EXHIBIT 13
LETTER TO THE STOCKHOLDERS
LSB Corporation reported net income for the year ended December 31, 2002 of
$3,100,000 or $0.69 diluted earnings per share as compared to $3,357,000 or
$0.74 diluted earnings per share for the year ended in 2001. The Company paid
dividends of $0.44 per share in 2002 and $0.40 per share in 2001, a 10% increase
from 2001 and a 69% increase from 2000, in which $0.26 per share was paid.
The decrease to net income for the year 2002 was due to higher non-interest
expenses. Salaries and employee benefits increased to $6,006,000 in 2002 as
compared to $5,264,000 in 2001 due to normal salary increases and an increase of
$358,000 in pension expense associated with the employees defined benefit
pension plan. Professional fees increased by $135,000 in 2002 compared to 2001
due to legal expenses. Other expenses increased due to increased holding company
expenses, data processing and expenses and other customer related expenses. The
Company had some positive impacts to earnings offsetting the rise in
non-interest expenses. Net interest income increased by $392,000 for the year
ended 2002 compared to 2001. The provisions for loan losses were zero in 2002
compared to $175,000 in 2001. Non-interest income increased to $1,493,000 for
the year ended 2002 compared to $1,426,000 in 2001. This increase was due to
gains on the sale of mortgage loans of $529,000 in 2002 compared to $249,000 in
2001. Deposit account fees increased to $665,000 in 2002 from $594,000 in 2001.
Offsetting these increases to non-interest income was a decrease in loan fees to
a loss of $145,000 from income of $155,000, respectively, for the years ended
2002 and 2001. The loss on loan fees was due primarily to provisions for losses
on mortgage servicing rights of $233,000 in 2002.
Net interest income increased by 3% to $13,573,000 for the year ended 2002
compared to $13,181,000 for the same period in 2001. The net interest margin was
fairly level year-to-date at 3.20% from 3.21% in 2002 and 2001, respectively.
Although interest income increased during 2002, lower interest rates had a
negative impact due to the acceleration of the amortization of premiums
associated with Collateralized Mortgage Obligations ("CMO's") in the amount of
$243,000 due to the current low interest rate environment of mortgage loans
which has decreased the duration of these investment securities.
The Company continues to look for quality assets and seeks to maintain a low
level of risk assets as it grows the loan portfolios, which increased by
$6,730,000 in 2002 to $243,127,000. Non-performing loans were $1,000 at December
31, 2002 and $951,000 at December 31, 2001. The Company has not acquired
property through foreclosure in the past four years.
Total assets were $439,134,000 at December 31, 2002 up slightly from
$438,267,000 at December 31, 2001. The increase in asset size at December 31,
2002 from December 31, 2001 is due to an increase in the loan portfolio of
$6,730,000 and an increase in Federal Funds of $3,928,000 partially offset by a
decrease in the investment portfolio as securities matured. Deposits increased
by $11,015,000 which helped pay down borrowed funds of $9,508,000 as these
borrowed funds became due.
Total deposits at December 31, 2002 were $279,465,000 up from $268,450,000 at
December 31, 2001. The increase in deposits at December 31, 2002 from December
31, 2001 was primarily due to an increase in NOW, money market and savings
deposit accounts.
The Corporation's leverage ratio was 12.10% and 11.98% at December 31, 2002 and
December 31, 2001, respectively. The Corporation exceeds all regulatory minimum
capital ratio requirements as defined by the Federal Reserve Bank as of and for
December 31, 2002 and 2001. The Bank exceeds all regulatory minimum capital
requirements as defined by the FDIC as of and for December 31, 2002 and 2001.
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.
Robert P. Perreault was the Executive Vice President
and Clerk of the Company. He decided to retire in
January 2003. He had over 43 years of service and
friendship with Lawrence Savings Bank employees
and customers. He was involved in opening four
branch offices. Mr. Perreault's service to the Bank
and Company has been greatly appreciated, and we
wish him the very best in the years to come.
Photo of
Robert P. Perreault
/s/ Paul A. Miller
Paul A. Miller
President and Chief Executive Officer
LSB CORPORATION
2
FINANCIAL TABLE OF CONTENTS
4 FINANCIAL HIGHLIGHTS
5 BUSINESS
8 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
22 REPORT OF MANAGEMENT RESPONSIBILITY
23 INDEPENDENT AUDITORS' REPORT
24 CONSOLIDATED BALANCE SHEETS
25 CONSOLIDATED STATEMENTS OF
OPERATIONS
26 CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
27 CONSOLIDATED STATEMENTS OF
CASH FLOWS
28 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
46 STOCKHOLDERS' INFORMATION
3
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------------------
December 31, 2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
BALANCE SHEET DATA:
Total assets $ 439,134 $ 438,267 $ 413,090 $ 404,172 $ 340,041
Loans, gross 243,127 236,397 222,045 198,098 197,110
Allowance for loan losses 4,167 4,070 3,685 3,381 3,272
Other real estate owned 12 22 32 519 556
Federal funds sold 9,633 5,705 15,427 - 5,629
U.S. Treasury, Government
agency and Corporate obligations 155,132 160,337 125,542 151,358 87,006
Municipal obligations 4,021 2,062 60 113 1,265
Other securities 7,256 11,369 25,231 26,301 25,216
Deposits 279,465 268,450 270,548 246,040 253,501
Borrowed funds 101,591 111,099 86,161 104,167 34,214
Equity 54,059 54,092 52,313 48,408 46,713
Year Ended December 31, 2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING DATA:
Interest income $ 25,138 $ 28,792 $ 29,037 $ 26,097 $ 25,060
Interest expense 11,565 15,611 16,358 13,183 13,257
--------- --------- --------- ---------- ---------
Net interest income 13,573 13,181 12,679 12,914 11,803
Provision for loan losses - 175 250 75 450
Non-interest income 1,493 1,426 1,124 844 1,380
Non-interest expense 10,155 9,122 8,376 9,347 8,725
--------- --------- --------- --------- ---------
Income before income taxes 4,911 5,310 5,177 4,336 4,008
Income tax expense (benefit) 1,811 1,953 854 1,582 (4,800)
--------- --------- --------- --------- ---------
Net income $ 3,100 $ 3,357 $ 4,323 $ 2,754 $ 8,808
============================================================================================================================
Basic earnings per share $ .71 $ .77 $ .99 $ .63 $ 2.04
Diluted earnings per share $ .69 $ .74 $ .97 $ .61 $ 1.95
============================================================================================================================
OTHER DATA:
Interest rate spread 2.78% 2.64% 2.66% 3.05% 2.97%
Net interest margin on average earning
assets 3.20 3.21 3.22 3.55 3.54
Return on average assets (net income /
average assets) 0.71 0.79 1.05 0.72 2.52
Return on average equity (net income /
average stockholders' equity) 5.72 6.35 8.72 5.77 21.09
Dividend payout ratio (dividends declared per
share divided by basic earnings per share) 61.97 51.95 26.26 23.81 -
Cash dividends declared and paid per
common share $ 0.44 $ 0.40 $ 0.26 $ 0.15 $ -
Average stockholders' equity to average
assets ratio 12.34 12.39% 12.06% 12.47% 11.96%
- ----------------------------------------------------------------------------------------------------------------------------
Book value per share at year end $ 12.71 $ 12.35 $ 11.99 $ 11.11 $ 10.78
- ----------------------------------------------------------------------------------------------------------------------------
4
BUSINESS
SUMMARY
LSB Corporation (the "Corporation" or the "Company") 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 System ("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, 2002. 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. The Bank has a
new remote ATM location in Haverhill, 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, 2002 were $243.1 million up from
$236.4 million at December 31, 2001.
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 these loans are fixed or variable. 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.
5
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 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
Financing 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 Federal Reserve
Bank ("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 Federal Deposit Insurance
Corporation ("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.
6
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 George W. 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 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.
SARBANES-OXLEY ACT OF 2002. On July 31, 2002, President George W. Bush signed
into law the "Sarbanes-Oxley Act of 2002" (or the "Sarbanes-Oxley Act"). The
Sarbanes-Oxley Act establishes a comprehensive framework for modernizing and
reforming the oversight of public company financial accounting and disclosure
practices. Principal components of the Sarbanes-Oxley Act include:
- The creation of a public company accounting oversight board, with
which all accounting firms performing audits for public companies
are required to register, and which is empowered to set auditing,
quality control and independence standards, to inspect registered
firms, and to conduct investigations and to take disciplinary
actions, subject to SEC oversight.
- The strengthening of auditor independence from corporate
management by limiting the type and scope of services that
auditors can offer their public company audit clients, requiring
periodic rotation of public company audit partners, requiring
direct auditor reports to company audit committees, and
prohibiting public companies from exerting improper influence over
their outside auditors.
- The imposition of new corporate governance requirements including
among other things, independence and financial expertise
requirements for audit committee membership and empowerment of
public company audit committees to appoint, compensate and oversee
their company's outside auditors.
- Requirements that the Chief Executive Officer and the Chief
Financial Officer certify financial statements included in public
company filings with the SEC and disgorge bonuses and stock-based
compensation for periods for which the company is forced to
restate its financial results, a prohibition of insider stock
trades during "black-out" periods when a company's employee
benefits plans are precluded from trading, and a prohibition of
public company loans or extensions of credit to directors and
officers.
- Requirements that public companies disclose whether they have a
code of ethics for their senior financial officers and if not, why
not, and that management periodically assess and report on the
adequacy of the company's internal controls.
- The imposition of new and accelerated public company disclosure
requirements, requirements to report off balance sheet
transactions and of accelerated reporting of insider transactions
in company stock
The SEC has issued final and proposed regulations implementing many of the
Sarbanes-Oxley Act provisions.
7
SECURITIES AND EXCHANGE COMMISSION FILINGS OF COMPANY'S WEB SITE. Under the
Securities Exchange Act of 1934 Sections 13 and 15(d), periodic and current
reports must be filed with the Securities and Exchange Commission ("SEC"). The
Company electronically files the following reports with the SEC: Form 10-K
(Annual Report), Form 10-Q (Quarterly Report), Form 8-K (Report of Unscheduled
Material Events), Form 3, 4 & 5 (Statements of Ownership), Form S-3 and 8-A
(Registration Statements, and Form DEF 14A (Proxy Statement). The Company may
file additional forms. The SEC maintains an Internet site, www.sec.gov in which
all forms filed electronically may be accessed. The Company's website:
www.lawrencesavings.com has a new section for SEC filings available free of
charge and provides a link under About Us, Stockholder Information,
Nasdaq-Symbol. Company filings.
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 the Corporation, projected or anticipated
benefits, or events related to other future developments involving the
Corporation or the industry in which it operates. 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.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those policies that have significant
judgments and uncertainties, and could potentially result in materially
different results under different assumptions and conditions. Management
believes that the Company's critical accounting policies upon which the
financial statements depend on and which involve the most complex or subjective
decisions or assessments are as follows:
ALLOWANCE FOR LOAN LOSSES: 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 the year. The
allowance is increased by provisions for loan losses, which are a charge to the
income statement, and by recoveries on loans previously charged-off. The
allowance is reduced by loans charged-off. For a further discussion of the
Company's methodology of assessing the adequacy of the allowance for loan
losses, see Management's Discussion and Analysis of Financial Condition and
Results of Operation and see Note 1 to the Consolidated Financial Statements for
more details on establishing the allowance for loan losses.
INCOME TAXES: 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 carry-forward period. 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. 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. For a further
discussion on income taxes, see Management's Discussion and Analysis of
Financial Condition and Results of Operation and see Note 1 & 8 to the
Consolidated Financial Statements.
MORTGAGE SERVICING RIGHTS: When loans are sold with servicing rights retained,
the Company allocates the carrying amount of the loan between the underlying
asset sold and the rights retained, based on their relative fair values. The
fair value is estimated using market prices when available or using a valuation
model that calculates the present value of future servicing fee income using
discount rates and prepayment assumptions that management believes represent
current market conditions. The following risk characteristics are considered for
determining fair value; loan type, interest rate, loan term and remaining
maturities. 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 through the establishment of a
valuation allowance. Periodically, the mortgage servicing rights are assessed
for impairment based on the fair value of such rights and recognized by a charge
to the valuation allowance. For further details on mortgage servicing rights see
Note 1 & 4 to the Consolidated Financial Statement.
8
FINANCIAL CONDITION
OVERVIEW
Total assets amounted to $439.1 million at December 31, 2002 up slightly from
$438.3 million at December 31, 2001. The increase in asset size during 2002 is
the result of an increase in the gross loan portfolio of $6.7 million and an
increase in Federal Funds of $3.9 million partially offset by a decrease in the
investment portfolio as securities matured. Deposits increased by $11.0 million
which helped pay down borrowed funds of $9.5 million as these became due.
INTEREST 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
$424.8 million in 2002, an increase of $13.6 million or 3.3% from 2001. Average
earning assets in 2001 totaled $411.2 million which was a $17.0 million or 4.0%
increase from $394.2 million in 2000.
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 business loans increased in 2002, 2001
and 2000. Loan growth in these portfolios caused the average balance of the loan
portfolio to increase in 2002 and 2001 by $4.4 million and $26.9 million,
respectively, to $235.0 million and $230.6 million, respectively, from $203.7
million in 2000.
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 bonds and equity
securities, and short-term investments amounted to $189.7 million in 2002 as
compared to $180.6 million in 2001 and $190.5 million in 2000. These securities
represent 43.2% of the Company's average assets at December 31, 2002 versus
42.3% and 46.3%, respectively, of average assets at December 31, 2001 and 2000.
INVESTMENT SECURITIES
The investment portfolio totaled $166.4 million and $173.8 million,
respectively, at December 31, 2002 and 2001, a decrease of $7.4 million or 4.2%.
The largest decrease was in corporate obligations which decreased $21.5 million
during 2002 as securities matured. Mortgage-backed securities and asset-backed
securities also experienced decreases in 2002 of $6.0 million and $3.8 million,
respectively, due to the low interest rate environment and increased refinance
activity the principal repayments on these securities have been higher than
normal. Partially offsetting these decreases were increases in U.S. Agencies and
municipal obligations of $22.0 million and $2.0 million, respectively, during
2002. For more information on investment securities, see Financial Highlights
and Note 2 of the Consolidated Financial Statements.
LOANS
Total loans at December 31, 2002 and 2001 amounted to $243.1 million and $237.4
million, respectively, an increase of $6.7 million or 2.8%. Residential loans
decreased $18.5 million or 23.5% during 2002, offset by increases in commercial
real estate, commercial loans and construction loans of $12.6 million, $13.5
million and $2.9 million, respectively. The shift in the portfolio mix was
accomplished to maximize these higher yielding assets. Equity loans decreased
$1.9 million or 14.2% as a result of the heavy refinance market. Consumer loans
decreased $337 thousand. For more information on loans, see Interest Rate
Sensitivity and Note 4 of the Consolidated Financial Statements.
9
The components of the loan portfolio at December 31, follow:
2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Percent Balance Percent Balance Percent Balance Percent Balance Percent
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Residential real estate loans:
Fixed rate $ 31,583 13.0% $ 40,861 17.3% $ 44,350 20.0% $ 49,825 25.1% $ 47,887 24.3%
Adjustable rate 28,557 11.7 37,744 16.0 33,576 15.1 30,232 15.3 31,845 16.2
-------- ----- -------- ----- --------- ----- -------- ----- -------- -----
60,140 24.7 78,605 33.3 77,926 35.1 80,057 40.4 79,732 40.5
-------- ----- -------- ----- --------- ----- -------- ----- -------- -----
Home equity loans:
Fixed rate 7,915 3.3 10,155 4.3 12,367 5.6 8,716 4.4 7,652 3.9
Adjustable rate 3,575 1.5 3,238 1.4 3,630 1.6 3,890 2.0 3,805 1.9
-------- ---- -------- ---- --------- ---- -------- ----- -------- -----
11,490 4.8 13,393 5.7 15,997 7.2 12,606 6.4 11,457 5.8
-------- ---- -------- ---- --------- ---- -------- ----- -------- -----
Commercial real estate loans:
Fixed rate 16,651 6.8 16,447 7.0 10,247 4.6 10,898 5.5 9,206 4.7
Adjustable rate 96,094 39.4 83,663 35.3 76,882 34.6 69,995 35.3 62,052 31.4
-------- ----- -------- ----- --------- ----- -------- ----- -------- -----
112,745 46.2 100,110 42.3 87,129 39.2 80,893 40.8 71,258 36.1
-------- ----- -------- ----- --------- ----- -------- ----- -------- -----
Construction loans 23,502 9.7 20,593 8.7 17,148 7.7 9,666 4.9 11,550 5.9
Loans held for sale 2,579 1.1 4,156 1.8 - 0.0 - 0.0 8,950 4.5
Commercial loans 32,017 13.2 18,549 7.8 22,602 10.2 13,143 6.6 12,558 6.4
Consumer loans 654 0.3 991 0.4 1,243 0.6 1,733 0.9 1,605 0.8
-------- ----- -------- ----- --------- ----- -------- ----- -------- -----
Total loans 243,127 100.0% 236,397 100.0% 222,045 100.0% 198,098 100.0% 197,110 100.0%
===== ===== ===== ===== =====
Allowance for loan losses 4,167 4,070 3,685 3,381 3,272
-------- -------- --------- -------- --------
Loans, net $238,960 $232,327 $ 218,360 $194,717 $193,838
==================================================================================================================================
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 current year end 2002 level of
the allowance for loan losses to be appropriate. The allowance as a percentage
of total loans was 1.7% at December 31, 2002, 2001 and 2000. 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 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 loans. 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 collateral dependent 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 Company maintained a low level of risk assets and had minimal delinquencies
during the year 2002. As a result, there was no charge to the provision for loan
losses in the year 2002. The provision for loan losses for the years 2001 and
2000 was a charge of $175 thousand, and $250 thousand, respectively. The Company
had net recoveries of $97 thousand in 2002, $210 thousand in 2001, and $54
thousand in 2000.
10
The following table summarizes changes in the allowance for loan losses for the
years ended December 31:
2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Balance at beginning of year $ 4,070 $ 3,685 $ 3,381 $ 3,272 $ 3,144
Charge-offs by loan type:
Residential mortgage - - - (17) (224)
Commercial - (3) - - -
Commercial real estate - - (27) - (215)
Consumer (1) - (1) - (16)
------- ------- ------- ------- -------
Total charge-offs (1) (3) (28) (17) (455)
------- ------- ------- ------- -------
Recoveries by loan type:
Residential mortgage - 2 6 28 10
Commercial - - 5 3 60
Commercial real estate 89 201 62 13 49
Consumer 9 10 9 7 14
------- ------- ------- ------- -------
Total recoveries 98 213 82 51 133
------- ------- ------- ------- -------
Net recoveries (charge-offs) 97 210 54 34 (322)
Provision for loan losses - 175 250 75 450
------- ------- ------- ------- -------
Ending balance $ 4,167 $ 4,070 $ 3,685 $ 3,381 $ 3,272
======================================================================================================================
Ratio of net recoveries (charge-offs) to average loans
outstanding during the period 0.04% 0.09% 0.03% 0.02% (0.18)%
======================================================================================================================
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.
2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(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 $3,525 69.1% $3,251 58.8% $2,711 57.1% $1,933 52.3% $ 1,787 48.4%
Residential mortgage and home equity 314 30.6 397 40.8 436 42.3 526 46.8 634 50.8
Consumer 29 0.3 41 0.4 49 0.6 55 0.9 55 0.8
Unallocated 299 N/A 381 N/A 489 N/A 867 N/A 796 N/A
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
$4,167 100.0% $4,070 100.0% $3,685 100.0% $3,381 100.0% $ 3,272 100.0%
=================================================================================================================================
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.
11
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, 2002 and 2001, there were $1,521 thousand and $941 thousand, respectively,
identified as potential problem loans.
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:
2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Risk assets:
Non-performing loans:
Residential real estate $ 1 $ 10 $ 10 $ - $ 66
Commercial real estate - 730 - - -
Commercial business - 211 - - -
Consumer - - - - -
------- ------- ------- ------- -------
Total non-performing loans 1 951 10 - 66
------- ------- ------- ------- -------
Other real estate owned:
One to four family residential properties - - - - -
Condominiums - - - - -
Land 57 67 77 87 89
Commercial real estate - - - 477 512
OREO valuation allowance (45) (45) (45) (45) (45)
------- ------- ------- ------- -------
Total other real estate owned 12 22 32 519 556
------- ------- ------- ------- -------
Total risk assets $ 13 $ 973 $ 42 $ 519 $ 622
========================================================================================================
Risk assets as a percent of total loans and OREO 0.0% 0.4% 0.0% 0.3% 0.3%
========================================================================================================
Risk assets as a percent of total assets 0.0% 0.2% 0.0% 0.1% 0.2%
========================================================================================================
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, 2002 were $1
thousand, a decrease from $951 thousand at December 31, 2001 and $10 thousand at
December 31, 2000.
The Company actively monitors risk assets. The Company 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.
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 2002 total average interest bearing liabilities were $368.4 million which was
a $10.0 million or 2.8% increase from $358.4 million in 2001. Average total
interest bearing deposits of $261.4 million comprised 71.0% of interest bearing
liabilities in 2002 while in 2001 such deposits totaling $263.3 million
comprised 73.5% of interest bearing liabilities.
12
Changing interest rates can affect the mix and level of various deposit
categories. The lower average interest rate paid on money market accounts and
certificates of deposit had an impact on the overall interest rate paid on
deposits and caused a decrease of 155 basis points in 2002 and 28 basis points
in 2001. The average balance of money market investment accounts increased by
$4.7 million to $59.0 million in 2002 and by $6.1 million to $54.3 million in
2001. The average balance of NOW and Super NOW accounts increased by $2.4
million to $33.6 million in 2002 and by $4.1 million to $31.2 million in 2001.
The average balance of certificates of deposit decreased by $13.3 million to
$123.7 million in 2002 while it increased by $6.0 million to $137 million in
2001.
Average borrowed funds in 2002, 2001 and 2000 were $107.0 million, $95.1 million
and $101.9 million, respectively, including advances from the FHLB and other
borrowed funds. The increase of $11.9 million in 2002 resulted from the
utilization of available credit in a low interest rate environment with longer
maturities of three to five years. 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.
DEPOSITS
Total deposits increased $11.0 million or 4.1% during 2002 to $279.5 million at
December 31, 2002 from $268.5 million at December 31, 2002. Money market
investment accounts had the largest increase of $7.1 million or 12.3%. NOW
accounts and savings accounts also increased during 2002 by $5.5 million and
$2.3 million, respectively. These increases likely resulted due to the
uncertainty of the stock market. Certificates of deposit decreased $5.6 million
or 5.7% during 2002 due to maturities and the low interest rate environment.
Retirement accounts and non-interest bearing demand deposit accounts had
increases of $950 thousand and $778 thousand, respectively, in 2002. For more
information, see Note 6 to the Consolidated Financial Statements.
BORROWED FUNDS
Total borrowed funds decreased $9.5 million or 8.6% during 2002 to $101.6
million from $111.1 million at December 31, 2002 and 2001, respectively. FHLB
advances totaled $94.2 million in 2002 and $103.0 million in 2001, a decrease of
$8.8 million due to repayments of $19.8 million partially offset by new advances
of $11.0 million. Other borrowed funds comprise of agreements to repurchase
which totaled $4.0 million and $4.2 million, respectively, at December 31, 2002
and 2001, and other secured borrowings which totaled $3.4 million and $3.9
million, respectively, in 2002 and 2001. See Note 7 to the Consolidated
Financial Statements for further information.
RESULTS OF OPERATIONS.
OVERVIEW
The Company's net earnings amounted to $3.1 million during 2002, $3.4 million
during 2001 and $4.3 million during 2000. The Company's earnings declined $257
thousand or 7.7% during 2002 impacted by net interest income increasing by $392
thousand compared to 2001. Non-interest income increased to $1.5 million for the
year ended 2002 compared to $1.4 million in 2001. Non-interest expenses had a
negative impact to earnings for the year ended 2002 increasing to $10.2 million
in 2002 from $9.1 million in 2001. The Company's earnings decreased by 22% or
$966 thousand in 2001 compared to 2000, 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.
The Company's net interest income, which is the difference between interest
earned on assets and interest paid on liabilities, totaled $13.6 million in
2002, $13.2 million in 2001 and $12.7 million in 2000. The increase in 2001
versus 2000 resulted from average earning assets growing faster than interest
bearing liabilities. The Company's net interest margin remained fairly flat in
2002 and 2001 at 3.20% and 3.21%, respectively, versus 3.22% in 2000. 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.
There was no provision for loan losses in 2002 due to the low level of risk
assets and minimal delinquent loans. The provision for loan losses was a charge
of $175 thousand in 2001 and $250 thousand in 2000. The provision for loan
losses was made to maintain an appropriate allowance for loan losses in 2001 and
2000.
Non-interest income amounted to $1.5 million, $1.4 million and $1.1 million in
2002, 2001 and 2000, respectively. The increase in 2002, 2001 and 2000 was
primarily due to gains on sales of mortgage loans of $529 thousand, $249
thousand and $47 thousand, respectively. Deposit account fees increased $71
thousand during 2002, offsetting these increases was a decrease in loan fees to
a net loss of $145 thousand from income of $155 thousand in 2001.
Non-interest expense totaled $10.2 million in 2002, $9.1 million in 2001 and
$8.4 million in 2000. Salaries and employee benefits increased during 2002 by
$742 thousand, of which $358 thousand was attributable to pension expense
associated with the employees defined benefit pension plan, and professional
fees increased by $135 thousand in 2002 due to legal expenses. 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 from $496 thousand in 2000.
The Company recognized an income tax expense of $1.8 million in 2002, $2.0
million in 2001 and $854 thousand in 2000. The lower provision for taxes in 2002
as compared with 2001 resulted from a reduction in income before income taxes to
$4.9 million for the year ended 2002 versus $5.3 million in 2001. 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.
13
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.
2002 2001 2000
----------------------------- ----------------------------- ---------------------------
Average Average Average
Average Interest Average Interest Average Interest
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
ASSETS
Loans:
Residential real estate $ 87,122 $ 5,848 6.71% $ 97,982 $ 7,123 7.27% $ 92,547 $ 6,875 7.43%
Commercial real estate 126,083 9,759 7.74 112,021 9,577 8.55 93,683 8,644 9.23
Commercial business 20,918 1,256 6.00 19,379 1,490 7.69 16,111 1,512 9.38
Consumer 905 69 7.62 1,236 105 8.50 1,337 108 8.08
-------- -------- ---- --------- -------- -------- -------
Total loans 235,028 16,932 7.20 230,618 18,295 7.93 203,678 17,139 8.41
-------- -------- --------- -------- -------- -------
Investment securities:
U.S. Treasury and Government
Agency obligations 105,438 4,763 4.52 67,293 4,189 6.23 94,353 5,640 5.98
Other bonds and equity securities 57,228 2,275 3.98 76,789 4,237 5.52 61,421 4,039 6.58
Mortgage-backed securities 18,715 1,040 5.56 26,290 1,618 6.15 32,423 2,077 6.41
Short-term investments 8,351 128 1.53 10,236 453 4.43 2,334 142 6.08
-------- -------- ---- --------- -------- ---- -------- -------
Total investment securities 189,732 8,206 4.33 180,608 10,497 5.81 190,531 11,898 6.24
-------- -------- --------- -------- -------- -------
Total interest earning assets 424,760 25,138 5.92% 411,226 28,792 7.00% 394,209 29,037 7.37%
-------- -------- -------
Allowance for loan losses (4,131) (3,864) (3,491)
Cash and due from banks 7,132 5,950 5,124
Other real estate owned 18 28 189
Other assets 11,841 13,432 15,338
-------- --------- --------
Total assets $439,620 $ 426,772 $411,369
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Regular savings accounts $ 45,102 $ 389 0.86% $ 40,938 $ 720 1.76% $ 39,045 $ 770 1.97%
NOW and Super NOW accounts 33,596 86 0.26 31,187 155 0.50 27,084 142 0.52
Money market accounts 59,011 1,097 1.86 54,266 1,664 3.07 48,199 1,935 4.01
Certificates of deposit 123,673 4,232 3.42 136,952 7,390 5.40 130,976 7,083 5.41
-------- -------- --------- -------- -------- -------
Total interest bearing deposits 261,382 5,804 2.22 263,343 9,929 3.77 245,304 9,930 4.05
Borrowed funds 107,001 5,761 5.38 95,089 5,682 5.98 101,913 6,428 6.31
-------- -------- --------- -------- -------- -------
Total interest bearing liabilities 368,383 11,565 3.14% 358,432 15,611 4.36 347,217 16,358 4.71%
-------- -------- --------- -------- -------- -------
Non-interest bearing deposits 13,515 12,015 9,877
Other liabilities 3,488 3,469 4,672
-------- --------- --------
Total liabilities 385,386 373,916 361,766
Stockholders' equity 54,234 52,856 49,603
-------- --------- --------
Total liabilities and
stockholders' equity $439,620 $ 426,772 $411,369
===========================================================================================================================
Net interest rate spread 2.78% 2.64% 2.66%
Net interest income $ 13,573 $ 13,181 $12,679
===========================================================================================================================
Net interest margin on average earning assets 3.20% 3.21% 3.22%
===========================================================================================================================
14
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).
2002 vs. 2001 2001 vs. 2000
----------------------------------------- -----------------------------------------
Total Rate/ Total Rate/
Change Volume Rate Volume Change Volume Rate Volume
- -----------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
INTEREST INCOME:
Loans:
Residential real estate $ (1,275) $ (789) $ (546) $ 60 $ 248 $ 404 $ (147) $ (9)
Commercial real estate 182 1,202 (906) (114) 933 1,692 (635) (124)
Commercial business (234) 118 (326) (26) (22) 307 (273) (56)
Consumer (36) (28) (11) 3 (3) (8) 6 (1)
-------- -------- -------- -------- -------- -------- -------- --------
Total loans (1,363) 503 (1,789) (77) 1,156 2,395 (1,049) (190)
-------- -------- -------- -------- -------- -------- -------- --------
Investment securities:
U.S. Treasury and Government Agency
obligations 574 2,375 (1,149) (652) (1,451) (1,618) 233 (66)
Other bonds and equity securities (1,962) (1,079) (1,184) 301 198 1,011 (650) (163)
Mortgage-backed securities (578) (466) (157) 45 (459) (393) (82) 16
Short-term investments (325) (83) (296) 54 311 481 (39) (131)
-------- -------- -------- -------- -------- -------- -------- --------
Total investments (2,291) 747 (2,786) (252) (1,401) (519) (538) (344)
-------- -------- -------- -------- -------- -------- -------- --------
Total interest income (3,654) 1,250 (4,575) (329) (245) 1,876 (1,587) (534)
-------- -------- -------- -------- -------- -------- -------- --------
INTEREST EXPENSE:
Deposits:
Regular savings accounts (331) 73 (367) (37) (50) 37 (83) (4)
NOW and Super NOW accounts (69) 12 (75) (6) 13 22 (7) (2)
Money market accounts (567) 145 (655) (57) (271) 244 (457) (58)
Certificates of deposit (3,158) (717) (2,704) 263 307 323 (15) (1)
-------- -------- -------- -------- -------- -------- -------- --------
Total interest bearing deposits (4,125) (487) (3,801) 163 (1) 626 (562) (65)
Borrowed funds 79 712 (562) (71) (746) (430) (338) 22
-------- -------- -------- -------- -------- -------- -------- --------
Total interest expense (4,046) 225 (4,363) 92 (747) 196 (900) (43)
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income $ 392 $ 1,025 $ (212) $ (421) $ 502 $ 1,680 $ (687) $ (491)
====================================================================================================================================
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 liability balances in addition to changes in interest
rates.
The Company's net interest income was $13.6 million in 2002, $13.2 million in
2001 and $12.7 million in 2000. Interest income from earning assets was $25.1
million, $28.8 million and $29.0 million in 2002, 2001 and 2000, respectively.
The decrease in interest income during 2002 compared to 2001 was due to a
decrease in rates earned on investment securities and loans coupled with the
acceleration of the amortization of premiums associated with collateralized
mortgage obligations in the amount of $243 thousand due to the current low
interest rate environment of mortgage loans which has decreased the duration of
these investment securities. The increase in interest income during 2001 versus
2000 resulted from loan growth funded by an increase in deposits, partially
offset by an overall decrease in rates.
15
Interest expense on interest bearing deposits was $5.8 million in 2002 compared
to $9.9 million in both 2001 and 2000. Average deposit balances decreased in
2002 from 2001. The primary decrease was in certificates of deposit. Although
there were increases in all other deposit categories, interest expense decreased
due to a decrease in rates paid on all deposit categories. Average deposit
balances increased in 2001 from 2000 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 1.86%
in 2002 from 3.07% in 2001 which resulted in $567 thousand net decrease in
interest expense. Average rates paid on certificates of deposit decreased to
3.42% during 2002 from 5.40% in 2001 resonating from a net decrease of $3.2
million in interest expense during 2002. Average rates paid on certificates of
deposit remained stable at 5.40% in 2001 and 5.41% in 2000; however, average
balances of certificates of deposit increased $6.0 million in 2001 causing
interest expense to also rise $307 thousand in total. Interest expense on
borrowed funds remained stable at $5.8 million in 2002 and $5.7 million in 2001
compared to an increase to $6.4 million in 2000. The increase in interest
expense in 2002 resulted from an increase in average balances partially offset
by a decrease in rates paid. The decrease in interest expense of $746 thousand
in 2001 resulted from a decrease in average balances coupled with a decrease in
the rates paid. Interest expense on total interest bearing liabilities totaled
$11.6 million, $15.6 million and $16.4 million during 2002, 2001 and 2000,
respectively.
The average yield on earning assets in 2002 was down 108 basis points at 5.92%
and was down 37 basis points at 7.00% in 2001 from 7.37% in 2000. The average
rate paid on interest bearing liabilities in 2002 was 3.14%, a decrease of 122
basis points and in 2001 was 4.36%, a decrease of 35 basis points from 4.71% in
2000. The net interest rate spread in 2002 was 2.78% up 14 basis points from
2.64% and 2.66% in 2001 and 2000, respectively. The decrease in 2001 was due to
interest rates on earning assets falling before interest rates on earning
liabilities.
PROVISION FOR LOAN LOSSES
There was no provision for loan losses in 2002 due to the low level of risk
assets and minimal delinquent loans. The provision for loan losses was a charge
of $175 thousand in 2001 and $250 thousand in 2000.
NON-INTEREST INCOME
Non-interest income increased 4.7% and totaled $1.5 million versus $1.4 million
and $1.1 million for the years ended 2001 and 2000, respectively. This increase
in 2002 was due to gains on the sale of mortgage loans of $529 thousand compared
to $249 thousand in 2001. Deposit fees and other income both increased during
2002 to $665 thousand and $444 thousand, respectively, from $594 thousand and
$390 thousand, respectively in 2001. Partially offsetting these increases in
2002 were decreases in both loan servicing fees by $300 thousand and gains on
sale of investment securities by $38 thousand. The primary decrease in loan
servicing fees is due to the decline in fair value of mortgage servicing rights
which is recognized by a charge to loan servicing fees of $302 thousand. See
Note 4 in the Consolidated Financial Statements on Mortgage Servicing Rights
(MSR's).
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.
NON-INTEREST EXPENSE
Non-interest expense increased to $10.2 million in 2002 from $9.1 million in
2001 versus $8.4 million in 2000. The increase in 2002 was primarily due to an
increase in salaries and employee benefits of $742 thousand and an increase of
$135 thousand in professional expenses which include legal expenses relating to
collection efforts.
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. Professional fees, which
include legal expenses, totaled $671 thousand in 2001, $496 thousand in 2000.
Salaries and employee benefits expense totaled $6.0 million in 2002, $5.3
million in 2001 and $5.0 million in 2000. Full-time equivalent employees were
105 at December 31, 2002, 102 at December 31, 2001 and 100 at December 31, 2000.
Increases in normal merit raises and an increase of $358 thousand in pension
expense associated with the employees defined benefit pension plan accounted for
the increase in 2002. Increases in normal merit raises offset by reduced pension
expense associated with the employees defined benefit pension plan accounted for
the increase between 2001 and 2000. The Company continually evaluates staffing
levels in order to control salaries and employee benefits while managing
business volumes.
Data processing expenses increased to $749 thousand during 2002 compared to $705
thousand during 2001 and up from $590 thousand in 2000. 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 decreased to $790 thousand
in 2002 and increased to $872 thousand in 2001 from $763 thousand in 2000.
Insurance expenses totaled $153 thousand, $146 thousand and $139 thousand in
2002, 2001 and 2000, respectively, and other expenses increased to $1.7 million
in 2002 from $1.4 million in both 2001 and 2000, respectively.
16
INCOME TAXES
The Company reported income tax expense of $1.8 million in 2002, $2.0 million in
2001 and $854 thousand in 2000. The increase in the provision for taxes in 2001
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 2002 was 36.9% compared to 36.8% in 2001 and 16.5% in 2000. 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 $3.7 million at December 31, 2002 compared
to $5.7 million at December 31, 2001. 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.
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 consists of high quality, and, therefore, readily
marketable, U.S. Treasury and Government Agency obligations. At December 31,
2002, the Bank's investment securities and mortgage-backed securities available
for sale totaled $53.1 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, 2002 and had the full $11.8
million available.
The liquidity position of the Company is managed by the Asset/Liability
Management Committee ("ALCO"). The duties of ALCO are to periodically review the
Company's level of liquidity under prescribed policies and procedures. It is the
responsibility of ALCO to report to the Board of Directors on a regular basis
the Company's liquidity position as it relates to these policies and procedures.
At December 31, 2002, the Company's liquidity position was above policy
guidelines. Management believes that the Bank has adequate liquidity to meet
current and future liquidity demands.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The company enters info off-balance sheet contractual obligations and
commitments in the normal course of business. The Company has contractual
obligations such as payments on FHLB advances, operating lease obligations and
customer repurchase agreements. The Company has commitments in the form of
financial instruments that are for loan originations, lines of credit, letters
of credit and to sell mortgage loans. These commitments have various expiration
dates. The following table summarizes the expiration dates if these commitments
at December 31, 2002.
Payments Due - By Period
------------------------------------------------------------
Less than One to Four to After
Contractual Obligations Total One Year Three Years Five Years Five Years
- --------------------------------------------------------------------------------------------------------
(In Thousands)
FHLB Advances $ 94,237 $ 15,275 $ 26,000 $ 20,000 $ 32,962
Lease Obligations 472 112 180 180 -
Customer Repurchase
Agreements 3,950 3,950 - - -
- --------------------------------------------------------------------------------------------------------
Total Contractual Cash
Obligations $ 98,659 $ 19,337 $ 26,180 $ 20,180 $ 32,962
========================================================================================================
17
Amount of Commitment Expiring - By Period
------------------------------------------------------------
Less than One to Four to After
Commitments Total One Year Three Years Five Years Five Years
- --------------------------------------------------------------------------------------------------------
(In Thousands)
Loan Originations $ 25,103 $ 25,103 $ - $ - $ -
Lines of Credit 37,877 27,037 4,737 3,881 2,222
Letters of Credit 1,120 1,120 - - -
Sell mortgage Loans 5,349 5,349 - - -
- --------------------------------------------------------------------------------------------------------
Total commitments $ 69,449 $ 58,609 $ 4,737 $ 3,881 $ 2,222
========================================================================================================
The Corporation has no off-balance sheet arrangements except those discussed in
the commitment table in the Liquidity section or Note 12 of the Consolidated
Financial Statements.
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 and FRB. At December 31, 2002 and 2001, 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.
On July 25, 2002, the Board of Directors of the Company adopted a stock
repurchase program (the "Repurchase Program") authorizing the Company to
repurchase up to five percent of its common stock outstanding as of June 30,
2002 for cash. As of December 31, 2002 the number of shares repurchased and
included as Treasury Stock was 136,500, which had an average purchase price of
$12.72. The Company's book value per share was $12.71 at December 31, 2002. The
Company was able to purchase shares of Treasury Stock at a price close to book
value, which had a minimal impact in the calculation of book value at December
31, 2002. The book value per share increased from $12.35 at December 31, 2001
due to net income of $3.1 million, unrealized gains on securities available for
sale of $490 thousand and exercise of stock options of $33 thousand.
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, 2002, the Company had interest rate sensitive assets which
repriced or matured within one year of $228.0 million and interest rate
sensitive liabilities which repriced or matured within one year of $173.5
million. As of December 31, 2001, the Company had interest rate sensitive assets
which matured or repriced within one year of $179.0 million and interest rate
sensitive liabilities which repriced or matured within one year of $174.1
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 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.
18
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 100 or 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, 2002 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, 2002,
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
2002 Flat Rates 100 bp 200 bp
- -------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Year One $ 13,501 $ 13,227 $ 14,190
Year Two 12,953 12,236 14,141
--------- -------- ---------
Total net interest income for 2 year period $ 26,454 $ 25,463 $ 28,331
=============================================================================================================
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
=============================================================================================================
The income simulation model reflects negative exposure to net interest income in
a declining interest rate environment from 100 to 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.
19
The Company's one-year cumulative GAP to total assets increased from 1% at
December, 2001, to 12% at December, 2002. The table below shows the interest
rate sensitivity gap position as of December 31, 2002. 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, 2002 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 $ 40,158 $ 12,333 $ 20,999 $ 37,906 $ 1,603 $ 326
Investments securities available for sale 3,461 8,199 9,741 29,486 1,000 1,029
Federal Home Loan Bank Stock and other earning
assets 16,524 - - - - 168
Fixed rate mortgages loans 5,693 2,851 5,084 13,835 7,086 7,529
Adjustable rate mortgages loans 7,186 2,435 5,643 10,715 5,604 548
Consumer loans 410 104 126 14 - -
Fixed rate commercial real estate loans 917 831 1,789 3,487 3,660 5,968
Adjustable rate commercial real estate loans 17,655 5,500 13,507 37,484 21,947 -
Construction loans 18,415 2,114 33 142 162 2,636
Fixed rate commercial business loans 597 510 921 1,851 287 10
Adjustable rate commercial business loans 24,129 39 80 3,593 - -
---------- --------- --------- --------- --------- ----------
Total earning assets 135,145 34,916 57,923 138,513 41,349 18,214
---------- --------- --------- --------- --------- ----------
INTEREST BEARING LIABILITIES:
Savings and escrow accounts - - - - - 45,357
NOW and Super Now accounts - - - - - 35,568
Money market accounts 64,653 - - - - -
Certificates of deposit and retirement accounts 27,204 18,205 44,000 21,500 9,314 -
FHLB advances and other borrowed funds 4,026 7,077 8,317 29,833 20,486 31,852
---------- --------- --------- --------- --------- ----------
Total interest bearing liabilities 95,883 25,282 52,317 51,333 29,800 112,777
---------- --------- --------- --------- --------- ----------
Interest Sensitivity Gap $ 39,262 $ 9,634 $ 5,606 $ 87,180 $ 11,549 $ (94,563)
========================================================================================================================
Cumulative GAP $ 39,262 $ 48,896 $ 54,502 $ 141,682 $ 153,231 $ 58,668
========================================================================================================================
Cumulative GAP as a percent of total assets 9% 11% 12% 32% 35% 13%
========================================================================================================================
RECENT ACCOUNTING DEVELOPMENTS
In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. Statement No. 144 provides additional
implementation guidance and supercedes Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. It
is effective for financial statements issued for fiscal years beginning after
December 15, 2001. Statement No. 144 was adopted on January 1, 2002 with no
impact to the financial condition or results of operations of the Company.
In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS 148 amends SFAS No. 123, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
Companies are able to eliminate a "ramp-up" effect that the SFAS No. 123
transition rule creates in the year of adoption. Companies can choose to elect a
method that will provide for comparability amongst years reported. In addition,
this Statement amends the disclosure requirement of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the
fair value based method of accounting for stock-based employee compensation and
the effect of the method used on reported results.
20
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,"
considers standby letters of credit, excluding commercial letters of credit and
other lines of credit, a guarantee of the Company. The Company enters into
standby letters of credit to assure performance of a customer to a third party.
These letters of credit are primarily issued to support public and private
borrowing arrangements. The credit risk involved is represented by the
contractual amounts of those instruments. In the event the customer fails to
meet its contractual obligation to the beneficiary, the Company is required to
make payments to the beneficiary upon request by the beneficiary so long as all
performance criteria have been met. Most letters of credit extend up to one
year. At December 31, 2002, the Company had letters of credit with potential
amounts of future payments aggregating $1,120,000. The Company requires that all
such letters of credit be secured by acceptable collateral. The majority of the
Company's letters of credit are collateralized by cash. Other collateral can be
pledged based upon management's credit evaluation of the customer which may
include accounts receivable, inventory, property, plant and equipment and
income-producing real estate. The recourse provisions of the agreements allow
the Company to liquidate the cash used to collateralize the agreement. If
another business asset is used as collateral and cash is not available, the
Company creates a loan for the customer with the same criteria of its other
lending activities. The fair value of letters of credit and other off-balance
sheet financial instruments are discussed in Note 13 to the Consolidated
Financial Statements. The fair value of these instruments is not reflected on
the balance sheet.
IMPACT OF INFLATION AND CHANGING PRICES
The 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.
21
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, 2002 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 /s/ John E. Sharland
Paul A. Miller John E. Sharland
President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
December 31, 2002
22
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
LSB CORPORATION:
We have audited the accompanying consolidated balance sheets of LSB Corporation
and its subsidiary as of December 31, 2002 and 2001 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, 2002. 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, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Boston, Massachusetts
January 18, 2003
23
CONSOLIDATED BALANCE SHEETS
December 31, 2002 2001
- ------------------------------------------------------------------------------------------------------------
(In Thousands)
ASSETS:
Cash and due from banks $ 7,136 $ 7,457
Fed funds sold 9,633 5,705
------------ -----------
Total cash and cash equivalents 16,769 13,162
Investment securities held to maturity
market value of $116,321 in 2002 and $137,886 in 2001 (notes 2 and 7) 113,325 135,002
Investment securities available for sale
amortized cost of $52,055 in 2002 and $38,480 in 2001 (notes 2 and 7) 53,084 38,766
Federal Home Loan Bank stock, at cost (note 3) 5,950 5,950
Loans, net of allowance for loan losses of $4,167 in 2002
and $4,070 in 2001 (notes 4 and 7) 238,960 232,327
Bank premises and equipment (note 5) 3,050 3,167
Accrued interest receivable 2,459 2,604
Other real estate owned 12 22
Deferred income tax asset (note 8) 3,686 5,737
Other assets 1,839 1,530
------------ -----------
Total assets $ 439,134 $ 438,267
============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Interest bearing deposits (note 6) $ 265,283 $ 255,046
Non-interest bearing deposits (note 6) 14,182 13,404
Federal Home Loan Bank advances (note 7) 94,237 102,992
Other borrowed funds (note 7) 7,354 8,107
Advance payments by borrowers for taxes and insurance 518 573
Other liabilities 3,501 4,053
------------ -----------
Total liabilities 385,075 384,175
------------ -----------
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; 4,389,705 and 4,379,550 shares issued
in 2002 and 2001, respectively,
4,253,205 and 4,379,550 shares outstanding in 2002 and 2001, respectively 439 438
Additional paid-in capital 57,845 57,813
Accumulated deficit (3,168) (4,348)
Treasury stock, at cost (136,500 shares in 2002) (1,736) -
Accumulated other comprehensive income 679 189
------------ -----------
Total stockholders' equity 54,059 54,092
------------ -----------
Total liabilities and stockholders' equity $ 439,134 $ 438,267
============================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
24
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
(In Thousands, Except Share Data)
Interest and dividend income:
Loans $ 16,932 $ 18,295 $ 17,139
Investment securities held to maturity 6,056 8,166 8,089
Investment securities available for sale 1,817 1,514 3,202
Federal Home Loan Bank stock 205 364 454
Other interest income 128 453 153
------------- ------------- -------------
Total interest and dividend income 25,138 28,792 29,037
- ---------------------------------------------------------------------------------------------------------
Interest expense:
Deposits (note 6) 5,804 9,929 9,930
Borrowed funds 5,458 5,278 4,525
Securities sold under agreements to repurchase and
other borrowed funds 303 404 1,903
------------- ------------- -------------
Total interest expense 11,565 15,611 16,358
- ---------------------------------------------------------------------------------------------------------
Net interest income 13,573 13,181 12,679
Provision for loan losses (note 4) - 175 250
------------- ------------- -------------
Net interest income after provision for loan losses 13,573 13,006 12,429
- ---------------------------------------------------------------------------------------------------------
Non-interest income:
Deposit account fees 665 594 500
Loan servicing fees, net (145) 155 281
Gains on sales of mortgage loans, net 529 249 47
Gains (losses) on sale of investment securities - 38 (41)
Other income 444 390 337
------------- ------------- -------------
Total non-interest income 1,493 1,426 1,124
- ---------------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 6,006 5,264 5,033
Occupancy and equipment expenses 790 872 763
Data processing expenses 749 705 590
Professional expenses 806 671 496
Insurance expenses 153 146 139
Other expenses 1,651 1,464 1,355
------------- ------------- -------------
Total non-interest expense 10,155 9,122 8,376
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 4,911 5,310 5,177
Income tax expense (note 8) 1,811 1,953 854
------------- ------------- -------------
Net income $ 3,100 $ 3,357 $ 4,323
=========================================================================================================
Average shares outstanding 4,348,085 4,374,195 4,360,415
Average diluted shares outstanding 4,518,649 4,535,305 4,434,645
=========================================================================================================
Basic earnings per share $ 0.71 $ 0.77 $ 0.99
Diluted earnings per share $ 0.69 $ 0.74 $ 0.97
=========================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
25
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
Additional
Common Paid-in Accumulated
Stock Capital Deficit
- --------------------------------------------------------------------------------------------
(In Thousands)
Balance at December 31, 1999 $ 436 $ 57,668 $ (9,145)
Net income - - 4,323
Other comprehensive income
unrealized gain (loss) on securities
available for sale (tax effect $346) - - -
Total comprehensive income
Exercise of stock options - 43 -
Dividends declared and paid ($0.26 per share) - - (1,134)
---------- ---------- ----------
Balance at December 31, 2000 436 57,711 (5,956)
Net income - - 3,357
Other comprehensive income
unrealized gain (loss) on securities
available for sale (tax effect $34) - - -
Total comprehensive income - - -
Exercise of stock options 2 102 -
Dividends declared and paid ($0.40 per share) - - (1,749)
---------- ---------- ----------
Balance at December 31, 2001 438 57,813 (4,348)
Net income - - 3,100
Other comprehensive income
unrealized gain (loss) on securities
available for sale (tax effect $253) - - -
Total comprehensive income - - -
Exercise of stock options 1 32 -
Purchase of treasury stock - - -
Dividends declared and paid ($0.44 per share) - - (1,920)
---------- ---------- ----------
Balance at December 31, 2002 $ 439 $ 57,845 $ (3,168)
=========================================================================================
Accumulated
Other Total
Treasury Comprehensive Stockholders'
Stock Income (Loss) Equity
- ------------------------------------------------------------------------------------------
(In Thousands)
Balance at December 31, 1999 $ - $ (551) $ 48,408
Net income - - 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
Dividends declared and paid ($0.26 per share) - - (1,134)
---------- ---------- ----------
Balance at December 31, 2000 - 122 52,313
Net income - - 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 - - 104
Dividends declared and paid ($0.40 per share) - - (1,749)
---------- ---------- ----------
Balance at December 31, 2001 - 189 54,092
Net income - - 3,100
Other comprehensive income
unrealized gain (loss) on securities
available for sale (tax effect $253) - 490 490
----------
Total comprehensive income - 3,590
Exercise of stock options - - 33
Purchase of treasury stock (1,736) - (1,736)
Dividends declared and paid ($0.44 per share) - - (1,920)
---------- ---------- ----------
Balance at December 31, 2002 $ (1,736) $ 679 $ 54,059
=========================================================================================
DISCLOSURE OF RECLASSIFICATION AMOUNT: 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Gross unrealized appreciation arising during the period $ 743 $ 124 $ 980
Tax effect (253) (42) (333)
---------- ---------- ----------
Unrealized holding appreciation net of tax 490 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 $ 490 $ 67 673
==============================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
26
CONSOLIDATED STATEMENTS
OF CASH FLOWS
Year Ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
(In Thousands)
Cash flows from operating activities:
Net income $ 3,100 $ 3,357 $ 4,323
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses - 175 250
Gains on sales of mortgage loans and mortgage-backed securities (529) (249) (47)
(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)
Net amortization (accretion) of investment securities 1,426 (37) 314
Depreciation of premises and equipment and other assets 454 484 448
Loans originated for sale (35,415) (25,301) (2,485)
Proceeds from sales of mortgage loans and mortgage-backed securities 37,521 21,394 2,532
Decrease (increase) in accrued interest receivable 145 365 (148)
Decrease in deferred income tax asset 1,798 1,742 1,999
(Increase) decrease in other assets (309) 55 18
(Decrease) increase in advance payments by borrowers (55) 60 (137)
(Decrease) increase in other liabilities (552) 498 (1,352)
---------- ---------- ----------
Net cash provided by operating activities 7,584 2,492 5,717
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of investment securities available for sale 5,493 6,532 -
Proceeds from maturities of investment securities held to maturity 337,318 642,579 8,611
Purchases of investment securities held to maturity (351,927) (678,882) (16,430)
Purchases of investment securities available for sale (31,194) (26,037) -
Purchases of mortgage-backed securities held to maturity (2,967) (4,335) -
Proceeds from sales of investment securities available for sale - 6,119 21,899
Principal payments of securities held to maturity 38,283 23,557 10,748
Principal payments of securities available for sale 11,670 7,765 2,775
Purchase of other equity securities - (46) -
Increase in loans, net (8,210) (9,986) (23,893)
Proceeds from sales or payments on OREO 10 10 526
Purchases of Bank premises and equipment (337) (314) (448)
---------- ---------- ----------
Net cash (used in) provided by investing activities (1,861) (33,038) 3,788
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 11,015 (2,098) 24,508
Additions to Federal Home Loan Bank advances 11,000 48,120 695,950
Payments on Federal Home Loan Bank advances (19,755) (27,411) (683,163)
Net (decrease) increase in agreements to repurchase securities (270) 4,220 -
(Decrease) increase in other borrowed funds (483) 9 (30,793)
Dividends paid (1,920) (1,749) (1,134)
Treasury stock purchased (1,736) - -
Proceeds from exercise of stock options 33 104 43
---------- ---------- ----------
Net cash (used in) provided by financing activities (2,116) 21,195 5,411
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,607 (9,351) 14,916
Cash and cash equivalents, beginning of year 13,162 22,513 7,597
---------- ---------- ----------
Cash and cash equivalents, end of year $ 16,769 $ 13,162 $ 22,513
==============================================================================================================
Cash paid during the year for:
Interest on deposits and borrowed funds $ 11,632 $ 15,603 $ 16,098
Income taxes 271 188 179
Cash received during the year for:
Income taxes 133 - -
Supplemental Schedule of non-cash activities:
Change in valuation of investment securities available for sale 743 99 1,019
==============================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
27
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION - 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.
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, income taxes and mortgage servicing rights.
CASH AND CASH EQUIVALENTS - For the purpose of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks and Federal Funds
sold. Generally, Federal Funds are sold with overnight maturities.
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.
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. 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.
28
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.
TRANSFERS AND SERVICING OF ASSETS AND EXTINGUISHMENTS OF LIABILITIES - The
Company accounts and reports for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial
components approach that focuses on control. This approach distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. After a transfer of financial assets, the Company recognizes all
financial and servicing assets it controls and liabilities it has incurred and
derecognizes financial assets it no longer controls and liabilities that have
been extinguished. This financial components approach focuses on the assets and
liabilities that exist after the transfer. Many of these assets and liabilities
are components of financial assets that existed prior to the transfer. If a
transfer does not meet the criteria for the sale, the Company accounts for the
transfer as a secured borrowing with a pledge of collateral.
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 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 rate.
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.
29
STOCK OPTIONS - The Corporation measures compensation cost for stock-based plans
using the intrinsic value method. The intrinsic value method measures
compensation cost as the difference between the exercise price of options
granted and the fair market value of the Company's stock at the grant date. All
options granted have an exercise price equivalent to the fair market value at
the date of grant accordingly no compensation cost has been recorded. 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:
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------
(In Thousands except per share data)
Net Income:
As Reported $ 3,100 $ 3,357 $ 4,323
Pro forma 2,867 3,086 4,167
Basic earnings per share:
As Reported $ 0.71 $ 0.77 $ 0.99
Pro forma 0.66 0.71 0.96
Diluted earnings per share:
As Reported $ 0.69 $ 0.74 $ 0.97
Pro forma 0.63 0.68 0.94
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:
2002 2001 2000
---- -------- ----
Expected volatility - 35.00% -
Risk-free interest rate - 5.12% -
Expected dividend yield - 3.37% -
Expected life in years - 10 years -
========================================================================================================
PENSION EXPENSE - The Bank is a participant in a multiple employer defined
benefit pension plan. Pension expense is recognized on a net periodic pension
cost method over the employee's approximate service period. Pension costs are
funded in the year of accrual using the aggregate cost method.
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.
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.
RECENT ACCOUNTING DEVELOPMENTS
In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. Statement No. 144 provides additional
implementation guidance and supercedes Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. It
is effective for financial statements issued for fiscal years beginning after
December 15, 2001. Statement No. 144 was adopted on January 1, 2002 with no
impact to the financial condition or results of operations of the Company.
In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS 148 amends SFAS No. 123, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
Companies are able to eliminate a "ramp-up" effect that the SFAS No. 123
transition rule creates in the year of adoption. Companies can choose to elect a
method that will provide for comparability amongst years reported. In addition,
this Statement amends the disclosure requirement of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the
fair value based method of accounting for stock-based employee compensation and
the effect of the method used on reported results.
30
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,"
considers standby letters of credit, excluding commercial letters of credit and
other lines of credit, a guarantee of the Company. The Company enters into
standby letters of credit to assure performance of a customer to a third party.
These letters of credit are primarily issued to support public and private
borrowing arrangements. The credit risk involved is represented by the
contractual amounts of those instruments. In the event the customer fails to
meet its contractual obligation to the beneficiary, the Company is required to
make payments to the beneficiary upon request by the beneficiary so long as all
performance criteria have been met. Most letters of credit extend up to one
year. At December 31, 2002, the Company had letters of credit with potential
amounts of future payments aggregating $1,120,000. The Company requires that all
such letters of credit be secured by acceptable collateral. The majority of the
Company's letters of credit are collateralized by cash. Other collateral can be
pledged based upon management's credit evaluation of the customer which may
include accounts receivable, inventory, property, plant and equipment and
income-producing real estate. The recourse provisions of the agreements allow
the Company to liquidate the cash used to collateralize the agreement. If
another business asset is used as collateral and cash is not available, the
Company creates a loan for the customer with the same criteria of its other
lending activities. The fair value of letters of credit and other off-balance
sheet financial instruments are discussed in Note 13 to the Consolidated
Financial Statements. The fair value of these instruments is not reflected on
the balance sheet.
(2) INVESTMENT SECURITIES
The amortized cost and market value of investment securities at December 31,
follows:
2002 2001
------------------------------------------- -----------------------------------------
Amortized Unrealized Market Amortized Unrealized Market
Cost Gain Loss Value Cost Gain Loss Value
- ---------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Investment securities held to maturity:
US Treasury obligations $ 6,002 $ 58 $ - $ 6,060 $ 6,022 $ 244 $ - $ 6,266
US Government
Agency obligations 26,243 1,471 - 27,714 15,966 1,111 - 17,077
Mortgage-backed securities 13,440 407 (7) 13,840 16,633 310 (8) 16,935
Asset-backed securities 32,551 610 (14) 33,147 40,337 694 (22) 41,009
Corporate obligations 33,068 456 (16) 33,508 53,982 542 - 54,524
Municipal obligations 2,021 31 - 2,052 2,062 13 - 2,075
-------- ------- ------- --------- --------- ------ ------- ---------
$113,325 $ 3,033 $ (37) $ 116,321 $ 135,002 $2,914 $ (30) $ 137,886
=================================================================================================================================
Investment securities available for sale:
US Government
Agency obligations $ 31,078 $ 742 $ - $ 31,820 20,126 37 (37) 20,126
Mortgage-backed securities 2,770 80 - 2,850 5,629 67 (7) 5,689
Asset-backed securities 12,074 14 (9) 12,079 8,077 20 (8) 8,089
Corporate obligations 3,965 212 (10) 4,167 4,480 217 (3) 4,694
Municipal obligations 2,000 - - 2,000 - - - -
Equity securities 168 - - 168 168 - - 168
-------- ------- ------- --------- --------- ------ ------- ---------
$ 52,055 $ 1,048 $ (19) $ 53,084 $ 38,480 $ 341 $ (55) $ 38,766
=================================================================================================================================
Proceeds from sales, realized gains and losses on investments available for sale
for the years ended December 31, follow:
2002 2001 2000
- -------------------------------------------------------------------------------------
(In Thousands)
Proceeds from sales $ - $ 6,119 $ 21,899
Realized gains on sales - 38 52
Realized losses on sales - - (93)
31
(2) INVESTMENT SECURITIES - (CONTINUED)
The following table is a summary of the contractual maturities of investment
securities held to maturity and available for sale at December 31, 2002. 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
---------------------------------- ----------------------------------
Weighted Weighted
Amortized Market Average Amortized Market Average
December 31, 2002 Cost Value Yield Cost Value Yield
====================================================================================================================
(Dollars in Thousands)
US Treasury & Agencies obligations:
Within 1 year $ 9,002 $ 9,104 5.89% $ 10,025 $ 10,155 3.18%
1 to 2 years 2,040 2,082 3.33 16,056 16,512 3.75
2 to 3 years 14,958 16,177 6.28 4,997 5,153 3.90
3 to 5 years 6,245 6,411 3.43 - - -
-------- --------- -------- ---------
32,245 33,774 5.43 31,078 31,820 3.59
-------- --------- -------- ---------
Mortgage-backed securities:
Within 1 year 209 212 7.65 - - -
1 to 2 years 2,211 2,282 6.04 - - -
2 to 3 years 2,910 2,903 4.39 111 114 2.98
3 to 5 years 576 618 7.06 - - -
5 to 10 years 5,680 5,933 6.46 - - -
After 10 years 1,854 1,892 5.33 2,659 2,736 5.33
-------- --------- -------- ---------
13,440 13,840 5.83 2,770 2,850 5.24
-------- --------- -------- ---------
Asset-backed securities:
3 to 5 years 10,729 10,993 5.22 - - -
5 to 10 years 12,647 12,875 5.33 7,277 7,269 4.43
After 10 years 9,175 9,279 5.79 4,797 4,810 5.44
-------- --------- -------- ---------
32,551 33,147 5.42 12,074 12,079 4.83
-------- --------- -------- ---------
Corporate obligations:
Within 1 year 25,492 25,560 3.64 - - -
1 to 2 years 5,098 5,266 5.81 2,965 3,177 7.34
2 to 3 years 1,060 1,123 4.81 - - -
3 to 5 years 1,418 1,559 7.71 1,000 990 2.68
After 10 years - - - - - -
------- --------- -------- ---------
33,068 33,508 4.19 3,965 4,167 6.16
-------- --------- -------- ---------
Municipal obligations:
Within 1 year 2,021 2,052 3.99 2,000 2,000 1.76
-------- --------- -------- ---------
$113,325 $ 116,321 5.09% $ 51,887 $ 52,916 4.09%
==================================================================================================================
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,
2002, the Company had callable investment securities with an amortized cost of
$9.2 million and a market value of $9.5 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.
32
(4) LOANS
The components of the loan portfolio at December 31, follow:
2002 2001
- ---------------------------------------------------------------------------
(In Thousands)
Residential real estate $ 60,140 $ 78,605
Loans held for sale 2,579 4,156
Home equity 11,490 13,393
Construction 23,502 20,593
Commercial real estate 112,745 100,110
Commercial business 32,017 18,549
Consumer 654 991
----------- -----------
Total loans 243,127 236,397
Allowance for loan losses (4,167) (4,070)
----------- -----------
$ 238,960 $ 232,327
===========================================================================
The amounts above include net deferred loan origination fees and costs totaling
$153 thousand at December 31, 2002 and $160 thousand at December 31, 2001.
Mortgage loans serviced by the Company for others amounted to $77.1 million and
$68.1 million at December 31, 2002 and 2001, respectively.
Non-performing loans at December 31, 2002 and 2001 amounted to $1 thousand and
$951 thousand, respectively. There were no impaired loans at December 31, 2002.
At December 31, 2001 impaired loans totaled $941 thousand, of which $210
thousand was allocated for in the allowance for loan losses.
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, 2002
follows:
Balance at Balance at
January 1, 2002 Additions Repayments December 31, 2002
- -------------------------------------------------------------------------------------------------------
(In Thousands)
$2,032 $835 $934 $1,933
========================================================================================================
The activity in the allowance for loan losses for the years ended December 31,
follows:
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------
(In Thousands)
Balance at beginning of year $ 4,070 $ 3,685 $ 3,381
Total charge-offs (1) (3) (28)
Total recoveries 98 213 82
-------- --------- --------
Net recoveries 97 210 54
Provision for loan losses - 175 250
-------- --------- --------
Balance at end of year $ 4,167 $ 4,070 $ 3,685
===========================================================================================================
33
(4) LOANS - (CONTINUED)
The following table summarizes the balances of mortgage service fees at December
31:
2002 2001
- ----------------------------------------------------------------------------------------------------------
(In Thousands)
Balance at beginning of year $ 948 $ 854
Additions 336 252
Amortization ( 269) (158)
-------- -------
Mortgage servicing rights 1,015 948
Valuation allowance (377) (75)
-------- -------
Balance at end of year $ 638 $ 873
==========================================================================================================
The following table summarizes activity in the mortgage service fees valuation
allowance for the years ended December 31:
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------
(In Thousands)
Balance at beginning of year $ 75 $ - $ -
Provision charged to operations 302 75 -
-------- --------- -------
Balance at end of year $ 377 $ 75 $ -
===========================================================================================================
The following table summarizes activity in the loan servicing fees net for the
years ended December 31:
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------
(In Thousands)
Service fee income $ 269 $ 281 $ 315
Amortization of mortgage servicing rights (269) (158) (161)
Provision for valuation allowance (302) (75) -
-------- --------- -------
Mortgage servicing income (expense) (302) 48 154
Late charges and other loan fees 157 107 127
-------- --------- -------
Loan servicing fees, net $ (145) $ 155 $ 281
===========================================================================================================
(5) BANK PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, follow:
2002 2001
- -------------------------------------------------------------------------------------------------------------
(In Thousands)
Premises $ 3,609 $ 3,572
Equipment 2,503 2,245
Leasehold improvements 378 336
-------- --------
6,490 6,153
Less accumulated depreciation and amortization 3,440 2,986
-------- --------
$ 3,050 $ 3,167
============================================================================================================
Depreciation and amortization expense for the years ended December 31, 2002,
2001, and 2000 amounted to $454,000, $484,000, and $448,000, respectively.
Rent expense for leased premises for the years ended December 31, 2002, 2001 and
2000 amounted to $152,000, $144,000 and $143,000, respectively. The Company is
obligated, under non-cancelable leases for premises and equipment, for minimum
payments in future periods of $112,000 in the year 2003, and $90,000 for each of
the years 2004 through 2007.
34
6) DEPOSITS
The following table shows the components of deposits at December 31, 2002 and
2001 and the range of interest rates paid as of December 31, 2002. Rates as of
December 31, 2002
Rates as of
December 31,
2002 2002 2002
- --------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest bearing accounts:
NOW and Super NOW accounts 0.10-0.50% $ 35,568 $ 30,080
Savings accounts 0.50% 44,839 42,531
Money market investment accounts 0.25-1.69% 64,653 57,575
Certificates of deposit 1.24-6.25% 92,241 97,828
Retirement accounts 1.24-6.25% 27,982 27,032
--------- --------
Total interest bearing deposits 265,283 255,046
Non-interest bearing demand deposit accounts - 14,182 13,404
--------- --------
$ 279,465 $268,450
============================================================================================
The components of interest expense on deposits for the years ended December 31,
follow:
2002 2001 2000
- --------------------------------------------------------------------------
(In Thousands)
Now and Super NOW accounts $ 81 $ 150 $ 138
Savings accounts 394 725 774
Money market investment accounts 1,097 1,664 1,935
Certificates of deposit 3,109 5,908 5,623
Retirement accounts 1,123 1,482 1,460
--------- -------- ------
$ 5,804 $ 9,929 $9,930
==========================================================================
The amount and weighted average interest rate on certificates of deposit,
including retirement accounts, by periods to maturity at December 31, 2002 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 $ 20,816 $ 6,386 $ 27,202 2.33%
From three to six months 14,616 3,589 18,205 2.18
From six to twelve months 34,507 9,494 44,001 3.11
From one to two years 14,130 2,414 16,544 3.30
From two to three years 4,517 441 4,958 4.70
Three years and thereafter 6,731 2,582 9,313 4.35
---------- -------- ---------
$ 95,317 $ 24,906 $ 120,223 2.98%
==================================================================================================================
Brokered deposits at December 31, 2002 totaled $2.0 million. There were no
brokered deposits at December 31, 2001.
35
(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, 2002 are collateralized by a blanket lien
against residential mortgages and other qualifying collateral.
Advances outstanding at December 31, follow:
2002 2001
- -------------------------------------------------------------------------------------------
Weighted Average Weighted Average
Maturity Amount Interest Rate Amount Interest Rate
- -------------------------------------------------------------------------------------------
(Dollars in Thousands)
2002 $ - -% $ 18,000 6.40%
2003 15,275 4.84 16,941 4.99
2004 20,000 4.73 20,000 4.73
2005 6,000 5.91 5,000 6.23
2006 5,000 4.69 5,000 4.69
2007 15,000 4.53 5,000 6.20
2009 255 6.42 270 6.42
2010 20,000 6.03 20,000 6.03
2011 10,000 4.93 10,000 4.93
2021 2,707 6.23 2,781 6.23
--------- ----------
$ 94,237 5.13% $ 102,992 5.52%
=========================================================================================
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, 2002 the Company had
callable advances totaling $53.0 million and amortizing advances totaling $4.7
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 $4.0 million at December 31,
2002 at a rate of 0.75%. Repurchase agreements outstanding at December 31, 2001
totaled $4.2 million at a rate of 0.31%.
Other borrowed funds at both December 31, 2002 and 2001 consisted of secured
borrowings of $3.4 million and $3.9 million, respectively, bearing average
interest rates of 8.86% and 7.46%, respectively.
Information relating to other borrowed funds for the years ended, follows:
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Repurchase FHLB/FRB Repurchase FHLB/FRB Repurchase FHLB/FRB
Agreements Advances Agreements Advances Agreements Advances
- --------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Outstanding at December 31 $ 3,950 $ - $ 4,220 $ - $ - $ -
Weighted average rate at December 31 0.75% -% 0.31% -% -% -%
Average balance outstanding during the year $ 3,254 $ 41 $ 2,468 $ 21 $ 24,539 $ 24,364
Weighted average rate during the year 0.58% 2.11% 2.35% 4.42% 6.29% 6.14%
Maximum outstanding at any month end $ 5,463 $ - $ 5,836 $ - $ 42,544 $ 71,000
36
(8) INCOME TAXES
An analysis of income tax expense for the years ended December 31, follows:
2002 2001 2000
- -----------------------------------------------------------------------------------------------
(In Thousands)
Current expense (benefit):
Federal $ (214) $ 65 $ 69
State 227 146 76
-------- --------- --------
Total current expense 13 211 145
-------- --------- --------
Deferred expense (benefit):
Federal 1,791 1,730 1,462
State (11) (11) 83
Change in valuation reserve 18 23 15
-------- --------- --------
Total deferred expense 1,798 1,742 1,560
-------- --------- --------
Change in estimate for tax contingencies - - (851)
-------- --------- --------
Total income tax expense $ 1,811 $ 1,953 $ 854
===============================================================================================
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:
2002 2001 2000
- -----------------------------------------------------------------------------------------------
(In Thousands)
Expected federal income tax expense $ 1,670 $ 1,805 $ 1,760
Items affecting expected tax:
State income tax, net of federal benefit 143 89 105
Other (20) 36 (175)
Change in valuation reserve 18 23 15
Change in estimate for tax contingencies - - (851)
------- --------- --------
Total income tax expense $ 1,811 $ 1,953 $ 854
===============================================================================================
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:
2002 2001
- -------------------------------------------------------------------------------------------
(In Thousands)
Deferred tax assets:
Allowance for loan losses $ 2,464 $ 2,464
Net operating loss carryforward 438 2,094
Alternative minimum tax carryforward 244 347
Pension costs 379 443
Deferred compensation 426 367
Loan origination fees 37 50
Depreciation 314 299
Other 292 274
---------- ---------
Gross deferred tax asset 4,594 6,338
Valuation reserve (56) (38)
---------- ---------
Deferred tax asset 4,538 6,300
---------- ---------
Deferred tax liabilities:
Unrealized gains on investment securities available for sale (350) (97)
Other (502) (466)
---------- ---------
Gross deferred tax liability (852) (563)
---------- ---------
Net deferred income tax asset $ 3,686 $ 5,737
- -------------------------------------------------------------------------------------------
Operating losses in the early 1990's resulted in available tax loss
carryforwards. 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, 2002,
the Bank has $1.3 million of tax loss carryforwards available that expire
between 2011 and 2019.
37
(8) INCOME TAXES - (CONTINUED)
At December 31, 2002, the Bank would need to generate approximately $10.8
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, 2002 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.
(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, 2002 and 2001, 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 and the Federal Reserve Bank 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,
2002 and 2001, follow:
Risk-Based Ratios
-----------------------------------------------------------------------------------
Tier 1 Capital Total Capital Leverage
--------------------------- ---------------------- ------------------------
Capital 2002 2001 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------
(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 16.49% 15.74% 17.74% 16.97% 12.10% 11.98%
Lawrence Savings Bank 15.68% 15.15% 16.93% 16.39% 11.49% 11.46%
Capital Amounts:
Adequately capitalized
LSB Corporation $ 12,799 $ 13,236 $ 25,599 $ 26,472 $ 17,445 $ 17,392
Lawrence Savings Bank 12,720 13,155 25,441 26,310 17,356 17,390
Well capitalized
LSB Corporation 19,199 19,854 31,999 33,090 21,807 21,740
Lawrence Savings Bank 19,081 19,733 31,801 32,888 21,695 21,737
Actual Amounts:
LSB Corporation 52,775 52,081 56,777 56,151 52,775 52,081
Lawrence Savings Bank 49,869 49,824 53,846 53,894 49,869 49,824
===============================================================================================================
38
(9) STOCKHOLDERS' EQUITY - (CONTINUED)
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.
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, 2002 and 2001.
2002 2001
- ------------------------------------------------------------------------------------
(In Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 5,396 $ 4,640
Service cost 319 280
Interest cost 377 360
Actuarial loss 157 195
Benefits paid (207) (79)
---------- ----------
Benefit obligation at end of year $ 6,042 $ 5,396
=====================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 5,710 $ 6,478
Actual return on plan assets (550) (710)
Employer contribution 355 21
Benefits paid (207) (79)
---------- ----------
Fair value of plan assets at end of year $ 5,308 $ 5,710
=====================================================================================
Funded status $ (734) $ 314
Unrecognized net actuarial gain (136) (1,380)
Unrecognized prior service cost (32) (36)
---------- ----------
Accrued benefit cost included in other liabilities $ (902) $ (1,102)
=====================================================================================
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation were
6.75% and 4.50% for 2002 and 7.00% and 4.50% for 2001.
Net pension cost components for the years ended October 31, follow:
2002 2001 2000
- ---------------------------------------------------------------
(In Thousands)
Service cost $ 319 $ 280 $ 258
Interest cost 377 360 334
Expected return on plan assets (456) (518) (416)
Amortization of net (gains) losses (81) (240) (228)
Net amortization and deferrals (4) (4) (4)
----- ----- -----
Net periodic pension cost $ 155 $(122) $ (56)
- --------------------------------------------------------------
39
(10) EMPLOYEE BENEFITS - (CONTINUED)
Assumptions used to develop the net periodic pension cost were:
2002 2001 2000
- -------------------------------------------------------------------------------------
Discount rate 7.00% 7.75% 7.75%
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 $104 thousand and $91
thousand on behalf of the employees who were in the Savings Plan in 2002 and
2001, respectively.
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. Under the 1986 and 1997 Stock
Option Plans, the Company may grant options to Directors, Officers or employees
up to 859,100 of which 166,670 shares have been exercised. As of December 31,
2002, 586,330 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:
2002 2001 2000
-------------------- --------------------- ----------------------
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 601,030 $ 8.63 452,030 $ 6.67 463,030 $ 6.66
Granted - - 165,000 13.87 - -
Exercised (14,700) 6.32 (14,750) 7.00 (8,000) 5.50
Canceled - - (1,250) 9.13 (3,000) 9.13
-------- --------- ----------
Outstanding at end of year 586,330 8.69 601,030 8.63 452,030 6.67
======== ========= ==========
Options exercisable end of year 503,830 7.84 397,530 6.42 372,530 6.16
Weighted average fair value of
options granted during the year $ - $ 5.47 $ -
The following table summarizes information about the Stock Option Plans based on
a range of exercise prices as of December 31, 2002.
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 $5.00 105,830 $ 4.40 1.6 years 105,830 $ 4.40
$5.01 to $8.00 175,000 6.05 3.5 175,000 6.05
$8.01 to $11.00 140,500 9.13 6.6 140,500 9.13
$11.01 to $14.00 165,000 13.87 8.6 82,500 13.87
------- -------
Outstanding at end of year 586,330 8.69 5.1 503,830 7.84
====================================================================================================================
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 $291 thousand and $262
thousand as of December 31, 2002 and 2001, respectively.
40
(10) EMPLOYEE BENEFITS - (CONTINUED)
The Company has two supplemental executive retirement plans with one of its key
officers. At December 31, 2002 and 2001 the accrued liability was $1.0 million
and $897 thousand, respectively. Expense associated with the plans was $143
thousand, $139 thousand and $136 thousand for the years ended December 31, 2002,
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 prevailed on this matter in appellate court. 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 $2.3 million at December
31, 2002. 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.
This case was heard by the appellate court on December 11, 2002. A decision by
the court has not been rendered as of March 31, 2003.
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 Consolidated 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
2002 Rate Rate Total
- ------------------------------------------------------------------------------------------------------
(In Thousands)
Financial instruments with contract amounts represent credit risk:
Unused commitments to extend credit:
Residential mortgages $ 2,866 $ 1,311 $ 4,177
Home equity lines of credit 1,919 6,342 8,261
Personal lines of credit 223 - 223
Commercial real estate mortgage 3,199 9,748 12,947
Construction 345 11,296 11,641
Commercial loans 9,062 16,669 25,731
--------- -------- --------
Total unused commitments $ 17,614 $ 45,366 $ 62,980
=======================================================================================================
Letters of credit and standby letters of credit $ - $ 1,120 $ 1,120
=======================================================================================================
Forward commitments to sell mortgage loans $ 5,349 $ - $ 5,349
=======================================================================================================
41
(12) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK - (CONTINUED)
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
=======================================================================================================
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.
(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.
42
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
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.
The estimated fair values of the Bank's financial instruments at December 31,
follow:
2002 2001
--------------------- -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
- -------------------------------------------------------------------------------------------
(In Thousands)
Financial assets:
Cash and due from banks $ 7,136 $ 7,136 $ 7,457 $ 7,457
Short-term investments 9,633 9,633 5,705 5,705
Investment securities 166,409 169,405 173,768 176,652
Federal Home Loan Bank stock 5,950 5,950 5,950 5,950
Accrued interest receivable 2,459 2,459 2,604 2,604
Loans, net 238,960 240,311 232,327 238,512
Financial liabilities:
Deposits $ 279,465 $ 281,216 $ 268,450 $ 269,533
Borrowed funds 101,591 107,134 111,099 113,381
Mortgagors' escrow accounts 518 518 573 573
Accrued interest payable 431 431 498 498
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.
43
(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 Sheets 2002 2001
- ---------------------------------------------------------------------------------------------------------
(In Thousands)
Assets:
Cash deposits in subsidiaries $ 958 $ 248
Investment securities held to maturity at amortized cost 1,999 1,999
Investment in subsidiary, at equity 51,045 51,817
Other assets 61 $ 44
---------- -----------
Total assets $ 54,063 $ 54,108
========== ===========
Liabilities and Stockholders' Equity:
Liabilities:
Accrued income taxes $ (4) $ 11
Accrued expenses 8 5
---------- -----------
Total liabilities 4 16
---------- -----------
Total stockholders' equity 54,059 54,092
---------- -----------
Total liabilities and stockholders' equity $ 54,063 $ 54,108
========== ===========
Statements of Operations 2002 2001
- ---------------------------------------------------------------------------------------------------------
(In Thousands)
Dividends from bank subsidiary $ 4,547 $ 3,320
---------- -----------
Total operating income 4,547 3,320
Non-interest expenses 235 188
---------- -----------
Income before income taxes and undistributed earnings 4,312 3,132
Income tax benefit (50) (7)
---------- -----------
Income before undistributed earnings of subsidiary 4,362 3,139
Equity in undistributed earnings of subsidiary (1,262) 218
---------- -----------
Net income $ 3,100 $ 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.
Cash flows 2002
- -----------------------------------------------------------------------------------------------------------
(In Thousands)
Cash flows from operating activities: $ 3,100
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Increase in deferred income tax asset (43)
Net distributed earnings of subsidiaries 1,262
Decrease in other assets 26
Decrease in other liabilities (12)
Accretion of discounts (47)
-----------
Net cash provided by operating activities 4,286
-----------
Cash flows from investing activities:
Purchases of investment securities held to maturity (50,153)
Proceeds from maturities of investment securities held to maturity 50,200
-----------
Net cash provided by investing activities 47
-----------
Cash flows from financing activities:
Proceeds from exercise of stock options 33
Treasury stock purchased (1,736)
Dividends paid (1,920)
-----------
Net cash provided by financing activities (3,623)
-----------
Net increase in cash and cash equivalents 710
Cash and cash equivalents, beginning of year 248
-----------
Cash and cash equivalents, end of year $ 958
===========
Supplemental cash flow information:
Cash paid during the year for:
Income taxes $ 30
===========
Cash flows for the parent company are presented for the year ended 2002 only.
The parent company became the holding company for the Bank on July 1, 2001 and
thus the cash flows were immaterial for the year ended December 31, 2001.
44
(15) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
2002
----------------------------------------------------
March June September December
31 30 30 31
- ----------------------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
Interest and dividend income $ 6,421 $ 6,480 $ 6,158 $ 6,079
Interest expense 3,103 2,936 2,923 2,603
------- -------- -------- --------
Net interest income 3,318 3,544 3,235 3,476
Provision for loan losses - - - -
------- -------- -------- --------
Net interest income after provision for loan losses 3,318 3,544 3,235 3,476
Non-interest income 429 349 323 392
Non-interest expense 2,459 2,601 2,529 2,566
------- -------- -------- --------
Income before income tax 1,288 1,292 1,029 1,302
Income tax 472 473 334 532
------- -------- -------- --------
Net income $ 816 $ 819 $ 695 $ 770
===============================================================================================================
Basic earnings per share $ 0.19 $ 0.19 $ 0.16 $ 0.18
Diluted earnings per share $ 0.18 $ 0.18 $ 0.15 $ 0.17
===============================================================================================================
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
===============================================================================================================
45
STOCKHOLDERS' INFORMATION
The Company's stock trades on the Nasdaq Stock Market under the symbol "ALSBX@".
Sales prices of the stock are reported in the Wall Street Journal as
"ALSBCorp@". 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
- --------------------------------------------------
2002
First Quarter $ 13.20 $ 12.00
Second Quarter 14.02 12.26
Third Quarter 14.00 12.00
Fourth Quarter 13.51 11.00
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
The Company declared and paid a cash dividend of $0.44 per share ($0.11 in each
quarter) during 2002. The Company expects to pay dividends during 2003.
On December 31, 2002 there were approximately 1,063 holders of common stock.
This number does not reflect the number of persons or entities who hold their
stock in nominee or "Astreet@" 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 6, 2003 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 A. 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
P.O. Box 43010
Providence, RI 02940-3010
INDEPENDENT AUDITORS
KPMG LLP
99 High Street
Boston, MA 02110
LEGAL COUNSEL
Goulston & Storrs, P.C.
400 Atlantic Avenue
Boston, MA 02110-3333
46
DIRECTORS OF
LSB CORPORATION AND
LAWRENCE SAVINGS BANK
Eugene A. Beliveau, D.D.S. Neil H. Cullen
Dentist Chief Financial Officer
Phillips Academy
Kathleen Boshar Reynolds Richard Hart Harrington, CPA
Prudential/Howe and Doherty Chairman
Gordon, Harrington & Osborn,
P.C.
Malcolm W. Brawn Robert F. Hatem
Executive Vice President & Secretary Business Consultant
The Andover Companies
Thomas J. Burke Marsha A. McDonough
Chairman of the Board Regional Education Offices
Lawrence Savings Bank U.S. Department of State
Register of Deeds
Attorney
Byron R. Cleveland, Jr. Paul A. Miller
President President and
J. H. Horne & Sons Chief Executive Officer
Lawrence Savings Bank and
LSB Corporation
OFFICERS OF
LSB CORPORATION
Paul A. Miller Richard J. D'Ambrosio
President and Assistant Treasurer
Chief Executive Officer
John E. Sharland Timothy L. Felter
Senior Vice President, Treasurer and Assistant Treasurer and
Chief Financial Officer Investment Officer
Robert P. Perreault Jeffrey W. Leeds
Executive Vice President Assistant Treasurer
Barbara A. Biondo
Secretary
47
OFFICERS OF
LAWRENCE SAVINGS BANK
PAUL A. MILLER COMMERCIAL REAL ESTATE LENDING SHARON S. PRIVITERA
President and FREDERICK P. MALOOF Vice President and
Chief Executive Officer Vice President Branch Administrator/Security
Officer
ROBERT P. PERREAULT PAUL M. VALLACE GAYLE M. FILI
Executive Vice President Vice President Vice President and
Branch Manager
BARBARA A. BIONDO CREDIT POLICY AND ADMINISTRATION CHERYL A. PARENT
Clerk LEE D. DICKEY Vice President and
Senior Vice President Branch Manager
CARLA M. FRIEDRICH JOHN P. MALYNN MARIA FINA
Vice President and Vice President and Branch Manager
Human Resources Officer Collections Manager
ROBYN K. LeBUFF LINDA A. BAILEY SUSAN M. DANCAUSE
Vice President and Assistant Vice President and Assistant Vice President and
Marketing Officer Credit Administration Officer Retirement Services Officer
BRENDA MISKINIS CONSUMER LENDING LINDA BUELL
Assistant Vice President MAUREEN McCARTHY Branch Manager
Marketing Officer Vice President and
Compliance/CRA Officer
Lending Division RESIDENTIAL MORTGAGE LENDING PAUL M. FRANK
JEFFREY W. LEEDS JOHN P. TEOLI Branch Manager
Executive Vice President and Vice President
Chief Lending Officer
Commercial Banking SUSAN M. CAIN SUPPORT SERVICE DIVISION
JACOB KOJALO Assistant Vice President and RICHARD J. D'AMBROSIO
Senior Vice President and Senior Mortgage Underwriter Senior Vice President
Senior Lending Officer
ROBERT J. DeLUCA FINANCE DIVISION CARMELA CUTULI
Vice President JOHN E. SHARLAND Vice President and
Senior Vice President, Treasurer Loan Servicing Manager
and Chief Financial Officer
STEVEN K. VENTRE LINDA M. CHASE BORRELLI CHERYL A. VINING
Vice President Vice President and Controller Vice President and
Deposit Servicing Manager
SCOTT P. McDUFFEE PERSONAL BANKING DIVISION STANLEY R. WARD, JR.
Commercial Credit Officer TIMOTHY L. FELTER Assistant Vice President
Executive Vice President and
Investment Officer LAURA LaVOIE
Assistant Vice President
Senior Computer Network Engineer
48
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
REMOTE ATM LOCATION:
36 Knipe Road
Haverhill, MA 01835
www.LawrenceSavings.com
Member
FDIC
Member
DIF
v
This Annual Report is printed on recycled paper. LSBCM-AR-03