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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 March 31, 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 March 31, 2003
- ----- --------------------------------
Common Stock, par value $.10 per share 4,204,362 shares
LSB CORPORATION AND SUBSIDIARY
INDEX
Page
-----
PART I - FINANCIAL INFORMATION
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 11
Loan Interest Income 11
Allowance for Loan Losses 11-12
Risk Assets 12
Deposit Portfolio 12-13
Deposit Interest Expense 13
Results of Operations:
Three Months ended March 31, 2003 and 2002 14-16
Liquidity and Capital Resources 16
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 17
ITEM 4 CONTROLS AND PROCEDURES 17
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 18
ITEM 2 CHANGES IN SECURITIES 18
ITEM 3 DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5 OTHER INFORMATION 18
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
CERTIFICATIONS 20-21
EXHIBIT INDEX 22
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
----------- ------------
(Unaudited)
(In Thousands)
ASSETS
Assets:
Cash and due from banks $ 6,665 $ 7,136
Federal funds sold 18,583 9,633
----------- ------------
Total cash and cash equivalents 25,248 16,769
Investment securities held to maturity (market value of
$109,367 in 2003 and $116,321 in 2002) 106,586 113,325
Investment securities available for sale (amortized cost of
$62,233 in 2003 and $52,055 in 2002) 63,278 53,084
Federal Home Loan Bank stock, at cost 5,950 5,950
Loans, net of allowance for loan losses 224,540 238,960
Bank premises and equipment 2,949 3,050
Accrued interest receivable 2,348 2,459
Deferred income tax asset 3,411 3,686
Other assets 1,477 1,851
----------- ------------
Total assets $ 435,787 $ 439,134
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Interest bearing deposits $ 266,471 $ 265,283
Non-interest bearing deposits 13,331 14,182
Federal Home Loan Bank advances 93,781 94,237
Securities Sold under Agreements to Repurchase 2,664 3,950
Other borrowed funds 2,134 3,404
Advance payments by borrowers for taxes and insurance 588 518
Other liabilities 3,557 3,501
----------- ------------
Total liabilities 382,526 385,075
----------- ------------
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 March 31, 2003 and
December 31, 2002, respectively, and 4,204,362 and 4,253,205 shares
outstanding at March 31, 2003 and December 31, 2002 442 439
Additional paid-in capital 58,009 57,845
Accumulated deficit (3,123) (3,168)
Treasury stock, at cost (219,300 and 136,500 shares at March 31, 2003
and December 31, 2002, respectively) (2,758) (1,736)
Accumulated other comprehensive income 691 679
----------- ------------
Total stockholders' equity 53,261 54,059
----------- ------------
Total liabilities and stockholders' equity $ 435,787 $ 439,134
=========== ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended March 31,
----------------------------
2003 2002
----------- -----------
(In Thousands, except share data)
Interest and dividend income:
Loans $ 3,948 $ 4,256
Investment securities held to maturity 1,129 1,654
Investment securities available for sale 493 415
Federal Home Loan Bank stock 51 55
Other interest and dividend income 41 41
----------- -----------
Total interest and dividend income 5,662 6,421
----------- -----------
Interest expense:
Deposits 1,150 1,594
Borrowed funds 1,203 1,412
Securities sold under agreements to repurchase 5 15
Other borrowed funds 41 82
----------- -----------
Total interest expense 2,399 3,103
----------- -----------
Net interest income 3,263 3,318
----------- -----------
Provision for loan losses - -
----------- -----------
Net interest income after provision for loan losses 3,263 3,318
----------- -----------
Non-interest income:
Loan servicing fees (130) 76
Deposit account fees 163 156
Gains on sales of mortgage loans 149 111
Other income 98 86
----------- -----------
Total non-interest income 280 429
----------- -----------
Non-interest expense:
Salaries and employee benefits 1,651 1,537
Occupancy and equipment expenses 220 199
Professional expenses 201 147
Data processing expenses 181 163
Other expenses 419 413
----------- -----------
Total non-interest expenses 2,672 2,459
----------- -----------
Income before income tax expense 871 1,288
Income tax expense 321 472
----------- -----------
Net income $ 550 $ 816
==================================================================================================
Average shares outstanding 4,214,363 4,381,974
Average diluted shares outstanding 4,357,883 4,550,976
==================================================================================================
Basic earnings per share $ 0.13 $ 0.19
Diluted earnings per share $ 0.13 $ 0.18
==================================================================================================
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
Accumulated
Additional Other Total
Common Paid-In (Accumulated Treasury Comprehensive Stockholders'
Stock Capital Deficit) Stock Income Equity
------------------------------------------------------------------------------
(In Thousands)
Balance at December 31, 2001 $ 438 $ 57,813 $ (4,348) $ - $ 189 $ 54,092
Net income - - 816 - - 816
Other comprehensive income:
Unrealized gain on securities
available for sale (tax effect $44) - - - - 83 83
========
Total comprehensive income 899
Dividends declared and paid
($0.11 per share) - - (482) - - (482)
----- -------- -------- ----- ------ --------
Balance at March 31, 2002 $ 438 $ 57,813 $ (4,014) $ - $ 272 $ 54,509
===== ======== ======== ===== ====== ========
Accumulated
Additional Other Total
Common Paid-In (Accumulated Treasury Comprehensive Stockholders'
Stock Capital Deficit) Stock Income Equity
------------------------------------------------------------------------------
(In Thousands)
Balance at December 31, 2002 $ 439 $ 57,845 $ (3,168) $ (1,736) $ 679 $ 54,059
Net income - - 550 - - 550
Other comprehensive income:
Unrealized gain on securities
available for sale (tax effect $4) - - - - 12 12
--------
Total comprehensive income 562
Exercise of stock options 3 164 - - - 167
Dividends declared and paid
($0.12 per share) - - (505) - - (505)
Purchase of 82,800 shares of Treasury
Stock, at cost - - - (1,022) - (1,022)
----- -------- -------- -------- ------ --------
Balance at March 31, 2003 $ 442 $ 58,009 $ (3,123) $ (2,758) $ 691 $ 53,261
===== ======== ======== ======== ====== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended
March 31,
2003 2002
--------- ---------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 550 $ 816
Adjustments to reconcile net income to net cash provided by operating activities:
Gains on sales of mortgage loans (149) (111)
Net amortization of investment securities 348 139
Depreciation of premises and equipment 114 116
Loans originated for sale (5,881) (5,911)
Proceeds from sales of mortgage loans 6,511 8,706
Decrease (increase) in accrued interest receivable 111 (141)
Decrease in deferred income tax asset 271 397
Decrease (increase) in other assets 371 (157)
Increase in advance payments by borrowers 70 36
Increase (decrease) in other liabilities 56 (366)
--------- ---------
Net cash provided by operating activities 2,372 3,524
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities held to maturity 134,400 158,745
Proceeds from maturities of investment securities available for sale 2,000 _
Purchases of investment securities held to maturity (123,868) (155,531)
Purchases of mortgage-backed securities held to maturity (15,304) -
Purchases of investment securities available for sale (4,165) (18,092)
Purchase of mutual fund available for sale (1,000) -
Purchases of mortgage-backed securities available for sale (8,461) -
Principal payments of securities held to maturity 11,259 6,593
Principal payments of securities available for sale 1,352 3,780
Decrease in loans, net 13,939 2,103
Proceeds from payments on OREO 3 3
Purchases of Bank premises and equipment (13) (50)
--------- ---------
Net cash provided by (used in) investing activities 10,142 (2,449)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 337 3,305
Payments of Federal Home Loan Bank advances (456) (3,431)
Net (decrease) increase in agreements to repurchase securities (1,286) 812
Decrease in other borrowed funds (1,270) (16)
Treasury stock purchased (1,022) -
Dividends paid (505) (482)
Proceeds from exercise of stock options 167 -
--------- ---------
Net cash (used in) provided by financing activities (4,035) 188
- --------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 8,479 1,263
Cash and cash equivalents, beginning of period 16,769 13,162
--------- ---------
Cash and cash equivalents, end of period $ 25,248 $ 14,425
==============================================================================================================
Cash paid during the period for:
Interest on deposits $ 1,134 $ 1,594
Interest on borrowed funds 1,253 1,525
Income taxes 115 80
Supplemental Schedule of non-cash activities:
Net change in valuation of investment securities available for sale 16 127
==============================================================================================================
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
LSB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 operations.
Actual results could differ significantly from those estimates and judgments.
Material estimates that are particularly susceptible to change relate to the
allowance for loan losses, income taxes and mortgage servicing rights.
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, 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 quarters ended March 31, and
are presented in the table which follows:
2003 2002
- --------------------------------------------------------------------
(In Thousands except per share data)
Net Income:
As Reported $ 550 $ 816
Pro forma 506 758
Basic earnings per share:
As Reported $ 0.13 $ 0.19
Pro forma 0.12 0.17
Diluted earnings per share:
As Reported $ 0.13 $ 0.18
Pro forma 0.12 0.17
7
3. 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 $435.8 million at March 31, 2003 compared to $439.1 million at December 31,
2002. The decrease in asset size at March 31, 2003 from December 31, 2002 is due
to the pay down of $3.0 million in borrowed funds as these became due. The cash
used came from the payoff of loans which decreased the loan portfolios by $14.4
million. The additional cash was used to purchase investment securities and
Federal funds.
INVESTMENTS
The investment securities portfolio totaled $169.9 million or 39.0% of total
assets at March 31, 2003, compared to $166.4 million, or 37.9% of total assets
at December 31, 2002, an increase of $3.5 million from year-end. The change in
mix in the investment securities portfolio was the result of maturities in U.S.
Treasury obligations, U.S. Government Agency obligations and Commercial Paper
included in Corporate obligations. Funds were reinvested in Mortgage-backed
Securities ("MBS") 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.
Federal funds increased by $8.9 million.
9
The following table reflects the components and carrying values of the
investment securities portfolio at March 31, 2003 and December 31, 2002:
3/31/03 12/31/02
------- --------
(In Thousands)
Investment securities held to maturity (at amortized cost):
US Treasury obligations $ - $ 6,002
US Government Agency obligations 22,191 26,243
Mortgage-backed securities 24,970 13,440
Asset-backed securities 39,456 32,551
Corporate obligations 16,947 33,068
Municipal obligations 3,022 2,021
------------ ------------
Total investment securities held to maturity $ 106,586 $ 113,325
============ ============
Investment securities available for sale (at market value):
US Government Agency obligations $ 31,951 $ 31,820
Mortgage-backed securities 11,019 2,850
Asset-backed securities 14,991 12,079
Corporate obligations 4,158 4,167
Municipal obligations - 2,000
Mutual Funds 991 -
Equity securities 168 168
------------ ------------
Total investment securities available for sale $ 63,278 $ 53,084
============ ============
Total investment securities portfolio $ 169,864 $ 166,409
============ ============
10
LOANS
The following table reflects the loan portfolio at March 31, 2003 and December
31, 2002:
3/31/03 12/31/02
------- --------
(In Thousands)
Residential mortgage loans $ 56,478 $ 60,140
Loans held for sale 2,098 2,579
Equity loans 10,697 11,490
Construction loans 19,860 23,502
Commercial real estate loans 108,049 112,745
Commercial loans 30,968 32,017
Consumer loans 560 654
----------- -----------
Total loans 228,710 243,127
Allowance for loan losses (4,170) (4,167)
----------- -----------
Total loans, net $ 224,540 $ 238,960
=========== ===========
Total loans decreased to $228.7 million or 52.5% of total assets at March 31,
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. Commercial real estate loans have declined
due to payoffs.
The following table lists the components of loan interest income for the three
months ended March 31, 2003 and 2002:
Three months ended
3/31/03 3/31/02
------- -------
(In Thousands)
Residential mortgage loans $ 941 $ 1,317
Loans held for sale 27 47
Equity loans 160 212
Construction loans 339 320
Commercial real estate loans 2,068 2,046
Commercial loans 401 295
Consumer loans 12 19
--------- --------
Total loan interest income $ 3,948 $ 4,256
========= ========
ALLOWANCE FOR LOAN LOSSES
The following table summarizes changes in the allowance for loan losses for the
three months ended March 31, 2003 and 2002:
Three months ended
3/31/03 3/31/02
------- -------
(In Thousands)
Beginning balance $ 4,167 $ 4,070
Provision charged to operations - -
Recoveries on loans previously charged-off 3 1
Loans charged-off - -
-------- --------
Ending balance $ 4,170 $ 4,071
======== ========
11
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 $32 thousand at March 31, 2003. This represents an
increase of $19 thousand from December 31, 2002 and an increase of $3 thousand
from March 31, 2002. These changes were primarily attributable to an increase in
non-performing loans to $23 thousand at March 31, 2003 from $1 thousand at
December 31, 2002 and $10 thousand at March 31, 2002. The Company had no
impaired loans at March 31, 2003, December 31, 2002 and March 31, 2002,
respectively.
The following table summarizes the Company's risk assets for the period ended
March 31, 2003, December 31, 2002 and March 31, 2002.
3/31/03 12/31/02 3/31/02
------- -------- -------
(Dollars in Thousands)
Non-performing loans $ 23 $ 1 $ 10
Other real estate owned 9 12 19
------- ------- -----
Total risk assets $ 32 $ 13 $ 29
======= ======= =====
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:
3/31/03 12/31/02 3/31/02
------- -------- -------
(Dollars in Thousands)
Allowance for loan losses $ 4,170 $ 4,167 $ 4,071
Allowance for loan losses as a percent of total loans 1.82% 1.71% 1.76%
DEPOSITS
Total interest bearing deposits amounted to $266.5 million at March 31, 2003
compared to $265.3 million at December 31, 2002, an increase of $1.2 million.
Included in the certificates of deposit at March 31, 2003 were brokered deposits
of $2.0 million. The change from December 31, 2002 is due to a decrease in
certificates of deposit and an increase in NOW 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.
12
The following table reflects the components of interest bearing deposits at
March 31, 2003 and December 31, 2002:
3/31/03 12/31/02
------- --------
(In Thousands)
NOW and Super NOW accounts $ 36,958 $ 35,568
Savings accounts 45,584 44,839
Money market investment accounts 65,193 64,653
Certificates of deposit 90,350 92,241
Retirement accounts 28,386 27,982
--------- ---------
Total interest bearing deposits $ 266,471 $ 265,283
========= =========
The following table lists the components of deposit interest expense for the
three months ended March 31, 2003 and 2002:
Three months ended
3/31/03 3/31/02
------- -------
(In Thousands)
NOW and Super NOW accounts $ 10 $ 22
Savings deposit accounts 57 107
Money market investment accounts 238 250
Certificates of deposit 594 916
Retirement accounts 251 299
-------- ---------
Total deposit interest expense $ 1,150 $ 1,594
========= =========
13
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
OVERVIEW
The Company reported net income of $550 thousand or $0.13 diluted earnings per
share and $816 thousand or $0.18 diluted earnings per share for the three months
ended March 31, 2003 and 2002, respectively. The decrease in net income is
primarily attributable to a decrease in net interest income of $55 thousand, a
decrease in non-interest income of $149 thousand and an increase of $213
thousand in non-interest expenses.
NET INTEREST INCOME FROM OPERATIONS
Net interest income for both the three months ended March 31, 2003 and 2002 was
$3.3 million. The net interest rate spread increased to 2.79% for the quarter
ended March 31, 2003 from 2.74% for the same quarter of 2002. Interest income in
the first quarter of 2003 experienced an overall decrease due to a declining
interest rate environment on interest earning assets and a change in the asset
mix from the first 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
deposit rates.
14
The following table presents the components of net interest income and net
interest rate spread:
Income/Expense Yield/Rate
--------------------- -----------------
Quarter Ended
-----------------------------------------
3/31/03 3/31/02 3/31/03 3/31/02
------- -------- ------- -------
(Dollars in Thousands)
Interest income and average yield:
Loans $ 3,948 $ 4,256 6.83% 7.42%
Investments, mortgage-backed securities
and other earning assets 1,714 2,165 3.74 4.63
--------- ---------
Total 5,662 6,421 5.46 6.17
--------- --------- ---- ----
Interest expense and average rate paid:
Deposits 1,150 1,594 1.76 2.52
Federal Home Loan Bank advances 1,203 1,412 5.19 5.59
Securities sold under agreements to
repurchase and other borrowed funds 46 97 3.36 4.64
--------- ---------
Total 2,399 3,103 2.67 3.43
--------- --------- ---- ----
Net interest income $ 3,263 $ 3,318
========= =========
Net interest rate spread 2.79% 2.74%
==== ====
Net interest margin 3.15% 3.19%
==== ====
INTEREST INCOME
Interest income for the first quarter of 2003 was $5.7 million as compared to
$6.4 million for the same quarter of 2002. The decrease of $759 thousand in
interest income is due to $760 thousand from lower yields earned on loans and
investment securities. The decrease in interest income due to lower yields was
coupled with lower average balances in investment securities, which decreased
interest income by $32 thousand. Partially offsetting these declines were higher
loan average balances which increased interest income by $33 thousand.
Yields on loans were 6.83% and 7.42% for the quarters ended March 31, 2003 and
2002, respectively. The impact to interest income due to lower yields was $341
thousand. Higher average loan balances of $234.6 million versus $232.6 million
for the quarters ended March 31, 2003 and 2002, respectively, increased interest
income by $33 thousand.
Yields on investment securities were 3.74% and 4.63% for the quarters ended
March 31, 2003 and 2002, respectively, decreasing interest income by $419
thousand. Lower average investment securities balances of $186.0 million versus
$189.5 million for the same periods decreased interest income by $32 thousand.
INTEREST EXPENSE
Interest expense for the first quarter of 2003 totaled $2.4 million, a decrease
of $704 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 $609 thousand. Lower average balances in borrowed funds resulted in a
$132 thousand decrease to interest expense; while higher average balances in
deposits contributed $37 thousand to interest expense.
Rates on deposits were 1.76% and 2.52% for the quarters ended March 31, 2003 and
2002, respectively. This decrease resulted in interest expense decreasing by
$481 thousand. Average deposit balances were $264.7 million versus $256.2
million for the same periods, which resulted in a $37 thousand increase to
interest expense.
Rates on FHLB advances were 5.19% and 5.59% for the first quarters of 2003 and
2002, respectively. The decrease in rates paid on FHLB advances resulted in
interest expense decreasing by $101 thousand. The average balances of FHLB
advances decreased from quarter to quarter for the same periods to $93.9 million
in the first quarter 2003 from $102.4 million for the first quarter of 2002,
which resulted in a decrease in interest expense of $108 thousand.
Rates on repurchase agreements and other borrowed funds were 3.36% and 4.64% for
the first quarters of 2003 and 2002, respectively. The decrease in rates paid on
these interest bearing liabilities resulted in interest expense decreasing by
$27 thousand. The average balance decreased to $5.5 million in 2003 from $8.5
million in 2002, which decreased interest expense by $24 thousand.
15
PROVISION FOR LOAN LOSSES
The provision for loan losses was zero for the quarters ended March 31, 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 $280 thousand and $429 thousand for the quarters
ended March 31, 2003 and 2002, respectively. The decrease in non-interest income
was primarily due to a decline in loan fees to a loss of $130 thousand in 2003
compared to income of $76 thousand in 2002. The loss in loan fees can be
attributed to provisions for losses on mortgage servicing rights ("MSR's") of
$229 thousand in the first 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. This decline was partially offset
by deposit account fees increasing by $7 thousand, other income by $12 thousand
and gains on the sale of mortgage loans by $38 thousand for the first quarter of
2003 from the same period in 2002.
NON-INTEREST EXPENSE
Non-interest expense totaled $2.7 million and $2.5 million for the quarters
ended March 31, 2003 and 2002, respectively. Salaries and employee benefits
increased by $114 thousand in the first quarter 2003 compared to the first
quarter in 2002 mainly due to pension expense associated with the employees
defined benefit plan and normal raises. Occupancy and equipment expenses totaled
$220 thousand in 2003, an increase of $21 thousand over 2002 due to building
maintenance and repairs expenses increasing due to snow plowing. Professional
expenses increased to $201 thousand in the first quarter 2003 compared to $147
thousand in the same period in 2002. The increase was due to increased legal
expenses associated with collection efforts on amounts due the Bank. Data
processing expenses increased to $181 thousand in the first quarter of 2003
compared to $163 thousand in the same quarter in 2002. Other expenses rose
slightly to $419 thousand in 2003 from $413 thousand in 2002.
INCOME TAXES
The Company reported an income tax expense of $321 thousand for the quarter
ended March 31, 2003 or an effective income tax rate of 36.9%. This compares to
an income tax expense of $472 thousand for the quarter ended March 31, 2002 or
effective income tax expense of 36.6%, which was fairly consistent with 2003.
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 $1.0 million during the first three
months of 2003 and 2002, respectively. The Company made payments of dividends to
shareholders in the amount of $505 thousand and $482 thousand in the first
quarters 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 March 31, 2003, the Company's stockholder's equity was $53.3 million as
compared to $54.1 million at December 31, 2002. The change during the first
three months of 2003 occurred due to net income of $550 thousand, a $12 thousand
increase in market values on securities available for sale, net of taxes and was
reduced by the declaration of dividends of $505 thousand and stock repurchases
totaling $1.0 million. The Company's leverage ratio at March 31, 2003 and
December 31, 2002 was 12.06% and 12.10%, respectively. The Company's and the
Bank's total risk based capital ratios were 18.72% and 18.16% at March 31, 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.
16
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-14(c)
and 15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before the
filing date of this quarterly report, have concluded that as of the Evaluation
Date, the Company's disclosure controls and procedures were adequate and
designed to ensure that material information relating to the Company and its
subsidiaries would be made known to them by others within those entities.
There were no significant changes in the Company's internal controls or, to the
Company's knowledge, in other factors that could significantly affect the
Company's disclosure controls and procedures subsequent to the Evaluation Date.
17
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits.
Please see the Exhibit Index attached hereto.
b. Reports on Form 8-K.
None.
18
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
May 9, 2003 /s/ Paul A. Miller
---------------------------------
Paul A. Miller
President and
Chief Executive Officer
May 9, 2003 /s/ John E. Sharland
---------------------------------
John E. Sharland
Senior Vice President
Chief Financial Officer
19
CERTIFICATIONS
I, Paul A. Miller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LSB Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiary, is made known to us by
others within those entities, particularly during the period
in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 9, 2003
/s/ Paul A. Miller
---------------------------------
Paul A. Miller
President and
Chief Executive Officer
20
I, John E. Sharland, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LSB Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiary, is made known to us by
others within those entities, particularly during the period
in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 9, 2003
/s/ John E. Sharland
---------------------------------
John E. Sharland
Senior Vice President
Chief Financial Officer
21
LSB CORPORATION AND SUBSIDIARY
Quarterly Report on Form 10-Q For Quarter Ended March 31, 2003
EXHIBIT INDEX
Page
----
99.1 Certification Pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the 23
Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the 24
Sarbanes-Oxley Act of 2002
22