federal Home Loan Bank advances (19,304) (26,988)
(Decrease) increase in securities sold under agreement to repurchase (1,770) 4,474
(Decrease) increase in other borrowed funds (466) 24
Treasury stock purchased (1,080) --
Dividends paid (1,447) (1,312)
Proceeds from exercise of stock options 15 104
--------- ---------
Net cash (used in) provided by financing activities (4,576) 21,931
--------- ---------
Net increase (decrease) in cash and cash equivalents 2,987 (9,203)
Cash and cash equivalents, beginning of period 13,162 22,513
--------- ---------
Cash and equivalents, end of period $ 16,149 $ 13,310
========= =========
Cash paid during the year for:
Interest on deposits $ 4,485 $ 7,976
Interest on borrowed funds 4,538 4,152
Income taxes 252 153
Cash received during the year for:
Income taxes 133 104
Supplemental Schedule of non-cash activities:
Net change in valuation of investment securities available for sale 912 190
========= =========
The accompanying note is an integral part of these unaudited financial
statements.
6
LSB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
1. 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 and prevailing practices within the banking industry and include all
necessary adjustments (consisting of only normal recurring adjustments), that,
in the opinion of management, are required for a fair presentation of the
results and financial condition of the Company. 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 interim results of consolidated operations are not necessarily indicative of
the results for any future interim period or for the entire year. These interim
consolidated financial statements do not include all disclosures associated with
annual financial statements and, accordingly, should be read in conjunction with
the annual consolidated financial statements and accompanying notes included in
the Company's Annual Report on Form 10-K as of and for the year ended December
31, 2001 filed with the Securities and Exchange Commission.
2. RECENT ACCOUNTING DEVELOPMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
(SFAS No. 145). SFAS No. 145 among other things addresses financial accounting
and reporting of gains and losses from extinguishment of debt. SFAS No. 145
requires gains and losses resulting from the extinguishment of debt to be
classified as extraordinary items only if they meet the criteria in Accounting
Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". This statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt,"
SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements," and amends SFAS No. 13, "Accounting for Leases." SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002, with early application
encouraged. The Company does not believe the adoption of this Statement will
have a material impact on the Company's financial position or results of
operations.
7
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The Company has made forward-looking statements (within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange
Act of 1934 as amended) in this document that are subject to risks and
uncertainties. Forward-looking statements include information concerning
possible or assumed future results of operations of the Company. Also, when
words in the present tense such as "believes," "expects," "anticipates,"
"continues" 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 Company and could
cause the results to differ materially from those expressed in or incorporated
by reference in this document. Those factors include fluctuations in interest
rate, inflation, government regulations, economic conditions and competition in
the geographic and business areas in which the Company conducts its operations.
Factors affecting the Bank include the Bank's ability to originate loans and the
ability to attract and retain deposits.
FINANCIAL CONDITION
The Company has maintained risk assets below 1% of total assets for the past
several years. The Company maintains its commitment to servicing the needs of
the local community in the Merrimack Valley area. The Company had total assets
of $435.8 million at September 30, 2002 compared to $438.3 million at December
31, 2001. The decrease in assets was due to the following factors. The
investment securities portfolio decreased by $4.2 million as of September 30,
2002 to $169.6 million from December 31, 2001 as securities matured offset by
increasing federal funds sold by $3.0 million. The loan portfolio balances
remained fairly consistent at $236.6 million and $236.4 million at September 30,
2002, and December 31, 2001, respectively. Deposits increased by $8.5 million at
September 30, 2002 from year end 2001, with the growth primarily in NOW, money
market and savings accounts which helped pay down borrowed funds of $10.5
million as these borrowings became due.
INVESTMENTS
The investment portfolio totaled $169.6 million or 38.9% of total assets at
September 30, 2002, compared to $173.8 million, or 39.6% of total assets at
December 31, 2001, a decrease of $4.2 million from year end. The decrease in the
investment securities portfolio was the result of decreasing the Company's
exposure to corporate obligations as these securities matured. Funds were
reinvested in US Government Agency obligations and Asset-backed securities and
helped pay down borrowed funds as they became due.
The following table reflects the components and carrying values of the
investment securities portfolio at September 30, 2002 and December 31, 2001:
9/30/02 12/31/01
-------- --------
(In Thousands)
Investment securities held to maturity (at amortized cost):
US Treasury obligations $ 6,007 $ 6,022
US Government Agency obligations 27,286 15,966
Mortgage-backed securities 14,955 16,633
Asset-backed securities 43,581 40,337
Corporate obligations 21,284 53,982
Municipal obligations 2,031 2,062
-------- --------
Total investment securities held to maturity $115,144 $135,002
======== ========
Investment securities available for sale (at market value):
US Government Agency obligations $ 31,881 $ 20,126
Mortgage-backed securities 3,289 5,689
Asset-backed securities 14,955 8,089
Corporate obligations 4,181 4,694
Equity securities 168 168
-------- --------
Total investment securities available for sale $ 54,474 $ 38,766
======== ========
Total investment securities portfolio $169,618 $173,768
======== ========
8
LOANS
The following table reflects the loan portfolio at September 30, 2002 and
December 31, 2001:
9/30/02 12/31/01
-------- --------
(In Thousands)
Residential mortgage loans $ 66,659 $ 78,605
Loans held for sale 2,716 4,156
Equity loans 12,918 13,393
Construction loans 17,873 20,593
Commercial real estate loans 114,529 100,110
Commercial loans 20,969 18,549
Consumer loans 909 991
-------- --------
Total loans 236,573 236,397
Allowance for loan losses (4,077) (4,070)
-------- --------
Total loans, net $232,496 $232,327
======== ========
Total loans increased to $236.6 million or 54.3% of total assets at September
30, 2002 from $236.4 million or 53.9% of total assets at December 31, 2001. The
residential mortgage loan balances have declined due to the current low interest
rate environment in which mortgage borrowers are refinancing existing mortgages
that could be sold into the secondary market. However, commercial real estate
loans have increased due to origination efforts.
The following table lists the components of loan interest income for the three
month and nine month periods ended September 30, 2002 and 2001:
Three months ended Nine months ended
9/30/02 9/30/01 9/30/02 9/30/01
------- ------- ------- -------
(In Thousands)
Residential mortgage loans $ 1,176 $ 1,529 $ 3,788 $ 4,451
Loans held for sale 42 23 112 37
Equity loans 216 281 639 866
Construction loans 262 407 854 1,190
Commercial real estate loans 2,238 2,041 6,341 5,945
Commercial loans 317 346 912 1,162
Consumer loans 17 26 54 82
------- ------- ------- -------
Total loan interest income $ 4,268 $ 4,653 $12,700 $13,733
======= ======= ======= =======
ALLOWANCE FOR LOAN LOSSES
The following table summarizes changes in the allowance for loan losses for the
three month and nine month periods ended September 30, 2002 and 2001:
Three months ended Nine months ended
9/30/02 9/30/01 9/30/02 9/30/01
------- ------- ------- -------
(In Thousands)
Beginning balance $ 4,074 $ 3,783 $ 4,070 $ 3,685
Provision charged to operations -- 125 -- 175
Recoveries on loans previously
charged-off 3 2 8 50
Loans charged-off -- -- (1) --
------- ------- ------- -------
Ending balance $ 4,077 $ 3,910 $ 4,077 $ 3,910
======= ======= ======= =======
9
The allowance for the loan losses 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 allowance levels. Management believes the
allowance level is adequate to absorb estimated credit losses associated with
the loan and lease portfolio, including all binding commitments to lend and
off-balance sheet credit instruments. The allowance for loan losses reflects
information available to management at the end of each period.
RISK ASSETS
Risk assets consist of non-performing loans and other real estate owned.
Non-performing loans consist of both a) loans 90 days or more past due, and b)
loans placed on non-accrual because full collection of the principal balance is
in doubt. Other real estate owned (OREO) is comprised of foreclosed properties
where the Company 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. Fair value of such property or collateral is determined based upon
independent appraisals and other relevant factors. Management periodically
reviews property values of selected risk assets and makes adjustments that such
reviews indicate are warranted. Gains from sales of properties, net operating
expenses and any subsequent provisions to increase the allowance for losses on
real estate acquired by foreclosure are charged to other real estate owned
expenses. Losses are charged to the allowance.
Total risk assets were $14 thousand at September 30, 2002. This represents a
decrease of $959 thousand from December 31, 2001 and a decrease of $1.3 million
from September 30, 2001. These changes were primarily attributable to a decrease
in non-performing loans to zero at September 30, 2002 from $951 thousand at
December 31, 2001 due to the sale of property at foreclosure auction. The
Company had impaired loans of $941 thousand at December 31, 2001 and zero at
September 30, 2002 and 2001, respectively.
The following table summarizes the Company's risk assets for the period ended
September 30, 2002, December 31, 2001 and September 30, 2001.
9/30/02 12/31/01 9/30/01
------- -------- -------
(Dollars in Thousands)
Non-performing loans $ -- $ 951 $ 1,336
Other real estate owned 14 22 24
------- -------- -------
Total risk assets $ 14 $ 973 $ 1,360
======= ======== =======
Risk assets as a percent of total assets 0.00% 0.22% 0.31%
======= ======== =======
The following table shows the allowance for loan losses as a percent of total
loans:
9/30/02 12/31/01 9/30/01
------- -------- -------
(Dollars in Thousands)
Allowance for loan losses $ 4,077 $ 4,070 $ 3,910
Allowance for loan losses as a percent
of total loans 1.72% 1.72% 1.61%
======= ======== =======
DEPOSITS
Total interest bearing deposits amounted to $263.7 million at September 30, 2002
compared to $255.0 million at December 31, 2001, an increase of $8.7 million.
Included in the certificates of deposit at September 30, 2002 were brokered
deposits of $2.0 million. Deposits increased overall in the NOW, savings
accounts and money market investment accounts attributable to external factors.
10
The following table reflects the components of interest bearing deposits at
September 30, 2002 and December 31, 2001:
9/30/02 12/31/01
-------- --------
(In Thousands)
NOW and Super NOW accounts $ 33,084 $ 30,080
Savings accounts 46,099 42,531
Money market investment accounts 61,856 57,575
Certificates of deposit 94,680 97,828
Retirement accounts 27,995 27,032
-------- --------
Total interest bearing deposits $263,714 $255,046
======== ========
The following table lists the components of deposit interest expense for the
three and nine months ended September 30, 2002 and 2001:
Three months ended Nine months ended
9/30/02 9/30/01 9/30/02 9/30/01
------- ------- ------- -------
(In Thousands)
NOW and Super NOW accounts $ 22 $ 39 $ 66 $ 118
Savings deposit accounts 106 208 325 598
Money market investment accounts 299 406 826 1,347
Certificates of deposit 730 1,472 2,439 4,773
Retirement accounts 276 374 854 1,145
------- ------- ------- -------
Total deposit interest expense $ 1,433 $ 2,499 $ 4,510 $ 7,981
======= ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of funds is cash dividends from its wholly-owned
subsidiary, Lawrence Savings Bank (the "Bank"). The Bank paid dividends to the
Company in the amount of $3.5 million during the first nine months of 2002. The
Company made payments of dividends to stockholders in the amount of $1.4 million
in the first nine months of 2002. Prior to the reorganization of the Bank into a
holding company structure, the Bank paid dividends to stockholders of the Bank
in the amount of $874 thousand in the first six months of 2001. The Company made
payments of dividends to shareholders in the amount of $438 thousand in the
third quarter of 2001.
The Bank's primary sources of funds include collections of principal payments
and repayments on outstanding loans, increases in deposits, advances from the
Federal Home Loan Bank of Boston (FHLB) and securities sold under agreements to
repurchase. The Bank has a line of credit of $6.8 million secured by a blanket
lien on all qualifying assets with the FHLB. The Bank has approximately $137.9
million in qualifying collateral with the FHLB as of September 30, 2002. The
Bank also has a $5 million unsecured Federal Funds line of credit.
At September 30, 2002, the Company's stockholder's equity was $54.5 million as
compared to $54.1 million at December 31, 2001. The increase during the first
nine months of 2002 occurred due to net income of $2.3 million, a $602 thousand
increase in market values on securities available for sale, net of taxes and was
reduced by the declaration to pay dividends of $1.4 million and the purchase of
treasury stock totaling $1.1 million. The Company's leverage ratio at September
30, 2002 and December 31, 2001 was 11.88% and 11.98%, respectively. The
Company's and the Bank's total risk based capital ratios were 18.15% and 17.17%
at September 30, 2002, respectively, compared with 16.97% and 16.39% at December
31, 2001, respectively. The Company exceeds all regulatory minimum capital ratio
requirements set forth by the FRB, and the Bank exceeds all minimum capital
ratio requirements as defined by the FDIC.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
OVERVIEW
The Company reported net income of $695 thousand or $0.15 diluted earnings per
share and $754 thousand or $0.17 diluted earnings per share for the three months
ended September 30, 2002 and 2001, respectively. The decrease in net income is
primarily attributable to a decrease in net interest income of $74 thousand and
a decrease in non-interest income of $31 thousand coupled with an increase of
$217 thousand in non-interest expenses.
11
NET INTEREST INCOME FROM OPERATIONS
Net interest income for the three months ended September 30, 2002 and 2001 was
$3.2 million and $3.3 million, respectively. The net interest rate spread
decreased to 2.57% for the quarter ended September 30, 2002 from 2.61% for the
same quarter of 2001. This decrease occurred because the average balances on
interest earning assets increased $12.5 million in the third quarter 2002
compared to 2001 offset by the negative impact to earnings of the acceleration
of the amortization of premiums associated with Collateralized Mortgage
Obligations ("CMO's") in the amount of $210 thousand due to the current low
interest rate environment of mortgage loans which has decreased the duration of
these investment securities and consequently the current yield in accordance
with the interest method.
The following table presents the components of net interest income and net
interest spread:
Income/Expense Yield/Rate
------------------ ------------------
Quarter Ended
-----------------------------------------
9/30/02 9/30/01 9/30/02 9/30/01
------- ------- ------- -------
(Dollars in Thousands)
Interest income and average yield:
Loans $ 4,268 $ 4,653 7.09% 7.77%
Investments, mortgage-backed securities
and other earning assets 1,890 2,584 3.92 5.80
------- -------
Total 6,158 7,237 5.68 6.93
------- ------- ------- -------
Interest expense and average rate paid:
Deposits 1,433 2,499 2.16 3.77
Federal Home Loan Bank advances 1,417 1,309 5.38 5.80
Securities sold under agreements to
repurchase and other borrowed funds 73 120 5.23 5.80
------- -------
Total 2,923 3,928 3.11 4.32
------- ------- ------- -------
Net interest income $ 3,235 $ 3,309
======= =======
Net interest rate spread 2.57% 2.61%
======= =======
INTEREST INCOME
Interest income for the third quarter of 2002 was $6.2 million as compared to
$7.2 million for the same quarter of 2001. The decrease of $1.1 million in
interest income is due to $1.2 million from lower yields earned on loans and
investment securities. The decrease in interest income due to lower yields was
offset slightly by higher average balances, which increased interest income by
$169 thousand.
Yields on loans were 7.09% and 7.77% for the quarters ended September 30, 2002
and 2001, respectively. The impact to interest income due to lower yields was
$409 thousand. Higher average loan balances of $238.8 million versus $237.5
million for the quarters ended September 30, 2002 and 2001, respectively,
increased interest income by $24 thousand.
Yields on investment securities were 3.92% and 5.80% for the quarters ended
September 30, 2002 and 2001, respectively, decreasing interest income by $839
thousand. Higher average investment securities balances of $191.5 million versus
$176.8 million for the same periods increased interest income by $145 thousand.
INTEREST EXPENSE
Interest expense for the third quarter of 2002 totaled $2.9 million, a decrease
of $1.0 million from the same quarter of 2001. This decrease is primarily due to
lower rates paid on interest bearing liabilities, which impacted interest
expense by $1.1 million. Higher average balances of deposits and borrowed Funds
resulted in a $169 thousand increase in interest expense.
Rates on deposits were 2.16% and 3.77% for the quarters ended September 30, 2002
and 2001, respectively. This decrease resulted in interest expense decreasing by
$1.1 million. Average deposit balances were $263.4 million versus $263.1 million
for the same periods, which resulted in a minimal impact to interest expense.
12
Rates on FHLB advances were 5.38.% and 5.80% for the third quarters of 2002 and
2001, respectively. The decrease in rates paid on FHLB advances resulted in
interest expense decreasing by $94 thousand. The average balances of FHLB
advances increased from quarter to quarter for the same periods to $104.4
million in the third quarter 2002 from $89.5 million for the third quarter of
2001, which resulted in an increase in interest expense of $202 thousand.
Rates on short term and other borrowed funds were 5.23% and 5.80% for the third
quarters of 2002 and 2001, respectively. The decrease in rates paid on these
interest bearing liabilities resulted in interest expense decreasing by $12
thousand. The average balance decreased to $5.5 million in 2002 from $8.2
million in 2001, which decreased interest expense by $35 thousand.
PROVISION FOR LOAN LOSSES
The provision for loan losses was zero and $125 thousand for the quarters ended
September 30, 2002 and 2001, respectively. The amount of the provision for loan
losses was based on management's assessment of the adequacy of the allowance
based on an evaluation of the Bank's loan portfolio.
NON-INTEREST INCOME
Non-interest income amounted to $323 thousand and $354 thousand for the quarters
ended September 30, 2002 and 2001, respectively. The decrease in non-interest
income was due to provisions for losses on mortgage servicing rights of $98
thousand due to the current low interest rate environment of mortgage loans.
Such decrease was offset by an increase in the gains on sales of
mortgage loans of $95 thousand and other income increasing overall by $37
thousand in the third quarter 2002 as compared to the same quarter in 2001.
NON-INTEREST EXPENSE
Non-interest expense totaled $2.5. million and $2.3 million for the quarters
ended September 30, 2002 and 2001, respectively. Salaries and employee benefits
increased by $167 thousand in the third quarter 2002 mainly due to pension
expense associated with the employees defined benefit plan and normal raises
compared to the third quarter in 2001. Occupancy and equipment expenses have
decreased to $182 thousand in the third quarter of 2002 from $232 thousand in
2001 due to fewer vacancies for rented office space at the corporate
headquarters of the Company. Professional expenses decreased to $170 thousand in
the third quarter 2002 compared to $199 thousand in the same period in 2001. The
decrease was due to a reduction of legal expenses associated with collection
efforts. Other expenses increased to $470 thousand for the third quarter of 2002
up from $362 thousand in the same period of 2001. This increase is due to
increased stockholder expenses for printing and legal costs associated with the
holding company structure.
INCOME TAXES
The Company reported an income tax expense of $334 thousand for the quarter
ended September 30, 2002 or an effective income tax rate of 32.5%. This compares
to an income tax expense of $472 thousand for the quarter ended September 30,
2001 or effective income tax expense of 38.5%. The decrease in the effective
income tax rate was due to the following factors; The Bank has more Industrial
Development Loans (bonds) and Municipal Obligations in 2002 not subject to
Federal income taxes and the organizational cost associated with the holding
company incurred during 2001 is not deductible for Federal income taxes.
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
OVERVIEW
The Bank reported net income of $2.3 million or $0.51 diluted earnings per share
and $2.3 million or $0.52 diluted earnings per share for the nine months ended
September 30, 2002 and 2001, respectively. During the first nine months of 2002,
there were several favorable impacts to earnings such as net interest income
increasing to $10.1 million in 2002 up from $9.8 million in 2001, provisions
for loan losses decreased to zero in 2002 from $175 thousand in 2001 and
non-interest income increasing to $1.1 million in 2002 up from $933 thousand in
2001. Offsetting these favorable impacts to earnings were increases to
non-interest expenses to $7.6 million for the period ended September 30, 2002 up
from $6.8 million in the same period in 2001.
13
NET INTEREST INCOME FROM OPERATIONS
Net interest income for the nine months ended September 30, 2002 and 2001 was
$10.1 million and $9.8 million, respectively. The net interest rate spread
increased to 2.75% from 2.63%. The rates paid on interest bearing liabilities
decreased more than the yield on interest bearing assets. The following table
presents the components of net interest income and net interest spread:
Income/Expense Yield/Rate
------------------ ------------------
Quarter Ended
-----------------------------------------
9/30/02 9/30/01 9/30/02 9/30/01
------- ------- ------- -------
(Dollars in Thousands)
Interest income and average yield:
Loans $12,700 $13,733 7.25% 8.08%
Investments, mortgage-backed
securities and other earning assets 6,359 8,184 4.44 6.07
------- -------
Total 19,059 21,917 5.99 7.19
------- ------- ------- -------
Interest expense and average rate paid:
Deposits 4,510 7,981 2.32 4.02
Federal Home Loan Bank advances 4,218 3,845 5.52 6.06
Short-term and other borrowed funds 234 305 4.51 7.20
Total 8,962 12,131 3.24 4.56
------- ------- ------- -------
Net interest income $10,097 $ 9,786
======= =======
Net interest rate spread 2.75% 2.63%
======= =======
INTEREST INCOME
Interest income for the first nine months of 2002 was $19.1 million as compared
to $21.9 million for the same period of 2001. The decrease in interest income of
$2.8 million is due to lower yields on loans and investment securities, which
decreased interest income by $3.6 million. Higher average balances on loans and
investment securities increased interest income by $741 thousand.
Yields on loans were 7.25% and 8.08% for the nine months ended September 30,
2002 and 2001, respectively. The impact on interest income due to lower yields
was $1.4 million. Higher average loan balances of $234.1 million in 2002 versus
$227.3 million in 2001 resulted in interest income increasing by $370 thousand.
Yields on investment securities decreased to 4.44% for the nine months ended
September 30, 2002. This compares to yields on investment securities of 6.07%
for the same period in 2001. This resulted in interest income declining by $2.2
million. Interest income during the quarter was negatively impacted by the
acceleration of the amortization of premiums associated with Collateralized
Mortgage Obligations for $210 thousand due to the current low interest rate
environment of mortgage loans which has decreased the duration of these
investment securities. Higher average balances for investment securities of
$191.4 million in 2002 versus $180.2 million in 2001 resulted in interest income
increasing by $371 thousand.
Other interest and dividend income declined to $104 thousand during the first
nine months of 2002 from $416 thousand in the same period of 2001. The decrease
is primarily attributed to a reduction in the average outstanding balances of
Federal funds sold from $10.8 million at September 30, 2001 to $8.2 million at
September 30, 2002 coupled with a significant decrease in rates.
INTEREST EXPENSE
Interest expense for the first nine months of 2002 and 2001 was $9.0 million and
$12.1 million, respectively. The decrease of $3.1 million in interest expense is
primarily due to lower rates paid on deposits and other interest bearing
liabilities, which decreased interest expense by $3.8 million. Interest expense
increased $760 thousand due to higher average balances for borrowed funds.
Yields on deposits were 2.32% and 4.02% for the first nine months of 2002 and
2001, respectively. This decrease resulted in interest expense decreasing by
$3.4 million. Average deposit balances were $260.1 million in 2002 down slightly
from $265.3 million in 2001, which resulted in interest expense declining by $89
thousand.
14
Declining yields on FHLB advances and short-term borrowing resulted in interest
expense decreasing by $458 thousand in 2002 from 2001. However, the average
balances for these interest bearing liabilities increased to $109.1 million in
2002 from $90.5 million in 2001, which increased interest expense by $760
thousand.
PROVISION FOR LOAN LOSSES
The provision for loan losses was zero and $175 thousand for the nine months
ended September 30, 2002 and 2001, respectively. The amount of the provision for
loan losses was based on management's assessment of the adequacy of the
allowance based on an evaluation of the Bank's loan portfolio.
due to the overall asset quality of the Company.
NON-INTEREST INCOME
Non-interest income was $1.1 million and $933 thousand for the nine months ended
September 30, 2002 and 2001, respectively. The increase of $168 thousand in
non-interest income primarily resulted from gains on sales of mortgage loans
increasing to $323 thousand in 2002 from $90 thousand in 2001. Also contributing
to the increase were deposit account fees which rose $61 thousand to $491
thousand for the first nine months of 2002 compared to the same period in the
prior year and other income which increased $50 thousand to $301 thousand for
the same time period. Partially offsetting these increases were loan fees which
decreased to a loss of $14 thousand in the first nine months of 2002 from income
of $162 thousand for the same period in the prior year, resulting from
provisions for losses on mortgage servicing rights of $167 thousand and $31
thousand in the first nine months of 2002 and 2001, respectively, due to the
current low interest rate environment of mortgage loans.
NON-INTEREST EXPENSE
Non-interest expense was $7.6 million and $6.8 million for the nine months ended
September 30, 2002 and 2001, respectively. The increase in non-interest expense
is due to salaries and employee benefits increasing to $4.5 million in 2002 up
by $585 thousand over the same period in 2001 due to pension expense associated
with the employees defined benefit plan plus normal raises, occupancy and
equipment expenses have declined to $595 thousand for the first nine months in
2002 from $655 thousand in 2001 due to fewer vacancies of office space and less
depreciation expenses for computers. Professional expense increased to $537
thousand for the nine months ended of 2002 from $509 thousand over the same
period in 2001 as the Bank continued to incur legal expenses in connection with
the award of $4.2 million judgement in 1997 and the award of $1.1 million in
1999.
INCOME TAXES
The Bank reported an income tax expense of $1.3 million and $1.4 million for the
nine months ended September 30, 2002 and 2001, respectively, representing an
effective tax rate of 35.4% and 37.2%, respectively. The decrease in the
effective income tax rate was due to the following factors; The Bank has more
Industrial Development Loans (bonds) and Municipal Obligations in 2002 not
subject to Federal income tax and the organizational cost associated with the
holding company incurred during 2001 is not deductible for Federal income taxes.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The response is incorporated herein by reference to the discussion
under the subcaption "Interest Rate Sensitivity" of the caption "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" on
pages 13 and 14 of the LSB Corporation's Annual Report for the fiscal year ended
December 31, 2001.
ITEM 4. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer,
after evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c)
and 15-d-14(c)) as of September 30, 2002 (the "Evaluation Date"), have concluded
that as of the Evaluation Date, the Company's disclosure controls and procedures
were adequate and designed to ensure that material information relating to the
Company and its subsidiaries would be made known to them by others within those
entities.
There were no significant changes in the Company's internal controls or, to the
Company's knowledge, in other factors that could significantly affect the
Company's disclosure controls and procedures subsequent to the Evaluation Date.
15
Part II -- Other Information
Item 1. Legal Proceedings
The response is incorporated herein by reference to the discussion
under the caption "CONTINGENCIES" on page 33 of the LSB Corporation's Annual
Report for the fiscal year ended December 31, 2001.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits.
Please see the Exhibit Index attached hereto.
b. Reports on Form 8-K.
None.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LSB CORPORATION AND SUBSIDIARIES
November 14, 2002 /s/ Paul A. Miller
--------------------------------
Paul A. Miller
President and
Chief Executive Officer
November 14, 2002 /s/ John E. Sharland
--------------------------------
John E. Sharland
Senior Vice President
Chief Financial Officer
17
CERTIFICATIONS
I, Paul A. Miller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LSB Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Paul A. Miller
-----------------------------
Paul A. Miller
President and
Chief Executive Officer
18
I, John E. Sharland, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LSB Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ John E. Sharland
-----------------------------
John E. Sharland
Senior Vice President
Chief Financial Officer
19
LSB Corporation
Quarterly Report on Form 10-Q For Quarter Ended September 30, 2002
EXHIBIT INDEX
PAGE
----
99.1 Certification Pursuant to 18 U.S.C. Section 1350, adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 21
99.2 Certification Pursuant to 18 U.S.C. Section 1350, adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 22
20