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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, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of The
Securities Exchange Act of 1934
For the transition period from ___ to ___
Commission File Number 000-32955
---------------------------
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)
---------------------------
Indicated 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 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, 2002
- ----- -------------------------------
Common Stock, par value $.10 per share 4,386,005 shares
LSB CORPORATION AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
PAGE
----
ITEM 1 FINANCIAL STATEMENTS:
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
FINANCIAL CONDITION:
Investment Portfolio 8
Loan Portfolio 9
Loan Interest Income 9
Allowance for Loan Losses 9
Risk Assets 10
Deposit Portfolio 11
Deposit Interest Expense 11
Liquidity and Capital Resources 11
RESULTS OF OPERATIONS:
Three Months ended June 30, 2002 and 2001 11-13
Six Months ended June 30, 2002 and 2001 13-15
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 16
ITEM 2 CHANGES IN SECURITIES 16
ITEM 3 DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5 OTHER INFORMATION 16
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
EXHIBIT INDEX
-2-
PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LSB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, December 31,
2002 2001
--------- ------------
(In Thousands)
ASSETS
Assets:
Cash and due from banks $ 9,594 $ 7,457
Federal funds sold 8,123 5,705
--------- ---------
Total cash and cash equivalents 17,717 13,162
Investment securities held to maturity (market value of
$135,613 in 2002 and $137,886 in 2001) 132,863 135,002
Investment securities available for sale (amortized cost of
$45,630 in 2002 and $38,480 in 2001) 46,016 38,766
Federal Home Loan Bank stock, at cost 5,950 5,950
Loans, net of allowance for loan losses 232,633 232,327
Bank premises and equipment 3,094 3,167
Accrued interest receivable 2,732 2,604
Other real estate owned 17 22
Deferred income tax asset 4,832 5,737
Other assets 1,541 1,530
--------- ---------
Total assets $ 447,395 $ 438,267
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Interest bearing deposits $ 263,961 $ 255,046
Non-interest bearing deposits 14,248 13,404
Federal Home Loan Bank advances 105,129 102,992
Securities sold under agreements to repurchase 1,866 4,220
Other borrowed funds 3,437 3,887
Advance payments by borrowers for taxes and insurance 498 573
Other liabilities 3,418 4,053
--------- ---------
Total liabilities 392,557 384,175
--------- ---------
Stockholders' equity:
Preferred stock, $.10 par value per share:
5,000,000 shares authorized, none issued -- --
Common stock, $.10 par value per share;
20,000,000 shares authorized;
4,386,005 and 4,379,550 shares issued and outstanding
at June 30, 2002 and December 31, 2001, respectively 439 438
Additional paid-in capital 57,821 57,813
Accumulated deficit (3,677) (4,348)
Accumulated other comprehensive income 255 189
--------- ---------
Total stockholders' equity 54,838 54,092
--------- ---------
Total liabilities and stockholders' equity $ 447,395 $ 438,267
========= =========
The accompanying note is an integral part of
these unaudited financial statements.
-3-
LSB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In Thousands, except share data)
Interest and dividend income:
Loans $ 4,176 $ 4,552 $ 8,432 $ 9,080
Investment securities held to maturity 1,728 2,141 3,382 4,183
Investment securities available for sale 500 408 915 847
Federal Home Loan Bank stock 56 93 111 199
Other interest and dividend income 20 88 61 371
---------- ---------- ---------- ----------
Total interest and dividend income 6,480 7,282 12,901 14,680
---------- ---------- ---------- ----------
Interest expense:
Deposits 1,483 2,716 3,077 5,482
Borrowed funds 1,390 1,194 2,801 2,535
Other borrowed funds 63 97 161 186
---------- ---------- ---------- ----------
Total interest expense 2,936 4,007 6,039 8,203
---------- ---------- ---------- ----------
Net interest income 3,544 3,275 6,862 6,477
---------- ---------- ---------- ----------
Provision for loan losses -- 50 -- 50
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 3,544 3,225 6,862 6,427
---------- ---------- ---------- ----------
Non-interest income:
Loan servicing fees 12 28 88 86
Deposit account fees 163 141 319 273
Gains on sales of mortgage loans 65 34 176 38
Other income 109 95 195 182
---------- ---------- ---------- ----------
Total non-interest income 349 298 778 579
---------- ---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits 1,482 1,306 3,019 2,601
Occupancy and equipment expenses 214 209 413 423
Professional expenses 220 143 367 310
Data processing expenses 203 178 366 336
Other expenses 482 467 895 841
---------- ---------- ---------- ----------
Total non-interest expenses 2,601 2,303 5,060 4,511
---------- ---------- ---------- ----------
Income before income tax expense 1,292 1,220 2,580 2,495
Income tax expense 473 430 945 914
---------- ---------- ---------- ----------
Net income $ 819 $ 790 $ 1,635 $ 1,581
====================================================================================================================================
Average shares outstanding 4,384,686 4,371,500 4,383,337 4,370,529
Average diluted shares outstanding 4,567,062 4,532,275 4,559,019 4,524,479
====================================================================================================================================
Basic earnings per share $ 0.19 $ 0.18 $ 0.37 $ 0.36
Diluted earnings per share $ 0.18 $ 0.17 $ 0.36 $ 0.35
====================================================================================================================================
The accompanying note is an integral part of
these unaudited financial statements.
-4-
LSB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN (ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL DEFICIT) INCOME EQUITY
---------------------------------------------------------------------------
(In Thousands)
Balance at December 31, 2000 $ 436 $ 57,711 $ (5,956) $ 122 $ 52,313
Net income -- -- 1,581 -- 1,581
Other comprehensive income:
Unrealized gain on securities
available for sale (tax effect $67) -- -- -- 136 136
--------
Total comprehensive income 1,717
Exercise of stock options 1 29 -- -- 30
Dividends declared and paid
($0.20 per share) -- -- (874) -- (874)
-------- -------- -------- -------- --------
Balance at June 30, 2001 $ 437 $ 57,740 $ (5,249) $ 258 $ 53,186
======== ======== ======== ======== ========
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
======== ======== ======== ======== ========
The accompanying note is an integral part of
these unaudited financial statements.
-5-
LSB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended
June 30,
2002 2001
--------- ---------
(In Thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 1,635 $ 1,581
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses -- 50
Gains on sales of mortgage loans (176) (38)
Depreciation and amortization of premises and equipment, investments and
other assets 666 119
Loans originated for sale (11,579) (4,984)
Proceeds from sales of mortgage loans and mortgage-backed securities 13,466 3,405
(Increase) decrease in accrued interest receivable (128) 195
Decrease in deferred income tax asset 871 808
(Increase) decrease in other assets (11) 204
Increase (decrease) in advance payments by borrowers (75) 16
Decrease in other liabilities (635) (131)
--------- ---------
Net Cash Provided by Operating Activities 4,034 1,225
===================================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities held to maturity 221,618 273,687
Proceeds from maturities of investment securities available for sale 3,993 --
Proceeds from sales of investment securities available for sale -- 6,118
Purchases of investment securities held to maturity (231,885) (309,810)
Purchases of mortgage-backed securities held to maturity (2,967) (4,335)
Purchases of investment securities available for sale (18,092) --
Principal payments of securities held to maturity 15,175 9,868
Principal payments of securities available for sale 6,710 2,366
Purchase of other equity securities -- (46)
Increase in loans, net (2,017) (9,717)
Proceeds from payments on OREO 5 5
Purchases of Bank premises and equipment (156) (193)
--------- ---------
Net cash used in investing activities (7,616) (32,057)
===================================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 9,759 10,694
Proceeds from issuance of Federal Home Loan Bank advances 6,000 30,000
Payments of Federal Home Loan Bank advances (3,863) (24,775)
(Decrease) increase in securities sold under agreement to repurchase (2,354) 2,375
Increase (decrease) in other borrowed funds (450) 30
Dividends paid (964) (874)
Proceeds from exercise of stock options 9 30
--------- ---------
Net cash provided by financing activities 8,137 17,480
===================================================================================================================================
Net increase (decrease) in cash and cash equivalents 4,555 (13,352)
Cash and cash equivalents, beginning of period 13,162 22,513
--------- ---------
Cash and equivalents, end of period $ 17,717 $ 9,161
===================================================================================================================================
Cash paid during the year for:
Interest on deposits $ 3,067 $ 5,482
Interest on borrowed funds 2,992 2,782
Supplemental Schedule of non-cash activities:
Net change in valuation of investment securities available for sale 100 203
===================================================================================================================================
The accompanying note is an integral part of
these unaudited financial statements.
-6-
LSB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
1. BASIS OF PRESENTATION
The LSB Corporation's consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America and prevailing practices within the banking industry and include all
necessary adjustments (consisting of only normal recurring adjustments), that,
in the opinion of management, are required for a fair presentation of the
results and financial condition of the Company. Accordingly, management is
required to make estimates and assumptions that affect amounts reported in the
balance sheets and statements of operations. Actual results could differ
significantly from those estimates and judgments. Material estimates that are
particularly susceptible to change relate to the allowance for loan losses and
the deferred tax asset.
LSB Corporation (the "Corporation" or the "Company") is a Massachusetts
corporation and the holding company of the wholly-owned subsidiary Lawrence
Savings Bank (the "Bank") a state-chartered Massachusetts savings bank. The
Corporation was organized by the Bank on July 1, 2001 to be a bank holding
company and to acquire all of the capital stock of the Bank. The consolidated
financial statements presented herein reflect the accounts of the Corporation
and its predecessor, Lawrence Savings Bank. The Corporation is supervised by the
Board of Governors of the Federal Reserve System ("FRB"), and it is also subject
to the jurisdiction of the Massachusetts Division of Banks, while the Bank is
subject to the regulations of, and periodic examination by, the Federal Deposit
Insurance Corporation ("FDIC") and the Massachusetts Division of Banks. The
Bank's deposits are insured by the Bank Insurance Fund of the FDIC up to
$100,000 per account, as defined by the FDIC, and the Depositors Insurance Fund,
Inc. ("DIF") for customer deposit amounts in excess of $100,000.
The consolidated financial statements include the accounts of LSB Corporation
and its wholly-owned consolidated subsidiary, Lawrence Savings Bank, and its
wholly-owned subsidiaries, Shawsheen Security Corporation, Shawsheen Security
Corporation II, Pemberton Corporation, and Spruce Wood Realty Trust. All
inter-company balances and transactions have been eliminated in consolidation.
The interim results of consolidated operations are not necessarily indicative of
the results for any future interim period or for the entire year. These interim
consolidated financial statements do not include all disclosures associated with
annual financial statements and, accordingly, should be read in conjunction with
the annual consolidated financial statements and accompanying notes included in
the Company's Annual Report on Form 10-K as of and for the year ended December
31, 2001 filed with the Securities and Exchange Commission.
-7-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The Company has made forward-looking statements (within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange
Act of 1934 as amended) in this document that are subject to risks and
uncertainties. Forward-looking statements include information concerning
possible or assumed future results of operations of the Company. Also, when
words such as "believes," "expects," "anticipates" or similar expressions are
used, forward-looking statements are being made. Stockholders should note that
many factors, some of which are discussed elsewhere in this document and in the
documents which we incorporate by reference, could affect the future financial
results of the Company and could cause the results to differ materially from
those expressed in or incorporated by reference in this document. Those factors
include fluctuations in interest rate, inflation, government regulations and
economic conditions and competition in the geographic and business areas in
which the Company conducts its operations.
FINANCIAL CONDITION
The Company has maintained risk assets below 1% of total assets for the past
several years. The Company maintains its commitment to servicing the needs of
the local community in the Merrimack Valley area. The investment securities
portfolio increased by $5.1 million as of June 30, 2002 to $178.9 million from
December 31, 2001 funded by deposit growth. Deposits increased by $9.8 million
at June 30, 2002 from year end 2001, with the growth primarily in NOW and
savings accounts.
INVESTMENTS
The investment portfolio totaled $178.9 million or 40.0% of total assets at June
30, 2002, compared to $173.8 million, or 39.6% of total assets at December 31,
2001, an increase of $5.1 million from year end.
The following table reflects the components and carrying values of the
investment securities portfolio at June 30, 2002 and December 31, 2001:
6/30/02 12/31/01
------- --------
(In Thousands)
Investment securities held to maturity (at amortized cost):
US Treasury obligations $ 6,012 $ 6,022
US Government Agency obligations 25,329 15,966
Mortgage-backed securities 16,080 16,633
Asset-backed securities 53,478 40,337
Corporate obligations 29,922 53,982
Municipal obligations 2,042 2,062
---------- ----------
Total investment securities held to maturity $ 132,863 $ 135,002
========== ==========
Investment securities available for sale (at market value):
US Government Agency obligations $ 31,282 $ 20,126
Mortgage-backed securities 3,505 5,689
Asset-backed securities 6,401 8,089
Corporate obligations 4,660 4,694
Equity securities 168 168
---------- ----------
Total investment securities available for sale $ 46,016 $ 38,766
========== ==========
Total investment securities portfolio $ 178,879 $ 173,768
========== ==========
The increase in the investment securities portfolio was the result of deposit
growth in which the Company increased US Government Agency Obligations and
Asset-Backed Securities while decreasing the Company's exposure to Corporate
Obligations.
-8-
LOANS
The following table reflects the loan portfolio at June 30, 2002 and December
31, 2001:
6/30/02 12/31/01
-------- --------
(In Thousands)
Residential mortgage loans $ 73,792 $ 78,605
Loans held for sale 2,445 4,156
Equity loans 14,095 13,393
Construction loans 15,731 20,593
Commercial real estate loans 108,963 100,110
Commercial loans 20,791 18,549
Consumer loans 890 991
--------- ----------
Total loans 236,707 236,397
Allowance for loan losses (4,074) (4,070)
--------- -----------
Total loans, net $ 232,633 $ 232,327
========= ==========
Total loans increased to $236.7 million or 52.9% of total assets at June 30,
2002 from $236.4 million or 53.9% of total assets at December 31, 2001.
The following table lists the components of loan interest income for the three
month and six month periods ended June 30, 2002 and 2001:
Three months ended Six months ended
6/30/02 6/30/01 6/30/02 6/30/01
------- ------- -------- -------
(In Thousands)
Residential mortgage loans $ 1,295 $ 1,481 $ 2,612 $2,922
Loans held for sale 23 12 70 14
Equity loans 211 285 423 585
Construction loans 272 397 592 783
Commercial real estate loans 2,057 1,979 4,103 3,904
Commercial loans 300 371 595 816
Consumer loans 18 27 37 56
------- ------- -------- -----
Total loan interest income $ 4,176 $4,552 $ 8,432 $9,080
======= ====== ======== ======
ALLOWANCE FOR LOAN LOSSES
The following table summarizes changes in the allowance for loan losses for the
three month and six month periods ended June 30, 2002 and 2001:
Three months ended Six months ended
6/30/02 6/30/01 6/30/02 6/30/01
------- ------- ------- -------
(In Thousands)
Beginning balance $ 4,071 $ 3,730 $ 4,070 $ 3,685
Provision charged to operations -- 50 -- 50
Recoveries on loans previously charged-off 4 3 5 48
Loans charged-off (1) -- (1) --
-------- ------- --------- -------
Ending balance $ 4,074 $ 3,783 $ 4,074 $ 3,783
======= ======= ======== =======
-9-
The allowance for the loan losses balance reflects management's assessment of
losses and is based on a review of the risk characteristics of the loan
portfolio. The Company considers many factors in determining the adequacy of the
allowance for loan losses. Collateral value on a loan by loan basis, trends of
loan delinquencies on a portfolio segment level, risk classification identified
in the Company's regular review of individual loans, and economic conditions are
primary factors in establishing allowance levels. Management believes the
allowance level is adequate to absorb estimated credit losses associated with
the loan and lease portfolio, including all binding commitments to lend and
off-balance sheet credit instruments. The allowance for loan losses reflects
information available to management at the end of each period.
RISK ASSETS
Risk assets consist of non-performing loans and other real estate owned.
Non-performing loans consist of both a) loans 90 days or more past due, and b)
loans placed on non-accrual because full collection of the principal balance is
in doubt. Other real estate owned (OREO) is comprised of foreclosed properties
where the Company has formally received title or has possession of the
collateral. Properties are carried at the lower of the investment in the related
loan or the estimated fair value of the property or collateral less selling
costs. Fair value of such property or collateral is determined based upon
independent appraisals and other relevant factors. Management periodically
reviews property values 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 $27 thousand at June 30, 2002. This represents a decrease
of $946 thousand from December 31, 2001 and a decrease of $10 thousand from June
30, 2001. These changes were primarily attributable to a decrease in
non-performing loans to $10 thousand at June 30, 2002 from $951 thousand at
December 31, 2001, due to the sale of property at the foreclosure auction, the
Company had impaired loans of $941 thousand at December 31, 2001 and zero at
June 30, 2002 and 2001, respectively.
The following table summarizes the Company's risk assets for the three months
ended June 30, 2002, December 31, 2001 and June 30, 2001.
6/30/02 12/31/01 6/30/01
------- ---------- --------
(Dollars in Thousands)
Non-performing loans $ 10 $951 $ 10
Other real estate owned 17 22 27
---- ---- ----
Total risk assets $ 27 $973 $ 37
==== ==== ====
Risk assets as a percent of total assets 0.01% 0.22% 0.01%
==== ==== ====
The following table shows the allowance for loan losses as a percent of total
loans:
6/30/02 12/31/01 6/30/01
------- -------- -------
(Dollars in Thousands)
Allowance for loan losses $ 4,074 $ 4,070 $ 3,783
Allowance for loan losses as a percent of total loans 1.72% 1.72% 1.62%
DEPOSITS
Total interest bearing deposits amounted to $264.0 million at June 30, 2002
compared to $255.0 million at December 31, 2001, an increase of $9.0 million.
Included in the certificates of deposit at June 30, 2002 were brokered deposits
of $2.0 million. Deposits increased overall in the NOW and Savings accounts
due to customers moving funds from the stock market or other financial
institutions.
-10-
The following table reflects the components of interest bearing deposits at June
30, 2002 and December 31, 2001:
6/30/02 12/31/01
-------- --------
(In Thousands)
NOW and Super NOW accounts $ 35,496 $ 30,080
Savings accounts 45,708 42,531
Money market investment accounts 57,182 57,575
Certificates of deposit 97,966 97,828
Retirement accounts 27,609 27,032
-------- --------
Total interest bearing deposits $263,961 $255,046
======== ========
The following table lists the components of deposit interest expense for the
three and six months ended June 30, 2002 and 2001:
Three months ended Six months ended
6/30/02 6/30/01 6/30/02 6/30/01
------- ------- ------- -------
(In Thousands)
NOW and Super NOW accounts $ 22 $ 41 $ 44 $ 79
Savings deposit accounts 112 201 219 390
Money market investment accounts 277 448 527 941
Certificates of deposit 793 1,641 1,709 3,301
Retirement accounts 279 385 578 771
------ ------ ------ ------
Total deposit interest expense $1,483 $2,716 $3,077 $5,482
====== ====== ====== ======
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 $2.5 million during the first half of 2002. The Company
made payments of dividends to stockholders in the amount of $964 thousand in the
first six months of 2002. Prior to the reorganization of the Bank into a holding
company structure the Bank paid dividends to stockholders of the Bank in the
amount of $874 thousand in the first six months of 2001.
The Bank's primary sources of funds include collections of principal payments
and prepayments 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, 2002, the Company's stockholder's equity was $54.8 million as
compared to $54.1 million at December 31, 2001. The increase during the first
half of 2002 occurred due to net income of $1.6 million, a $66 thousand increase
in market values on securities available for sale, net of taxes and was reduced
by the declaration to pay dividends of $964 thousand. The Company's leverage
ratio at June 30, 2002 and December 31, 2001 was 12.18% and 11.98%,
respectively. The Company's and the Bank's total risk based capital ratios were
18.00% and 17.03% at June 30, 2002, respectively, compared with 16.97% and
16.39% at December 31, 2001, respectively. The Company exceeds all regulatory
minimum capital ratio requirements set forth by the FRB, and the Bank exceeds
all minimum capital ratio requirements as defined by the FDIC.
-11-
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
OVERVIEW
The Company reported net income of $819 thousand and $790 thousand for the three
months ended June 30, 2002 and 2001, respectively. The increase in net income is
primarily attributable to an increase in net interest income of $269 thousand
and non-interest income of $51 thousand partially offset by an increase of $298
thousand in non-interest expenses.
NET INTEREST INCOME FROM OPERATIONS
Net interest income for the three months ended June 30, 2002 and 2001 was $3.5
million and $3.3 million, respectively. The net interest rate spread increased
to 2.92% for the quarter ended June 30, 2002 from 2.66% for the same quarter of
2001. This increase occurred because the average balances on interest earning
assets increased $19.9 million in the second quarter 2002 compared to 2001.
The following table presents the components of net interest income and net
interest spread:
INCOME/EXPENSE YIELD/RATE
-------------------------- ------------------------
QUARTERS ENDED
-------------------------------------------------------------
6/30/02 6/30/01 6/30/02 6/30/01
-------------------------- ------------------------
(Dollars in Thousands)
Interest income and average yield:
Loans $4,176 $4,552 7.26% 8.10%
Investments, mortgage-backed securities
and other earning assets 2,304 2,730 4.79 6.06
------ ------
Total 6,480 7,282 6.13 7.20
------ ------ ---- ----
Interest expense and average rate paid:
Deposits 1,483 2,716 2.28 4.04
Federal Home Loan Bank advances 1,390 1,194 5.59 6.07
Securities sold under agreements to
repurchase and other borrowed funds 63 97 3.70 7.76
------ ------
Total 2,936 4,007 3.21 4.54
------ ------ ---- ----
Net interest income $3,544 $3,275
------ ------
Net interest rate spread 2.92% 2.66%
---- ----
INTEREST INCOME
Interest income for the second quarter of 2002 was $6.5 million as compared to
$7.3 million for the same quarter of 2001. The decrease of $0.8 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
offset slightly by higher average balances, which increased interest income by
$0.3 million.
Yields on loans were 7.26% and 8.10% for the quarters ended June 30, 2002 and
2001, respectively. The impact to interest income due to lower yields was $0.5
million. Higher average loan balances of $230.8 million versus $225.3 million
for the quarters ended June 30, 2002 and 2001, respectively, increased interest
income by $0.1 million.
Yields on investment securities were 4.79% and 6.06% for the quarters ended June
30, 2002 and 2001, respectively, decreasing interest income by $0.6 million.
Higher average investment securities balances of $193.1 million versus $180.6
million for the same periods increased interest income by $0.2 million.
INTEREST EXPENSE
Interest expense for the second quarter of 2002 totaled $2.9 million, a decrease
of $1.1 million from the same quarter of 2001. This decrease is primarily due to
lower rates paid on interest bearing liabilities, which impacted interest
expense by $1.3 million. Higher average balances resulted in a $0.2 million
increase.
-12-
Rates on deposits were 2.28% and 4.04% for the quarters ended June 30, 2002 and
2001, respectively. This decrease resulted in interest expense decreasing by
$1.1 million. Average deposit balances were $260.8 million versus $269.8 million
for the same periods, which resulted in a $0.1 million decrease in interest
expense.
Rates on FHLB advances were 5.59% and 6.07% for the second quarters of 2002 and
2001, respectively. The decrease in rates paid on FHLB advances resulted in
interest expense decreasing by $0.1 million. The average balances of FHLB
advances increased from quarter to quarter for the same periods to $99.8 million
in the second quarter 2002 from $78.9 million for the second quarter of 2001,
which resulted in an increase in interest expense of $0.3 million.
Rates on short term and other borrowed funds were 3.70% and 7.76% for the
second quarters of 2002 and 2001, respectively. The decrease in rates paid on
these interest bearing liabilities resulted in interest expense decreasing by
$0.1 million. The average balance increased to $6.8 million in 2002 from $5.0
million in 2001, which increased interest expense by a minimal amount.
PROVISION FOR LOAN LOSSES
The provision for loan losses was zero for the quarters ended June 30, 2002 and
2001. The amount of the provision for loan losses was due to the overall asset
quality of the Company.
NON-INTEREST INCOME
Non-interest income amounted to $349 thousand and $298 thousand for the quarters
ended June 30, 2002 and 2001, respectively. The increase in non-interest income
was due to an increase in deposit account fees of $22 thousand, an increase in
the gains on sales of mortgage loans of $31 thousand and other income increasing
overall by $17 thousand in the second quarter 2002 as compared to the same
quarter in 2001.
NON-INTEREST EXPENSE
Non-interest expense totaled $2.6 million and $2.3 million for the quarters
ended June 30, 2002 and 2001, respectively. Salaries and employee benefits
increased by $176 thousand in the second quarter 2002 mainly due to pension
expense associated with the employees defined benefit plan and normal raises
compared to the second quarter in 2001. Professional expenses decreased to $220
thousand in the second quarter 2002 compared to $143 thousand in the same period
in 2001. The increase was due to legal expenses associated with collection
efforts on delinquent and prior borrowers. Data processing expenses increased to
$203 thousand in the second quarter of 2002 compared to $178 thousand in the
same quarter in 2001.
INCOME TAXES
The Company reported an income tax expense of $473 thousand for the quarter
ended June 30, 2002 or an effective income tax rate of 36.6%. This compares to
an income tax expense of $430 thousand for the quarter ended June 30, 2001 or
effective income tax expense of 35.2%.
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
OVERVIEW
The Bank reported net income of $1.6 million for the six months ended June 30,
2002 and 2001, respectively. During the first half of 2002, there were several
favorable impacts to earnings such as net interest income increasing to $6.9
million in 2002 up from $6.5 million in 2001, non-interest income increasing to
$0.8 million in 2002 up from $0.5 million in 2001. Offsetting these favorable
impacts to earnings were increases to non-interest expenses to $5.1 million for
the first half of 2002 up from $4.5 million in the same period in 2001.
NET INTEREST INCOME FROM OPERATIONS
Net interest income for the six months ended June 30, 2002 and 2001 was $6.9
million and $6.5 million, respectively. The net interest rate spread increased
to 2.83% from 2.65%. The rates paid on interest bearing liabilities decreased
more than the yield on interest bearing
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assets. The following table presents the components of net interest income and
net interest spread:
INCOME/EXPENSE YIELD/RATE
--------------------------- --------------------
SIX MONTHS ENDED
-------------------------------------------------------------
6/30/02 6/30/01 6/30/02 6/30/01
----------- ----------- ------- -------
(In Thousands)
Interest income and average yield:
Loans $ 8,432 $ 9,080 7.34% 8.24%
Investments, mortgage-backed
securities and other earning assets 4,469 5,600 4.71 6.21
------- --------
Total 12,901 14,680 6.15 7.33
------- -------- ----- ----
Interest expense and average rate paid:
Deposits 3,077 5,482 2.40 4.15
Federal Home Loan Bank advances 2,802 2,535 5.59 6.21
Short-term and other borrowed funds 160 186 4.21 8.57
------- --------
Total 6,039 8,203 3.32 4.68
------- -------- ----- ----
Net interest income $ 6,862 $ 6,477
------- --------
Net interest rate spread 2.83% 2.65%
----- ----
INTEREST INCOME
Interest income for the first half of 2002 was $12.9 million as compared to
$14.7 million for the same period of 2001. The decrease in interest income of
$1.8 million is due to lower yields on loans and investment securities, which
decreased interest income by $2.4 million. Higher average balances on loans and
investment securities increased interest income by $0.6 million.
Yields on loans were 7.34% and 8.24% for the six months ended June 30, 2002 and
2001, respectively. The impact on interest income due to lower yields was $1.0
million. Higher average loan balances of $231.7 million in 2002 versus $222.1
million in 2001 resulted in interest income increasing by $0.4 million.
Yields on investment securities decreased to 4.71% for the six months ended June
30, 2002. This compares to yields on investment securities of 6.21% for the same
period in 2001. This resulted in interest income declining by $1.4 million.
Higher average balances for investment securities of $191.3 million in 2002
versus $182.0 million in 2001 resulted in interest income increasing by $0.2
million.
Other interest and dividend income declined to $61 thousand in the first half
of 2002 from $371 thousand in the same period of 2001. The decrease is
primarily attributed to a reduction in the average outstanding balances for six
months of Federal funds sold from $14.1 million at June 30, 2001 to $7.7
million at June 30, 2002 coupled with a decrease in rates.
INTEREST EXPENSE
Interest expense for the first six months of 2002 and 2001 was $6.0 million and
$8.2 million, respectively. The decrease of $2.2 million in interest expense is
primarily due to lower rates paid on deposits and other interest bearing
liabilities, which decreased interest expense by $2.7 million. Interest expense
increased $0.5 million due to higher average balances for borrowed funds.
Yields on deposits were 2.40% and 4.15% for the first half of 2002 and 2001,
respectively. This decrease resulted in interest expense decreasing by $2.4
million. Average deposit balances decreased were $258.5 million in 2002 down
slightly from $266.4 million in 2001, which resulted in interest expense
declining by $0.1 million.
Yields on FHLB advances and short-term borrowing resulted in interest expense
decreasing by $0.3 million in 2002 from 2001. However, the average balances for
these interest bearing liabilities increased to $108.8 million in 2002 from
$86.8 million in 2001, which increased interest expense by $0.6 million.
PROVISION FOR LOAN LOSSES
The provision for loan losses was zero and $50 thousand for the six months ended
June 30, 2002 and 2001, respectively. The amount of the provision for loan
losses was due to the overall asset quality of the Company.
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The allowance for loan losses increased slightly from December 31, 2001. This
was because the Bank received net recoveries on loans previously charged off of
$4 thousand. Any charge-offs that were made during the six month periods based
upon management's analysis of the borrowers' financial situation and estimated
collateral values.
The allowance for loan losses at June 30, 2002 was 1.72% of total loans. The
same ratio at December 31, 2001 was 1.72%. The allowance for loan losses
reflects all information available at the end of each respective quarter.
NON-INTEREST INCOME
Non-interest income was $0.8 million and $0.6 million for the six months ended
June 30, 2002 and 2001, respectively. The increase of $199 thousand in
non-interest income primarily resulted from gains on sales of mortgage loans
increasing to $176 thousand in 2002 from $38 thousand in 2001.
NON-INTEREST EXPENSE
Non-interest expense was $5.1 million and $4.5 million for the six months ended
June 30, 2002 and 2001, respectively. The increase in non-interest expense is
due to salaries and employee benefits increasing to $3.0 million in 2002 up by
$0.4 million over the same period in 2001 due to pension expense associated with
the employees defined benefit plan plus normal raises. Professional expense
increased to $367 thousand for the first half of 2002 from $310 thousand in 2001
as the Bank continues to incur legal expenses associated with prior borrowers.
INCOME TAXES
The Bank reported an income tax expense of $945 thousand and $914 thousand for
the six months ended June 30, 2002 and 2001 representing an effective tax rate
of 36.6% for both periods.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The response is incorporated herein by reference to the discussion
under the subcaption "Interest Rate Sensitivity" of the caption "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" on
pages 13 and 14 of the LSB Corporation's Annual Report for the fiscal year ended
December 31, 2001.
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Part II -- Other Information
Item 1. Legal Proceedings
The response is incorporated herein by reference to the discussion
under the caption "CONTINGENCIES" on page 33 of the LSB Corporation's Annual
Report for the fiscal year ended December 31, 2001.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On May 7, 2002 LSB Corporation (the "Company") held its annual meeting of
stockholders (the "Annual Meeting").
The stockholders elected each of the following four individuals as Class C
directors of the Company to serve until the 2005 annual meeting of stockholders,
with the following votes cast:
BROKER NON-VOTES
NOMINEE FOR WITHHELD AND ABSTENTIONS
- ------- --------- -------- ----------------
Eugene A. Beliveau, DDS 3,748,482 59,456 0
Byron R. Cleveland, Jr. 3,750,132 57,806 0
Robert F. Hatem 3,752,923 55,015 0
Paul A. Miller 3,736,348 71,590 0
The following directors of the Company continued as directors after the Annual
Meeting: Kathleen I. Boshar, Malcolm W. Brawn, Thomas J. Burke, Neil H. Cullen,
Richard Hart Harrington and Marsha A. McDonough.
The stockholders also elected Robert P. Perreault as Clerk of the Company. Mr.
Perreault received 3,748,838 affirmative votes, 18,976 negative votes and 10,124
absentions.
Finally, the stockholders ratified the appointment of KPMG LLP ("KPMG") as the
Company's independent auditors for the fiscal year ending December 31, 2002.
KPMG received 3,762,998 affirmative votes, 34,236 negative votes and 10,704
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
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LSB CORPORATION AND SUBSIDIARIES
--------------------------------
August 13, 2002 /s/ Paul A. Miller
--------------------------------------------
Paul A. Miller
President and
Chief Executive Officer
August 13, 2002 /s/ John E. Sharland
--------------------------------------------
John E. Sharland
Senior Vice President
Chief Financial Officer
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LSB Corporation
Quarterly Report on Form 10-Q For Quarter Ended June 30, 2002
EXHIBITS INDEX
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Added by Section
906 of the Sarbanes-Oxley Act of 2002
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