UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20529
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period ended June 30, 2003
[ ] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the transition period from ___ to ___
Commission File Number 000-32955
---------------------------
LSB CORPORATION
(Exact name of Registrant as specified in its Charter)
---------------------------
MASSACHUSETTS 04-3557612
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
30 MASSACHUSETTS AVENUE, NORTH ANDOVER, MA 01845
(Address of principal executive offices) (Zip Code)
---------------------------
(978) 725-7500
(Registrant's telephone number, including area code)
---------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ----
- --------------------------------------------------------------------------------
Indicate by a check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
- --------------------------------------------------------------------------------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding as of June 30, 2003
- ----- -------------------------------
Common Stock, par value $.10 per share 4,204,362 shares
LSB CORPORATION AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION
Page
-----
ITEM 1 FINANCIAL STATEMENTS:
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
Financial Condition:
Investment Portfolio 9-10
Loan Portfolio 10
Loan Interest Income 11
Allowance for Loan Losses 11
Risk Assets 11-12
Deposit Portfolio 12
Deposit Interest Expense 12
Results of Operations:
Three Months ended June 30, 2003 and 2002 13-14
Six Months ended June 30, 2003 and 2002 15-16
Liquidity and Capital Resources 17
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 18
ITEM 4 CONTROLS AND PROCEDURES 18
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 19
ITEM 2 CHANGES IN SECURITIES 19
ITEM 3 DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 5 OTHER INFORMATION 19
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
EXHIBIT INDEX 21
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2003 2002
---------- ----------
(In Thousands)
ASSETS
Assets:
Cash and due from banks $ 7,923 7,136
Federal funds sold 6,456 9,633
---------- ----------
Total cash and cash equivalents 14,379 16,769
Investment securities held to maturity (market value of
$123,403 in 2003 and $116,321 in 2002) 120,680 113,325
Investment securities available for sale (amortized cost of
$66,271 in 2003 and $52,055 in 2002) 67,279 53,084
Federal Home Loan Bank stock, at cost 5,950 5,950
Loans, net of allowance for loan losses 211,123 238,960
Bank premises and equipment 2,873 3,050
Accrued interest receivable 2,146 2,459
Deferred income tax asset 3,123 3,686
Other assets 1,438 1,851
---------- ----------
Total assets $ 428,991 $ 439,134
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Interest bearing deposits $ 267,041 $ 265,283
Non-interest bearing deposits 13,297 14,182
Federal Home Loan Bank advances 86,317 94,237
Securities Sold under Agreements to Repurchase 2,694 3,950
Other borrowed funds 2,111 3,404
Advance payments by borrowers for taxes and insurance 470 518
Other liabilities 3,685 3,501
---------- ----------
Total liabilities 375,615 385,075
---------- ----------
Stockholders' equity:
Preferred stock, $.10 par value per share:
5,000,000 shares authorized, none issued - -
Common stock, $.10 par value per share;
20,000,000 shares authorized;
4,423,662 and 4,389,705 shares issued at June 30, 2003 and December 31,
2002, respectively, and 4,204,362 and 4,253,205 shares
outstanding at June 30, 2003 and December 31, 2002 443 439
Additional paid-in capital 58,018 57,845
Accumulated deficit (2,992) (3,168)
Treasury stock, at cost (219,300 and 136,500 shares at June 30, 2003
and December 31, 2002, respectively) (2,758) (1,736)
Accumulated other comprehensive income 665 679
---------- ----------
Total stockholders' equity 53,376 54,059
---------- ----------
Total liabilities and stockholders' equity $ 428,991 $ 439,134
========== ==========
The accompanying notes are an integral part of
these unaudited Consolidated Financial Statements.
3
LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended June 30, Six months ended June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
(In Thousands, except share data)
Interest and dividend income:
Loans $ 3,740 $ 4,176 $ 7,688 $ 8,432
Investment securities held to maturity 1,048 1,728 2,177 3,382
Investment securities available for sale 463 500 956 915
Federal Home Loan Bank stock 44 56 95 111
Other interest and dividend income 19 20 60 61
----------- ----------- ----------- -----------
Total interest and dividend income 5,314 6,480 10,976 12,901
----------- ----------- ----------- -----------
Interest expense:
Deposits 1,096 1,483 2,246 3,077
Borrowed funds 1,181 1,390 2,384 2,801
Securities sold under agreements to repurchase 5 5 10 10
Other borrowed funds 34 58 75 151
----------- ----------- ----------- -----------
Total interest expense 2,316 2,936 4,715 6,039
----------- ----------- ----------- -----------
Net interest income 2,998 3,544 6,261 6,862
----------- ----------- ----------- -----------
Provision for loan losses -- -- -- --
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 2,998 3,544 6,261 6,862
----------- ----------- ----------- -----------
Non-interest income:
Loan servicing fees (50) 12 (180) 88
Deposit account fees 180 163 343 319
Gains on sales of mortgage loans 165 65 314 176
Other income 88 109 186 195
----------- ----------- ----------- -----------
Total non-interest income 383 349 663 778
----------- ----------- ----------- -----------
Non-interest expense:
Salaries and employee benefits 1,420 1,482 3,071 3,019
Occupancy and equipment expenses 202 214 422 413
Professional expenses 162 220 363 367
Data processing expenses 179 203 360 366
Other expenses 409 482 828 895
----------- ----------- ----------- -----------
Total non-interest expenses 2,372 2,601 5,044 5,060
----------- ----------- ----------- -----------
Income before income tax expense 1,009 1,292 1,880 2,580
Income tax expense 374 473 695 945
----------- ----------- ----------- -----------
Net income $ 635 $ 819 $ 1,185 $ 1,635
=========== =========== =========== ===========
Average shares outstanding 4,204,362 4,384,686 4,209,335 4,383,337
Average diluted shares outstanding 4,364,480 4,567,062 4,361,182 4,559,019
=========== =========== =========== ===========
Basic earnings per share $ 0.15 $ 0.19 $ 0.28 $ 0.37
Diluted earnings per share $ 0.15 $ 0.18 $ 0.27 $ 0.36
=========== =========== =========== ===========
The accompanying notes are an integral part of
these unaudited Consolidated Financial Statements.
4
LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
Accumulated
Additional Other Total
Common Paid-In (Accumulated Treasury Comprehensive Stockholders'
Stock Capital Deficit) Stock Income Equity
-----------------------------------------------------------------------------------------
(In Thousands)
Balance at December 31, 2001 $ 438 $ 57,813 $ (4,348) $ -- $ 189 $ 54,092
Net income -- -- 1,635 -- -- 1,635
Other comprehensive income:
Unrealized gain on securities
available for sale (tax effect $34) -- -- -- -- 66 66
--------
Total comprehensive income 1,701
Exercise of stock options 1 8 9
Dividends declared and paid
($0.22 per share) -- -- (964) -- -- (964)
-------- -------- -------- -------- -------- --------
Balance at June 30, 2002 $ 439 $ 57,821 $ (3,677) $ -- $ 255 $ 54,838
======== ======== ======== ======== ======== ========
Accumulated
Additional Other Total
Common Paid-In (Accumulated Treasury Comprehensive Stockholders'
Stock Capital Deficit) Stock Income Equity
-------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 439 $ 57,845 $ (3,168) $ (1,736) $ 679 $ 54,059
Net income -- -- 1,185 -- -- 1,185
Other comprehensive income:
Unrealized loss on securities
available for sale (tax effect $7) -- -- -- -- (14) (14)
--------
Total comprehensive income 1,171
Exercise of stock options 4 173 -- -- -- 177
Dividends declared and paid
($0.24 per share) -- -- (1,009) -- -- (1,009)
Purchase of 82,800 shares of Treasury
Stock, at cost -- -- -- (1,022) -- (1,022)
-------- -------- -------- -------- -------- --------
Balance at June 30, 2003 $ 443 $ 58,018 $ (2,992) $ (2,758) $ 665 $ 53,376
======== ======== ======== ======== ======== =========
The accompanying notes are an integral part of
these unaudited Consolidated Financial Statements.
5
LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended
June 30,
------------------------
2003 2002
---- ----
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,185 $ 1,635
Adjustments to reconcile net income to net cash provided by operating activities:
Gains on sales of mortgage loans (314) (176)
Net amortization of investment securities 1,005 437
Loss on sale of investment securities available for sale 14 --
Depreciation of premises and equipment 224 229
Loans originated for sale (17,043) (11,579)
Proceeds from sales of mortgage loans 15,968 13,466
Decrease (increase) in accrued interest receivable 313
(128)
Decrease in deferred income tax asset 570 871
Decrease (increase) in other assets 408
(11)
Decrease in advance payments by borrowers (48) (75)
Increase (decrease) in other liabilities 184 (635)
--------- ---------
Net cash provided by operating activities 2,466 4,034
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of mortgage backed securities available for sale 5,684 --
Proceeds from maturities of investment securities held to maturity 155,600 221,618
Proceeds from maturities of investment securities available for sale 7,000 3,993
Purchases of investment securities held to maturity (168,107) (231,885)
Purchases of mortgage-backed securities held to maturity (17,937) (2,967)
Purchases of investment securities available for sale (16,712) (18,092)
Purchase of mutual fund available for sale (1,000) --
Purchases of mortgage-backed securities available for sale (14,775) --
Principal payments of securities held to maturity 22,477 15,175
Principal payments of securities available for sale 5,180 6,710
Decrease (increase) in loans, net 29,226 (2,017)
Proceeds from payments on OREO 5 5
Purchases of Bank premises and equipment (47) (156)
--------- ---------
Net cash provided by (used in) investing activities 6,594 (7,616)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 873 9,759
Additions to Federal Home Loan Bank advances 6,000 --
Payments on Federal Home Loan Bank advances (7,920) (3,863)
Net decrease in agreements to repurchase securities (1,256) (2,354)
Net decrease in other borrowed funds (1,293) (450)
Treasury stock purchased (1,022) --
Dividends paid (1,009) (964)
Proceeds from exercise of stock options 177 9
--------- ---------
Net cash (used in) provided by financing activities (11,450) 8,137
- ------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (2,390) 4,555
Cash and cash equivalents, beginning of period 16,769 13,162
--------- ---------
Cash and cash equivalents, end of period $ 14,379 $ 17,717
===================================================================================================================================
Cash paid during the period for:
Interest on deposits $ 2,245 $ 3,067
Interest on borrowed funds 2,515 2,992
Income taxes 245 230
Supplemental Schedule of non-cash activities:
Net change in valuation of investment securities available for sale (21) 100
===================================================================================================================================
The accompanying notes are an integral part of
these unaudited Consolidated Financial Statements
6
LSB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
1. 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 ("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 income.
Actual results could differ significantly from those estimates and judgments.
Material estimates that are particularly susceptible to change relate to the
allowance for loan losses, income taxes and mortgage servicing rights.
The interim results of consolidated income are not necessarily indicative of the
results for any future interim period or for the entire year. These interim
Consolidated Financial Statements do not include all disclosures associated with
annual financial statements and, accordingly, should be read in conjunction with
the annual Consolidated Financial Statements and accompanying notes included in
the Company's Annual Report on Form 10-K as of and for the year ended December
31, 2002 filed with the Securities and Exchange Commission.
2. STOCK OPTIONS
The Corporation measures compensation cost for stock-based plans using the
intrinsic value method. The intrinsic value method measures compensation cost,
if any, as the fair market value of the Company's stock at the grant date over
the exercise price. All options granted have an exercise price equivalent to the
fair market value at the date of grant and, accordingly, no compensation cost
has been recorded. If the fair value based method of accounting for stock
options had been used, the Company's net income and earnings per share would
have been reduced to the proforma amounts for the three months and six months
ended June 30, and are presented in the table which follows:
Three months ended Six months ended
6/30/03 6/30/02 6/30/03 6/30/02
------- ------- ------- -------
(In Thousands, except share data)
Net income:
As Reported $ 635 $ 819 $ 1,185 $ 1,635
Pro forma 590 680 1,096 1,438
Basic earnings per share:
As Reported $ 0.15 $ 0.19 $ 0.28 $ 0.37
Pro forma 0.14 0.16 0.26 0.33
Diluted earnings per share:
As Reported $ 0.15 $ 0.18 $ 0.27 $ 0.36
Pro forma 0.14 0.15 0.25 0.32
7
3. CONTINGENCIES
The Bank is a defendant in litigation brought in Massachusetts Superior Court
related to transactions completed at a branch of the Bank. The claims against
the Bank approximate $200,000. While the case has not been fully adjudicated,
the Bank has filed for Summary Judgment. While the outcome of the litigation
is uncertain management does not believe that the resolution of the litigation
will have material impact upon the financial condition of the Bank. The Bank
has notified its insurance carrier in the event of a loss.
4. RECENT ACCOUNTING DEVELOPMENTS
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.
In April 2003, the FASB announced it will issue new rules requiring all
companies to expense the value of employee stock options. Companies will be
required to measure the cost according to the fair value of the options at the
grant date. The FASB has not yet clarified how the fair value of the options is
to be determined. The FASB plans to issue an exposure draft later this year that
could become effective in 2004.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The Company has made forward-looking statements (within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange
Act of 1934 as amended) in this document that are subject to risks and
uncertainties. Forward-looking statements include information concerning
possible or assumed future results of operations of the Company, projected or
anticipated benefits or events related to other future developments involving
the Company or the industry in which it operates. When verbs in the present
tense such as "believes", "expects", "seeks", "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 Company and could
cause the results to differ materially from those expressed in or incorporated
by reference in this document. Those factors include fluctuations in interest
rates, inflation, government regulations and economic conditions and
competition, as well as, possible infrastructure disruptions due to weather,
terrorist activity, computer capacity overload or other factors in the
geographic and business areas in which the Company conducts its operations. As a
result of such risks and uncertainties, the Company's actual results may differ
materially from such forward-looking statements. The Company does not undertake,
and specifically disclaims any obligation to publicly release revisions to any
such forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
FINANCIAL CONDITION
OVERVIEW
The Company has maintained risk assets below 1% of total assets for the past
several years. The Company maintains its commitment to servicing the needs of
the local community in the Merrimack Valley area. The Company had total assets
of $429.0 million at June 30, 2003 compared to $439.1 million at December 31,
2002. The decrease in asset size at June 30, 2003 from December 31, 2002 is due
to the pay down of $10.5 million in borrowed funds as advances from the FHLB
became due. The cash used came from the payoff of loans which declined by $27.8
million and the reduction of $3.2 million in Federal Funds. The additional cash
was used to purchase investment securities which increased by $21.6 million
since December 31, 2002.
INVESTMENTS
The investment securities portfolio totaled $188.0 million or 43.8% of total
assets at June 30, 2003, compared to $166.4 million, or 37.9% of total assets at
December 31, 2002, an increase of $21.6 million from year-end. The change in mix
in the investment securities portfolio was the result of maturities in
Commercial Paper and Corporate obligations. Funds were reinvested in
Mortgage-backed Securities ("MBS"), U.S. Treasury Obligations and Collateralized
Mortgage obligations ("CMO"). All CMO's are included in the Asset-backed
Securities category. The increase in investment securities was the result of the
utilization of excess funds from loan payoffs, which decreased the loan
portfolio by $27.8 million, and a decrease in Federal funds of $3.2 million.
During the second quarter of 2003, sales of mortgage-backed securities available
for sale totaled $5.7 million resulting in a loss of $14 thousand, which is
included in other income.
9
The following table reflects the components and carrying values of the
investment securities portfolio at June 30, 2003 and December 31, 2002:
6/30/03 12/31/02
------- --------
(In Thousands)
Investment securities held to maturity (at amortized cost):
US Treasury obligations $ - $ 6,002
US Government Agency obligations 32,544 26,243
Mortgage-backed securities 25,331 13,440
Asset-backed securities 46,538 32,551
Corporate obligations 13,267 33,068
Municipal obligations 3,000 2,021
---------- ----------
Total investment securities held to maturity $ 120,680 $ 113,325
========== ==========
Investment securities available for sale (at market value):
US Treasury obligations $ 5,153 $ -
US Government Agency obligations 26,842 31,820
Mortgage-backed securities 9,584 2,850
Asset-backed securities 18,141 12,079
Corporate obligations 6,387 4,167
Municipal obligations - 2,000
Mutual Funds 1,004 -
Equity securities 168 168
---------- ----------
Total investment securities available for sale $ 67,279 $ 53,084
========== ==========
Total investment securities portfolio $ 187,959 $ 166,409
========== ==========
LOANS
The following table reflects the loan portfolio at June 30, 2003 and December
31, 2002:
6/30/03 12/31/02
--------- ----------
(In Thousands)
Residential mortgage loans $ 52,442 $ 60,140
Loans held for sale 3,968 2,579
Equity loans 9,650 11,490
Construction loans 16,923 23,502
Commercial real estate loans 109,149 112,745
Commercial loans 22,692 32,017
Consumer loans 475 654
--------- ---------
Total loans 215,299 243,127
Allowance for loan losses (4,176) (4,167)
--------- ---------
Total loans, net $ 211,123 $ 238,960
========= =========
Total loans decreased to $215.3 million or 50.2% of total assets at June 30,
2003 from $243.1 million or 55.4% of total assets at December 31, 2002. The
residential mortgage loan balances have declined due to the current low interest
rate environment in which mortgage borrowers are refinancing existing mortgages
and sales into the secondary market. Construction, commercial real estate and
commercial loans have declined due to payoffs.
10
The following table lists the components of loan interest income for the three
months and six months ended June 30, 2003 and 2002: Three months ended Six
months ended
6/30/03 6/30/02 6/30/03 6/30/02
------- ------- ------- -------
(In Thousands) (In Thousands)
Residential mortgage loans $ 855 $ 1,295 $ 1,796 $ 2,612
Loans held for sale 57 23 84 70
Equity loans 137 211 297 423
Construction loans 296 272 635 592
Commercial real estate loans 2,003 2,057 4,071 4,103
Commercial loans 382 300 783 595
Consumer loans 10 18 22 37
-------- -------- --------- ---------
Total loan interest income $ 3,740 $ 4,176 $ 7,688 $ 8,432
======== ======== ========= =========
ALLOWANCE FOR LOAN LOSSES
The following table summarizes changes in the allowance for loan losses for the
three months and six months ended June 30, 2003 and 2002:
Three months ended Six months ended
6/30/03 6/30/02 6/30/03 6/30/02
------- ------- ------- -------
(In Thousands) (In Thousands)
Beginning balance $ 4,170 $ 4,071 $ 4,167 $ 4,070
Provision charged to operations - - - -
Recoveries on loans previously 6 4 9 5
charged-off
Loans charged-off - (1) - (1)
-------- -------- --------- ---------
Ending balance $ 4,176 $ 4,074 $ 4,176 $ 4,074
======== ======== ========= =========
The balance of the allowance for loan losses reflects management's assessment of
losses and is based on a review of the risk characteristics of the loan
portfolio. The Company considers many factors in determining the adequacy of the
allowance for loan losses. Collateral value on a loan by loan basis, trends of
loan delinquencies on a portfolio segment level, risk classification identified
in the Company's regular review of individual loans, and economic conditions are
primary factors in establishing allowance levels. Management believes the
allowance level is adequate to absorb estimated credit losses associated with
the loan and lease portfolio, including all binding commitments to lend and
off-balance sheet credit instruments. The allowance for loan losses reflects
information available to management at the end of each period.
RISK ASSETS
Risk assets consist of non-performing loans and other real estate owned.
Non-performing loans consist of both a) loans 90 days or more past due, and b)
loans placed on non-accrual because full collection of the principal balance is
in doubt. Other real estate owned (OREO) is comprised of foreclosed properties
where the Company has formally received title or has possession of the
collateral. Properties are carried at the lower of the investment in the related
loan or the estimated fair value of the property or collateral less selling
costs. Fair value of such property or collateral is determined based upon
independent appraisals and other relevant factors. Management periodically
reviews property values and makes adjustments as required. Gains from sales of
properties, net operating expenses and any subsequent provisions to increase the
allowance for losses on real estate acquired by foreclosure are charged to other
real estate owned expenses. Losses are charged to the allowance.
Total risk assets were $30 thousand at June 30, 2003. This represents an
increase of $17 thousand from December 31, 2002 and an increase of $3 thousand
from June 30, 2002. These changes were primarily attributable to an increase in
non-performing loans to $23 thousand at June 30, 2003 from $1 thousand at
December 31, 2002 and $10 thousand at June 30, 2002. The Company had no impaired
loans at June 30, 2003, December 31, 2002 and June 30, 2002, respectively.
11
The following table summarizes the Company's risk assets at June 30, 2003,
December 31, 2002 and June 30, 2002:
6/30/03 12/31/02 6/30/02
------- -------- -------
(Dollars in Thousands)
Non-performing loans $23 $ 1 $10
Other real estate owned 7 12 17
--- --- ---
Total risk assets $30 $13 $27
=== === ===
Risk assets as a percent of total assets 0.01% 0.00% 0.01%
=== === ===
The following table shows the allowance for loan losses as a percent of total
loans at June 30, 2003, December 31, 2002 and June 30, 2002:
6/30/03 12/31/02 6/30/02
------- -------- --------
(Dollars in Thousands)
Allowance for loan losses $ 4,176 $ 4,167 $ 4,074
Allowance for loan losses as a percent of total loans 1.94% 1.71% 1.72%
The allowance for loan losses has remained fairly consistent at $4.2 million at
the end of June 30, 2003 and December 31, 2002. However, allowance for loan
losses as a percent of total loans has increased to 1.94% up from 1.71%. This
increase is due to the lower balances in the loan portfolio at June 30, 2003
compared to December 31, 2002.
DEPOSITS
Total interest bearing deposits amounted to $267.0 million at June 30, 2003
compared to $265.3 million at December 31, 2002, an increase of $1.8 million.
Included in the certificates of deposit at June 30, 2003 were brokered deposits
of $2.0 million. The change from December 31, 2002 is due to an increase in
money market investment accounts partially offset by a decrease in certificates
of deposit accounts. Although the total balance of interest bearing deposits
remained fairly level, the mix of deposits has changed from higher interest
bearing accounts to lower interest bearing accounts.
The following table reflects the components of interest bearing deposits at June
30, 2003 and December 31, 2002:
6/30/03 12/31/02
------- --------
(In Thousands)
NOW and Super NOW accounts $36,129 $ 35,568
Savings accounts 44,730 44,839
Money market investment accounts 69,201 64,653
Certificates of deposit 88,597 92,241
Retirement accounts 28,384 27,982
---------- ----------
Total interest bearing deposits $ 267,041 $ 265,283
========== ==========
The following table lists the components of deposit interest expense for the
three months and six months ended June 30, 2003 and 2002:
Three months ended Six months ended
06/30/03 06/30/02 6/30/03 6/30/02
-------- -------- ---------- ----------
(In Thousands) (In Thousands)
NOW and Super NOW accounts $ 10 $ 22 $ 20 $ 44
Savings deposit accounts 56 112 113 219
Money market investment accounts 229 277 467 527
Certificates of deposit 560 793 1,154 1,709
Retirement accounts 241 279 492 578
---------- ----------- ---------- ---------
Total deposit interest expense $ 1,096 $ 1,483 $ 2,246 $ 3,077
========== =========== ========== ==========
12
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 AND 2002
OVERVIEW
The Company reported net income of $635 thousand or $0.15 diluted earnings per
share and $819 thousand or $0.18 diluted earnings per share for the three months
ended June 30, 2003 and 2002, respectively. The decrease in net income is
primarily attributable to a decrease in net interest income of $546 thousand.
Partially offsetting this decline were an increase of $34 thousand in
non-interest income and non-interest expenses declining by $229 thousand.
NET INTEREST INCOME FROM OPERATIONS
Net interest income for the three months ended June 30, 2003 and 2002 was $3.0
million and $3.5 million, respectively. The net interest rate spread decreased
to 2.51% for the quarter ended June 30, 2003 from 2.92% for the same quarter of
2002. Interest income in the second quarter of 2003 experienced an overall
decrease due to a declining interest rate environment on interest earning assets
and lower average loan balances outstanding from the second quarter of 2002.
Interest expense incurred a similar decline in interest rates resulting in lower
rates paid on deposits and borrowed funds; however, the rates paid on borrowed
funds have declined at a slower pace than rates paid on deposits.
The following table presents the components of net interest income and net
interest rate spread:
Income/Expense Yield/Rate
---------------------- -------------------------
Three Months Ended
-------------------------------------------------------------
6/30/03 6/30/02 6/30/03 6/30/02
------- ------- ------- -------
(Dollars in Thousands)
Interest income and average yield:
Loans $3,740 $4,176 6.66% 7.26%
Investments, mortgage-backed securities
and other earning assets 1,574 2,304 3.24 4.79
------ ------
Total 5,314 6,480 5.07 6.13
------ ------ ---- ----
Interest expense and average rate paid:
Deposits 1,096 1,483 1.65 2.28
Federal Home Loan Bank advances 1,181 1,390 5.19 5.59
Securities sold under agreements to
repurchase and other borrowed funds 39 63 3.16 3.70
------ ------
Total 2,316 2,936 2.56 3.21
------ ------ ---- ----
Net interest income $2,998 $3,544
====== ======
Net interest rate spread 2.51% 2.92%
==== ====
Net interest margin 2.86% 3.35%
==== ====
INTEREST INCOME
Interest income for the second quarter of 2003 was $5.3 million as compared to
$6.5 million for the same quarter of 2002. The decrease of $1.2 million in
interest income is due to $1.1 million from lower yields earned on loans and
investment securities. The decrease in interest income due to lower yields was
coupled with lower average loan balances, which decreased interest income by $92
thousand. Partially offsetting these declines were higher average investment
securities balances which increased interest income by $16 thousand.
Yields on loans were 6.66% and 7.26% for the quarters ended June 30, 2003 and
2002, respectively. The impact to interest income due to lower yields was $344
thousand. Lower average loan balances of $225.3 million versus $230.8 million
for the quarters ended June 30, 2003 and 2002, respectively, decreased interest
income by $92 thousand.
Yields on investment securities were 3.24% and 4.79% for the quarters ended June
30, 2003 and 2002, respectively, decreasing interest income by $746 thousand.
Higher average investment securities balances of $195.1 million versus $193.1
million for the same periods increased interest income by $16 thousand.
13
INTEREST EXPENSE
Interest expense for the second quarter of 2003 totaled $2.3 million, a decrease
of $620 thousand from the same quarter of 2002. This decrease is primarily due
to lower rates paid on interest bearing liabilities, which impacted interest
expense by $521 thousand. Lower average balances in borrowed funds resulted in a
$125 thousand decrease to interest expense; while higher average balances in
deposits contributed $26 thousand to interest expense.
Rates on deposits were 1.65% and 2.28% for the quarters ended June 30, 2003 and
2002, respectively. This decrease resulted in interest expense decreasing by
$413 thousand. Average deposit balances were $267.1 million versus $260.8
million for the same periods, which resulted in a $26 thousand increase to
interest expense.
Rates on FHLB advances were 5.19% and 5.59% for the second quarters of 2003 and
2002, respectively. The decrease in rates paid on FHLB advances resulted in
interest expense decreasing by $99 thousand. The average balances of FHLB
advances decreased from quarter to quarter to $91.3 million in the second
quarter 2003 from $99.8 million for the second quarter of 2002, which resulted
in a decrease in interest expense of $110 thousand.
Rates on repurchase agreements and other borrowed funds were 3.16% and 3.70% for
the second quarters of 2003 and 2002, respectively. The decrease in rates paid
on these interest bearing liabilities resulted in interest expense decreasing by
$9 thousand. The average balance decreased to $4.9 million in 2003 from $6.8
million in 2002, which decreased interest expense by $15 thousand.
PROVISION FOR LOAN LOSSES
The provision for loan losses was zero for the quarters ended June 30, 2003 and
2002, respectively. The absence of a provision for loan losses was based on
management's assessment of the adequacy of the allowance based on an evaluation
of the Bank's loan portfolio.
NON-INTEREST INCOME
Non-interest income amounted to $383 thousand and $349 thousand for the quarters
ended June 30, 2003 and 2002, respectively. The increase in non-interest income
was primarily due to gains on the sale of mortgage loans of $165 thousand in the
second quarter of 2003 up from $65 thousand in 2002 and an increase of $17
thousand in deposit account fees. Partially offsetting these increases was a
decrease in loan fees to a loss of $50 thousand in 2003 compared to income of
$12 thousand in 2002. The loss in loan fees can be attributed to provisions for
losses on mortgage servicing rights ("MSR's") of $72 thousand in the second
quarter of 2003 due to higher than normal prepayment speeds used in the fair
value calculation of MSR's caused by the current low interest rate environment
on mortgage loans. Other income also declined $21 thousand from June 30, 2002 to
2003, which includes a loss on sale of a mortgage-backed security available for
sale in the amount of $14 thousand.
NON-INTEREST EXPENSE
Non-interest expense totaled $2.4 million and $2.6 million for the quarters
ended June 30, 2003 and 2002, respectively. Salaries and employee benefits
decreased by $62 thousand in the second quarter 2003 compared to the second
quarter in 2002 mainly due to several salary reduction initiatives instituted
during the second quarter of 2003 as a result of the net interest margin
declining to 2.86%. Occupancy and equipment expenses totaled $202 thousand in
2003, a decrease of $12 thousand over 2002 due to fewer office space vacancies
and lower building maintenance and repairs expenses. Professional expenses
decreased to $162 thousand in the second quarter 2003 compared to $220 thousand
in the same period in 2002. The decrease was due to decreased legal expenses.
Data processing expenses decreased to $179 thousand in the second quarter of
2003 compared to $203 thousand in the same quarter in 2002. Other expenses
declined to $409 thousand in 2003 from $482 thousand in 2002 due primarily to a
reduction in marketing expenses of $55 thousand.
INCOME TAXES
The Company reported an income tax expense of $374 thousand for the quarter
ended June 30, 2003 or an effective income tax rate of 37.1%. This compares to
an income tax expense of $473 thousand for the quarter ended June 30, 2002 or
effective income tax expense of 36.6%.
14
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Overview
The Bank reported net income of $1.2 million or $0.27 diluted earnings per share
and $1.6 million or $0.36 diluted earnings per share for the six months ended
June 30, 2003 and 2002, respectively. During the first six months of 2003, net
interest income declined to $6.3 million in 2003 down from $6.9 million in 2002.
Non-interest income decreased to $663 thousand in 2003 down from $778 thousand
in 2002. Non-interest expenses remained fairly consistent for the first six
months of 2003 totaling $5.0 million compared to $5.1 million for the same
period in 2002.
Net Interest Income From Operations
Net interest income for the six months ended June 30, 2003 and 2002 was $6.3
million and $6.9 million, respectively. The net interest rate spread decreased
to 2.65% from 2.83%. The yield on interest bearing assets decreased more rapidly
than the rates paid on interest bearing liabilities. The following table
presents the components of net interest income and net interest spread:
Income/Expense Yield/Rate
---------------------------- -------------------------------
Six Months Ended
----------------------------------------------------------------
6/30/03 6/30/02 6/30/03 6/30/02
------- ------- ------- -------
(In Thousands)
Interest income and average yield:
Loans $ 7,688 $ 8,432 6.74% 7.34%
Investments, mortgage-backed
securities and other earning assets 3,288 4,469 3.48 4.71
---------- --------
Total 10,976 12,901 5.26 6.15
---------- -------- ---- ----
Interest expense and average rate paid:
Deposits 2,246 3,077 1.70 2.40
Federal Home Loan Bank advances 2,384 2,801 5.19 5.59
Securities sold under agreements to
repurchase and other borrowed funds 85 161 3.27 4.21
--------- -------
Total 4,715 6,039 2.61 3.32
--------- ------- ---- ----
Net interest income $ 6,261 $ 6,862
========= =======
Net interest rate spread 2.65% 2.83%
==== =====
Net interest margin 3.00% 3.27%
==== =====
INTEREST INCOME
Interest income for the first six months of 2003 was $11.0 million as compared
to $12.9 million for the same period of 2002. The decrease in interest income of
$1.9 million is due to lower yields on loans and investment securities, which
decreased interest income by $1.9 million. Lower average loan and investment
securities balances decreased interest income by $72 thousand.
Yields on loans were 6.74% and 7.34% for the six months ended June 30, 2003 and
2002, respectively. The impact on interest income due to lower yields was $684
thousand. Lower average loan balances of $229.9 million in 2003 versus $231.7
million in 2002 resulted in interest income decreasing by $60 thousand.
Yields on investment securities decreased to 3.48% for the six months ended June
30, 2003. This compares to yields on investment securities of 4.71% for the same
period in 2002. This resulted in interest income declining by $1.2 million.
Lower average investment securities balances of $190.6 million in 2003 versus
$191.3 million in 2002 resulted in interest income decreasing by $12 thousand.
15
INTEREST EXPENSE
Interest expense for the first six months of 2003 and 2002 was $4.7 million and
$6.0 million, respectively. The decrease of $1.3 million in interest expense is
primarily due to lower rates paid on deposits and other interest bearing
liabilities, which decreased interest expense by $1.1 million. Interest expense
decreased $258 thousand due to lower average borrowed funds balances.
Rates on deposits were 1.70% and 2.40% for the first six months of 2003 and 2002
respectively. This decrease resulted in interest expense decreasing by $894
thousand. Average deposit balances were $265.9 million in 2003 up from $258.5
million in 2002, which resulted in interest expense rising by $63 thousand.
Rates on FHLB advances were 5.19% and 5.59% resulting in interest expense
decreasing by $200 thousand in 2003 from 2002. The average balances for these
interest bearing liabilities decreased to $92.6 million in 2003 from $101.1
million in 2002, which decreased interest expense by $218 thousand.
Rates on repurchase agreements and other borrower funds were 3.27% and 4.21% for
the first six months of 2003 and 2002, respectively. This decrease resulted in a
decrease of $35 thousand in interest expense. The average balances of repurchase
agreements and other borrowed funds decreased to $5.2 million in 2003's first
half compared to $7.7 million for 2002's first half, resulting in a decrease of
$40 thousand in interest expense.
PROVISION FOR LOAN LOSSES
The provision for loan losses was zero for the six months ended June 30, 2003
and 2002, respectively. The absence of a provision for loan losses was due to
the overall asset quality of the Company as of June 30, 2003 and 2002.
NON-INTEREST INCOME
Non-interest income amounted to $663 thousand and $778 thousand for the six
months ended June 30, 2003 and 2002, respectively. The decrease of $115 thousand
in non-interest income primarily resulted from a decrease in loan fees to a loss
of $180 thousand in 2003 from income of $88 thousand in 2002. The loss in loan
fees can be attributed to provisions for losses on mortgage servicing rights
(MSR's) due to higher prepayment speeds used in fair value calculation of MSR's
caused by the current low interest rate environment on mortgage loans. Also
contributing to the decrease was a decline in other income of $9 thousand
primarily attributable to a loss on sale of a mortgage-backed security of $14
thousand. Partially offsetting these decreases were gains on the sale of
mortgage loans totaling $314 thousand versus $176 thousand in the first six
months of 2003 and 2002, respectively, and deposit account fees which increased
to $343 thousand in the first six months of 2003 from $319 thousand for the same
period in the prior year, resulting from a rise in NOW account fees.
NON-INTEREST EXPENSE
Non-interest expense remained consistent and totaled $5.0 million and $5.1
million for the six months ended June 30, 2003 and 2002, respectively. The
decrease in non-interest expense is attributable to a decrease of $67 thousand
in other expenses resulting mainly from a reduction in marketing expenses of $56
thousand. Salaries and employee benefits increased to $3.1 million in 2003 up by
$52 thousand over the same period in 2002. Occupancy and equipment expenses have
risen to $422 thousand for the first six months in 2003 from $413 thousand in
2002 due to increased building maintenance and repairs expenses due to snow
plowing related to first quarter 2003 offset by lower vacancies of office space.
Professional expense decreased slightly to $363 thousand for the six months
ended of 2003 from $367 thousand over the same period in 2002 as the Bank's
legal expenses relating to collection efforts have decreased slightly. Data
processing expense decreased to $360 thousand from $366 thousand resulting from
a slight decrease in service bureau charges.
INCOME TAXES
The Bank reported an income tax expense of $695 thousand and $945 thousand for
the six months ended June 30, 2003 and 2002, respectively, representing an
effective tax rate of 37.0% and 36.6%, respectively.
16
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of funds is cash dividends from its wholly-owned
subsidiary, Lawrence Savings Bank (the "Bank"). The Bank paid dividends to the
Company in the amount of $500 thousand and $2.5 million during the first half of
2003 and 2002, respectively. The Company made payments of dividends to
shareholders in the amount of $1.0 million and $964 thousand in the first six
months of 2003 and 2002, respectively.
The Bank's primary sources of funds include collections of principal payments
and repayments on outstanding loans, increases in deposits, advances from the
Federal Home Loan Bank of Boston (FHLB) and securities sold under agreements to
repurchase. The Bank has a line of credit of $6.8 million with the FHLB. The
Bank also has a $5 million unsecured Federal Funds line of credit.
At June 30, 2003, the Company's stockholder's equity was $53.4 million as
compared to $54.1 million at December 31, 2002. The change during the first six
months of 2003 occurred due to net income of $1.2 million, a $14 thousand
decrease in market values on securities available for sale, net of taxes and was
reduced by the declaration of dividends of $1.0 million and stock repurchases
totaling $1.0 million. The Company's leverage ratio at June 30, 2003 and
December 31, 2002 was 12.18% and 12.10%, respectively. The Company's and the
Bank's total risk based capital ratios were 20.19% and 19.72% at June 30, 2003,
respectively, compared with 17.74% and 16.93% at December 31, 2002,
respectively. The Company exceeds all regulatory minimum capital ratio
requirements set forth by the FRB, and the Bank exceeds all minimum capital
ratio requirements as defined by the FDIC.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The response is incorporated herein by reference to the discussion
under the sub-caption "Interest Rate Sensitivity" of the caption "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" on
pages 18 and 19 of the LSB Corporation's Annual Report for the fiscal year ended
December 31, 2002.
ITEM 4: CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer,
after evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e)
and 15-d-15(e)) as of the date of this report, have concluded that the Company's
disclosure controls and procedures were adequate and designed to ensure that
material information relating to the Company and its subsidiaries would be made
known to them by others within those entities.
There were no significant changes in the Company's internal controls or, to the
Company's knowledge, in other factors that could significantly affect the
Company's disclosure controls and procedures during the last fiscal quarter that
have materially affected, or are reasonable likely to materially affect the
internal controls over financial reporting.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The response is incorporated herein by reference to the discussion
under the caption "CONTINGENCIES" on page 41 of the LSB Corporation's Annual
Report for the fiscal year ended December 31, 2002.
The Bank is a defendant in litigation brought in Massachusetts Superior
Court related to transactions completed at a branch of the Bank. The claims
against the Bank approximate $200,000. While the case has been fully
adjudicated, the Bank has filed for Summary Judgment. While the outcome of the
litigation is uncertain management does not believe that the resolution of the
litigation will have a material impact upon the financial condition of the
Bank. The Bank has notified its insurance carrier in the event of a loss.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 6, 2003, LSB Corporation (the "Company") held its annual meeting (the
"Annual Meeting").
The stockholders elected each of the following three individuals as Class A
directors of the Company to serve until the 2006 Annual Meeting, with the
following votes cast:
Broker non-votes
Nominees For Withheld and Abstentions
- -------- --- -------- ---------------
Thomas J. Burke 3,375,913 265,937 0
Marsha A. McDonough 3,375,713 266,137 0
Kathleen Boshar Reynolds 3,375,713 266,137 0
The following directors of the Company continued as directors after the Annual
Meeting: Eugene A. Beliveau, Malcolm W. Brawn, Byron R. Cleveland, Jr., Neil H.
Cullen, Richard Hart Harrington, Robert F. Hatem and Paul A. Miller
Finally, the stockholders ratified the appointment of KPMG LLP ("KPMG") as the
Company's independent auditors for the fiscal year ending December 31, 2003.
KPMG received 3,569,240 affirmative votes, 68,410 negative votes, and 4,200
abstentions.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits.
Please see the Exhibit Index attached hereto.
b. Reports on Form 8-K.
The following is a list of Form 8-K's that have been filed by
LSB Corporation with the Securities and Exchange Commission
during the quarter ended June 30, 2003:
Date Filed Items reported
---------- ----------------------------------------------------
April 21, 2003 LSB Corporation's press release announcing the
Company's Earnings for the quarter ended March 31,
2003.
April 25, 2003 LSB Corporation's press release announcing the
Company's Dividend to shareholders' for the second
quarter 2003.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LSB CORPORATION AND SUBSIDIARY
August 14, 2003 /S/ Paul A. Miller
-------------------------------------
Paul A. Miller
President and
Chief Executive Officer
August 14, 2003 /S/ John E. Sharland
------------------------------------
John E. Sharland
Senior Vice President
Chief Financial Officer
20
LSB CORPORATION AND SUBSIDIARY
Quarterly Report on Form 10-Q For Quarter Ended June 30, 2003
EXHIBIT INDEX
Page
----
31.1 Certification of Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002 22
31.2 Certification of Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002 23
32.1 Certification Pursuant to 18 U.S.C. Section 1350, adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 24
32.2 Certification Pursuant to 18 U.S.C. Section 1350, adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 25
21