UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the fiscal year ended December 31, 2008
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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Commission File Number 000-32955
LSB CORPORATION
(Exact name of registrant as specified in its charter)
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Massachusetts
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04-3557612
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number)
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30 Massachusetts Avenue, North Andover, MA
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01845
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(Address of principal executive offices)
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(Zip Code)
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(978) 725-7500
(Registrants telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
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Titles of each Class
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Name of each Exchange on which registered
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Common Stock, par value $.10 per share
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The NASDAQ Stock Market LLC
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(including associated Preferred Stock Purchase Rights)
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Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
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Yes
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No
Indicate by check mark if the registrant is not required to file pursuant to Section 13 or Section 15(d) of the Act.
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Yes
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No
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 reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
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No
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State the aggregate market value of the voting common equity stock held by non-affiliates* of
the registrant based on the closing sale price of $15.24 per share as of June 30, 2008
Approximately $64.6 million
Indicate the number of shares outstanding of each of the registrants classes of common stock, as
of the latest practicable date.
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Class
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Outstanding as of March 6, 2009
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Common Stock, par value $.10 per share
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4,470,941 shares
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DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K
(e.g., Part I, Part II, etc.) into which the document is incorporated:
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(1)
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Certain information required for Part III of this report is incorporated herein by reference
to the registrants definitive Proxy Statement for its 2009 Annual Meeting of Stockholders,
which the registrant intends to file with the Commission within 120 days after the end of the
registrants fiscal year ended December 31, 2008.
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*
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For purposes of this calculation only, the common stock of LSB Corporation held by directors
and executive officers of LSB Corporation has been treated as owned by affiliates.
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TABLE OF CONTENTS
PART I
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements (within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 as amended) that
are subject to risks and uncertainties. Forward-looking statements include information concerning
possible or assumed future results of operations of the Company, projected or anticipated benefits,
or events related to other future developments involving the Company or the industry in which it
operates. Also, when verbs in the present tense such as believes, expects, anticipates,
continues, attempts or similar expressions are used, forward-looking statements are being made.
For example, the amounts of and statements regarding the adequacy of the Companys provision and
allowance for loan losses, which reflect managements estimates of the likelihood and magnitude of
future losses in the loan portfolio of the Companys subsidiary bank, are forward looking
statements. Investors 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 results to differ materially from those expressed
or implied by these forward-looking statements. Those factors include fluctuations in interest
rates, disruptions in credit markets, inflation, changes in the regulatory environment, government
regulations and changes in regional and local economic conditions, including changes in real estate
conditions in the Companys lending area and changes in loan defaults and charge-off rates, and
changes in the competitive environment in the geographic and business areas in which the Company
conducts its operations. As a result of such risks and uncertainties, the Companys actual results
may differ materially from those expressed or implied by such forward-looking statements. These
risks and others are described elsewhere in this report, including particularly in Item 1A, Risk
Factors. 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.
CAUTION REGARDING NON-GAAP FINANCIAL MEASURES
This Form 10-K also contains certain non-GAAP financial measures in addition to results presented
in accordance with Generally Accepted Accounting Principles (GAAP) in both 2008 and 2007 as
indicated. In an effort to provide investors with information regarding the Companys results, the
Company has disclosed certain non-GAAP information, which management believes provides useful
information to the investor. This information should not be viewed as a substitute for operating
results determined in accordance with GAAP, nor is it necessarily comparable to non-GAAP
information which may be presented by other companies.
ITEM 1. BUSINESS
SUMMARY
LSB Corporation (the Corporation or the Company) is a one bank-holding company principally
conducting business through its subsidiary, River Bank (the Bank). The Corporation became the
holding company for the Bank on July 1, 2001 pursuant to a plan of reorganization in which each
share of Bank common stock then outstanding (and accompanying preferred stock purchase rights) was
converted into and exchanged for one share of the Corporations common stock (and accompanying
preferred stock purchase rights). The Corporations common stock is currently traded on the Nasdaq
Global Market under the symbol LSBX. Prices of the common stock are reported in
The Wall
Street Journal
as LSB Corp.
The Bank was established as a Massachusetts savings bank in 1868; the Bank converted from mutual to
stock form on May 9, 1986.
The Corporation is subject to regulation, supervision and periodic examination by the Board of
Governors of the Federal Reserve System (FRB) and Massachusetts Division of Banks (the
Division). The Bank is subject to supervision, regulation, and periodic examination by the
Federal Deposit Insurance Corporation (FDIC) and the Massachusetts Division of Banks.
The Bank has three wholly-owned subsidiaries at December 31, 2008. Shawsheen Security Corporation
and Shawsheen Security Corporation II engage exclusively in buying, selling, dealing in and holding
securities for their own accounts. Spruce Wood Realty Trust holds real estate used in the ordinary
course of the Banks business.
The Bank offers various financial products to the general public. These products include loans for
residential real estate, commercial real estate, construction, consumer and commercial businesses.
The Bank offers various deposit accounts including savings, checking, money market, certificates of
deposit and individual retirement accounts. The Bank invests a portion of its funds in federal
funds and investment securities.
The principal source of funds for the Corporation is dividends from its Bank subsidiary. The
principal sources of funds for the Banks lending and investment activities are deposits, loan
payments and prepayments, investment securities payments and maturities, advances from the Federal
Home Loan Bank of Boston (FHLBB), Federal funds purchased and securities sold
under agreements to repurchase.
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MARKET AREA
The Banks primary market area is the Merrimack Valley in northeastern Massachusetts and southern
New Hampshire. The Bank has seven banking offices in the communities of Andover, Lawrence, Methuen
(2), and North Andover, Massachusetts and Salem and Derry, New Hampshire.
LENDING ACTIVITIES
The Banks loan portfolio consists of commercial real estate, commercial business, construction,
residential mortgage, home equity and consumer loans. Competition on both pricing and underwriting
terms has been strong in the Banks market area. Gross loans at December 31, 2008 were $452.6
million, an increase of $94.5 million from $358.1 million at December 31, 2007.
COMMERCIAL REAL ESTATE
The Bank originates loans secured by real estate other than 1-4 family residential properties.
These loans are generally secured by various types of commercial real estate including income
properties, commercial facilities (including retail, manufacturing, office and office
condominiums) and small businesses. The interest rates on these loans are fixed or variable. The
interest rates are based on a margin over the rates charged on FHLBB advances or another index
(such as the Prime Rate as published in
The Wall Street Journal
) for a similar term. The
margin is determined by the Bank based on the creditworthiness of the borrower, relationship
profitability and competitive factors.
COMMERCIAL BUSINESS
The Bank originates loans secured by business assets which are not real estate. The Bank has
Certified Lender status from the U.S. Small Business Administration (SBA), which means that,
subject to various conditions, the SBA guarantees repayment of some portion of the loan amount. The
interest rates on these loans may be fixed or variable. The rates are primarily based on a margin
over the Prime Rate as published in
The Wall Street Journal
. The margin is determined based
on the creditworthiness of the borrower, security offered and competitive factors.
CONSTRUCTION
The Bank originates generally short-term loans for land development, construction of residential
homes built on speculation, construction of homes for homeowners with permanent financing, and
construction of commercial facilities (including retail, manufacturing and office space). These
loans have variable interest rates and are generally priced to yield
The Wall Street
Journal
Prime Rate plus a margin. Construction loans may involve additional risk due to
uncertainty of estimated cost of completion of a project, or ultimate sale of the property to an
end buyer. The Bank attempts to reduce these risks by lending to contractors with pre-arranged
buyers or permanent financing commitments upon completion, or to businesses that are expanding and
will occupy the completed project.
RESIDENTIAL MORTGAGES
The Bank originates fixed and adjustable rate residential mortgage loans which are underwritten to
be eligible for sale in the secondary market. These loans are secured primarily by owner occupied
1-4 family primary residential properties. Adjustable rate mortgage loans are generally held by the
Bank in the loan portfolio as a means to manage interest rate risk. Fixed rate mortgages are
generally sold into the secondary market unless management believes they represent a good long-term
asset based on various factors such as loan-to-value ratios, interest rates and managements
expectations of a loans duration. During 2008, the Bank retained all of its originated loans.
SECONDARY MORTGAGE MARKET
The Bank is an approved seller and servicer for the Federal Home Loan Mortgage Corporation
(FHLMC) and the Massachusetts Housing Financing Agency (MHFA). Sales of mortgage loans may be
made at a premium or discount resulting in gains or losses on the transaction. Based on the
structure of the sale, loans sold into the secondary market may provide the Bank with service fee
income over the life of the loan.
HOME EQUITY
The Bank makes second mortgage and home equity loans. Home equity loans can be accessed by the
borrower through a deposit account established with the Bank. These loans carry interest rates that
are either fixed or variable based on the Prime Rate published in
The Wall Street Journal
plus or minus a margin above or below this rate depending on the particular product selected by the
borrower.
CONSUMER
The Bank offers a variety of consumer loan products including overdraft lines of credit, collateral
loans, and secured and unsecured personal loans. These loans are generally fixed rate in nature.
The Bank adjusts interest rates on these products from
time to time based on competitive factors in the marketplace.
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DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
Deposits and borrowings are the primary source of funds for funding loans and purchasing investment
securities. The mix of deposits and borrowings is dependent on many factors, such as loan demand,
competition, the economy, interest rates, and capital resources. Deposits are obtained from the
general public through the Banks branch offices by additions to various deposit accounts,
including checking, savings, money market, certificates of deposit and individual retirement
accounts. The interest rates on these accounts generally are competitive with other local financial
institutions. The Banks core deposit products (savings, checking and money market accounts) allow
customers more flexibility and access and generally earn lower interest rates than other types of
accounts due to the Banks higher operating costs to service these accounts. Certificates of
deposit provide customers with higher interest rates, but less flexibility and access to deposits.
Increasing and decreasing interest rates offered on certificates of deposit allows the Bank to
adjust its sources of funds while providing a competitive interest rate to its customers. Another
alternative source of deposits utilized by the Bank is brokered certificates of deposit. In
addition to deposit accounts, other sources of funds include advances from the FHLBB, Federal funds
purchased and securities sold under agreements to repurchase.
The Bank is a member of the FHLBB. The Bank is required to own stock of the FHLBB which is carried
on the Companys balance sheet at cost, which equals par value. On April 19, 2004, the FHLBB
implemented a new capital structure and stock investment requirements for members to comply with
the Gramm-Leach-Bliley Act of 1999. The minimum stock investment requirements are based in part on
the amount of the Banks outstanding advances with the FHLBB. The Bank receives an amount equal to
the par value of the FHLBB stock when excess stock is redeemed. In December 2008, the FHLBB placed
a moratorium on repurchases of all excess stock. At December 31, 2008, the Bank held $11.8 million
of FHLBB stock.
The Company functions only as a holding company for the Bank, engages in no business activities
directly and is entirely dependent on the receipt of dividends from the Bank to meet its separate
expenses, repay any indebtedness and pay dividends to the Companys stockholders.
EMPLOYEES
The Company maintains no separate payroll. As of December 31, 2008, the Bank employed 94 employees
on a full-time equivalent basis. None of the Banks employees is subject to a collective
bargaining agreement or represented by a labor union. Management considers its relations with
employees to be good.
COMPETITION
The Bank competes with local, regional and national financial service providers in its lending and
deposit activities. The Bank competes in the local market against other local and branch offices of
regional financial institutions such as banks, thrifts and credit unions. In addition, local and
national non-bank businesses such as mortgage companies, securities brokerage firms, insurance
companies and mutual funds offer services competitive with those of the Bank. Bank mergers and
legislation permitting interstate and cross-industry expansion have increased, and are expected to
continue to increase, competition in the Banks market area. The Bank competes on the basis of
interest rates, deposit and loan terms, fees, office location, product and service arrays, customer
convenience and technological advantages. Competition on the Banks deposit taking and lending
activities is affected by movements in interest rates, local and national market developments,
economic trends and the Banks ability to adjust to change.
SUPERVISION AND REGULATION
As a bank holding company, the Corporation is subject to regulation and supervision by the Federal
Reserve Board (FRB) pursuant to the Bank Holding Company Act of 1956, as amended (the BHC Act),
and files with the FRB an annual report and such additional reports as the FRB may require. The
Corporation is also subject to regulations by the Massachusetts Division of Banks. As a bank
holding company, the Corporations activities are limited to the business of banking and activities
closely related or incidental to banking as determined by the FRB. The Corporation may not
directly or indirectly engage in business activities or acquire more than five percent of any class
of voting shares of any company without notice to or approval of the FRB. The Bank is an FDIC
insured state-chartered savings bank subject to the regulations and supervisory authority of, and
periodic examinations by, both the FDIC and the Division. These examinations test the Banks safety
and soundness and compliance with various statutory and regulatory requirements. The Corporation
and the Bank are both subject to federal and state taxation authorities. The Bank is subject to
certain reserve and reporting requirements as a non-member bank of the Federal Reserve System. The
Bank is a member of the Massachusetts Depositors Insurance Fund, an industry-sponsored insurer of
deposit balances exceeding FDIC insurance limits.
Federal and state bank regulatory agencies have authority to issue cease and desist orders, assess
civil money penalties, remove officers and directors, issue capital directives and impose prompt
corrective action restrictions or requirements to address safety
and soundness and compliance issues of the Corporation and the Bank. Among other things, the
regulatory agencies have authority to restrict or prohibit the payment of dividends on the Banks
or the Corporations capital stock if such payment would constitute an unsafe or unsound banking
practice or reduce the Companys or the Banks capital levels below regulatory minimums. (See
Results of Operations Capital Adequacy in Managements Discussion and Analysis of Financial
Condition and Results of Operations and Note 9 to the Consolidated Financial Statements). In
addition, the Bank must obtain prior regulatory approvals to undertake certain banking transactions
and initiatives, including establishment, relocation or termination of a banking office, and merger
or acquisition transactions with other banks or non-banking entities. The supervision and
regulation of the Bank are intended primarily for the
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protection of depositors, the Bank Insurance Fund of the FDIC and non-business borrowers and not for the protection of investors or stockholders
of the Company. The results of examinations provide regulators with a means of measuring and
assessing each institution and taking prompt corrective actions to address any safety and soundness
or compliance issues.
To the extent that information in this report under the heading Supervision and Regulation
describes statutory or regulatory provisions, it is qualified in its entirety by reference to the
particular statutory or regulatory provision described. Any changes in applicable laws or
regulations may have a material effect on the business and prospects of the Company.
FEDERAL DEPOSIT INSURANCE PREMIUMS
The Federal Deposit Insurance Reform Act of 2005 (FDIRA), among other things, gave the FDIC
greater discretion to identify the relative risks depository institutions present to the Deposit
Insurance Fund (DIF) and set risk-based premiums accordingly. The premiums vary depending on the
institutions risk category, which is based on the institutions capital level and supervisory
ratings. FDIC insurance premiums would have been $230,000 in 2008, however the Company was able to
apply credits of $175,000 resulting in a net expense of $55,000. In December 2008, the FDIC board
approved a 7 basis points (bps) increase in premiums charged to banks for deposit insurance,
boosting the rate to between 12 cents and 50 cents per $100 of domestic deposits from a range of
five cents to 43 cents due to market developments that have significantly depleted the insurance
fund of the FDIC and reduced the ratio of reserves to insured deposits.
On February 27, 2009, the FDIC issued a final rule, effective April 1, 2009, which changes the way
the FDICs assessment system differentiates for risk, makes corresponding changes to assessment
rates beginning with the second quarter of 2009, and makes certain technical and other changes to
the assessment rules. The FDIC simultaneously issued an interim rule to impose a 20 bps special
assessment (and possible additional special assessments of up to 10 basis points thereafter) to
replenish the DIF. The special assessment will be equal to 20 basis points of an institutions
assessment base on June 30, 2009. Additionally, beginning April 1, 2009, the FDIC will increase
its base fees on insured deposits. The combination of the special assessment plus the base fee
increase will increase the Companys 2009 deposit insurance premiums to approximately $1.2 million.
The risk-based assessments contained in the final rule may cause the Companys premiums to increase
further in the future. The final rule provides for the following adjustments to an institutions
assessment rate: (1) a decrease for long-term unsecured debt, including most senior and
subordinated debt and, for small institutions, a portion of Tier 1 capital; (2) an increase for
secured liabilities, including Federal Home Loan Bank advances, securities sold under repurchase
agreements, secured Federal funds purchased and certain other secured borrowings, if the
institutions ratio of secured liabilities to domestic deposits is greater than 25%; and (3) for
all institutions other than those in Risk Category I (i.e., banks that are well capitalized with
few weaknesses), an increase of up to 10 bps in the assessment rate if the institution has brokered
deposits in excess of 10% of the institutions domestic deposits. As of December 31, 2008, River
Banks ratio of secured liabilities to domestic deposits was 66% and its ratio of brokered deposits
to domestic deposits was 8%.
The final rule also adds an adjusted brokered deposit ratio, which measures the extent to which
brokered deposits are funding rapid asset growth. The adjusted brokered deposit ratio will affect
only those established Risk Category I institutions whose total gross assets are more than 40
percent greater than they were four years previously, after adjusting for mergers and acquisitions.
In general, the greater an institutions asset growth and the greater its percentage of brokered
deposits, the greater will be the increase in its initial base assessment rate. Specifically, if
an institutions ratio of brokered deposits to domestic deposits exceeds 10 percent and its asset
growth over the previous four years is more than 70 percent, the adjusted brokered deposit ratio
will equal the institutions ratio of brokered deposits to domestic deposits less the 10 percent
threshold. If an institutions ratio of brokered deposits to domestic deposits exceeds 10 percent
but its asset growth over the previous four years is between 40 percent and 70 percent, the
adjusted brokered deposit ratio will equal a gradually increasing fraction of the ratio of brokered
deposits to domestic deposits (minus the 10 percent threshold). If an institutions ratio of
brokered deposits to domestic deposits is 10 percent or less or if the institutions asset growth
over the previous four years is less than 40 percent, the adjusted brokered deposit ratio will be
zero and will have no effect on the institutions assessment rate. As of December 31, 2008, River
Banks ratio of brokered deposits to domestic deposits was 8%, and its asset growth over the
previous four years was approximately 48%.
BANK HOLDING COMPANY ACT, CHANGE IN CONTROL ACT AND REGULATION Y
Under the BHC Act and Regulation Y of the FRB, no company may acquire control of the Company or
the Bank, and no bank holding company may acquire more than five percent of any class of outstanding voting
securities of the Company or the Bank, without prior approval of the FRB. Under the Change in Bank
Control Act of 1978 (the Control Act), no person or group of persons acting in concert may
acquire control of the Company if they do not provide at least 60 days prior written notice to
the FRB or if the FRB gives written notice of objection to such acquisition. Under Regulation Y,
the FRB has established a rebuttable presumption that direct or indirect ownership or control of
more than 10 percent of any class of the Companys outstanding voting securities constitutes
control of the Company and the Bank for purposes of the Control Act.
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GRAMM-LEACH-BLILEY ACT
The Gramm-Leach-Bliley Act of 1999 (the GLB Act) enhanced the authority of banks and their
holding companies to engage in non-banking activities. By electing to become a financial holding
company, a qualified parent company of a banking institution may engage, directly or through
non-bank subsidiaries, in any activity that is determined by the FRB in consultation with the
United States Department of Treasury (the Treasury) to be financial in nature or incidental to
such a financial activity or in any other activity that is complimentary to a financial activity
and does not pose a substantial risk to the safety and soundness of depository institutions or the
financial system generally. Financial activities include all of the activities that have been
determined to be closely related to banking and permissible for bank holding companies, plus
insurance agency, securities underwriting and dealing, and insurance underwriting, among other
activities.
A bank holding company may elect to be regulated as a financial holding company if all of its
depository institution subsidiaries are well capitalized, well managed and have at least a
satisfactory rating under the federal Community Reinvestment Act (CRA). A bank holding company
that elects financial holding company status remains subject to regulation and oversight by the
FRB. While the Company believes that it presently satisfies all requirements to elect to become a
financial holding company, the Company has no present plan to elect financial holding company
status.
Pursuant to the GLB Act, the Bank may also organize or acquire, subject to approvals of the
Division and the FDIC, financial subsidiaries to engage in activities that are financial in
nature or incidental to a financial activity. To form a financial subsidiary, the Bank would be
required to satisfy conditions substantially similar to those that the Company would be required to
satisfy in order to elect to become a financial holding company. While the Company believes that
the Bank would be able to satisfy the requirements to organize or acquire a financial subsidiary,
the Company has no present plan for the Bank to do so.
FEDERAL RESERVE ACT SECTIONS 23A AND 23B AND REGULATION W
Under Sections 23A and 23B of the Federal Reserve Act and Regulation W of the FRB, the Bank may not
enter into any covered transaction with the Company or any separate subsidiary of the Company (a
Reg W Affiliate) on terms that are less favorable to the Bank than the Bank would in good faith
offer to an unaffiliated party. Any loan from the Bank to a Reg W Affiliate must be fully
collateralized by qualifying assets having a fair value equal to or exceeding the amount of the
loan, depending on the character of the collateral. Covered transactions between the Bank and its
Reg W Affiliates must be consistent with safe and sound banking practices and are limited to 10%
and 20% of the Banks capital in the case of any one such Affiliate and all such Affiliates,
respectively. The Bank is prohibited from accepting any assets or securities of a Reg W Affiliate
as collateral for a loan, and may not purchase any low quality asset from any such Affiliate.
FEDERAL RESERVE ACT SECTION 22 AND REGULATION O
Under Section 22 of the Federal Reserve Act and Regulation O of the FRB, the Bank may not make any
loan to directors or executive officers of the Company or the Bank or to the related interests of
any such persons except in conformity with specified restrictions and requirements related to the
amounts, terms, purposes, credit quality and pricing of such loans and with the prior approval of
the Banks Board of Directors.
HOME OWNERSHIP AND EQUITY PROTECTION ACT AND REGULATION Z
Under the Home Ownership and Equity Protection Act (HOEPA), the FRB has created a new category of
higher-priced mortgage loan that will be subject to heightened consumer protections under recent
amendments to Regulation Z of the FRB. Regulation Z defines loans that qualify as higher-priced
mortgage loans by reference to a new index published by the Federal Reserve called the average
prime offer rate (offer rates for the lowest-risk prime mortgage to be derived from the Freddie
Mac Primary Mortgage Market Survey). A lender making a higher-priced mortgage loan may not extend
credit without regard to the borrowers ability to repay from sources other than the collateral and
must verify income and assets the lender relies on to determine the borrowers ability to repay.
The new rules also significantly restrict prepayment penalties that may be charged on higher priced
mortgages and require escrow accounts for property taxes and insurance. The amendments to
Regulation Z are generally effective on October 1, 2009.
USA PATRIOT ACT
The USA Patriot Act is intended to strengthen U.S. law enforcements and the intelligence
communities abilities to work cohesively to combat terrorism on a variety of fronts. The
potential impact of the USA Patriot Act on financial institutions of all
kinds is significant and wide ranging. The USA Patriot Act contains sweeping anti-money laundering
and financial transparency laws and imposes various regulations including standards for verifying
client identification at account opening, and rules to promote cooperation among financial
institutions, regulators and law enforcement entities in identifying parties that may be involved
in terrorism or illegal money laundering. A bill extending the principal provisions of the USA
Patriot Act was signed into law by President George W. Bush on March 9, 2006.
SARBANES-OXLEY ACT OF 2002
The SarbanesOxley Act of 2002 (the Sarbanes-Oxley Act) establishes a comprehensive framework
for modernizing and reforming the oversight of public company financial accounting and disclosure
practices. Principal components of the Sarbanes-Oxley Act include:
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The creation of the Public Company Accounting Oversight Board, with which all accounting
firms performing audits for public companies are required to register, and which is
empowered to set auditing, quality control and independence standards, to inspect
registered firms, and to conduct investigations and to take disciplinary actions, subject
to SEC oversight.
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The strengthening of auditor independence from corporate management by limiting the type
and scope of services that auditors can offer their public company audit clients, requiring
periodic rotation of public company audit partners, requiring direct auditor reports to
company audit committees, and prohibiting public companies from exerting improper influence
over their outside auditors.
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The imposition of new corporate governance requirements including, among other things,
independence and financial expertise requirements for audit committee membership and
empowerment of public company audit committees to appoint, compensate and oversee their
companys outside auditors.
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Requirements that the Chief Executive Officer and the Chief Financial Officer certify
financial statements included in public company filings with the SEC and disclose bonuses
and stock-based compensation for periods for which the company is forced to restate its
financial results, a prohibition of insider stock trades during periods when a companys
employee benefits plans are precluded from trading, and a prohibition of public company
loans or extensions of credit to directors and officers except by regulated financial
institutions in conformity with applicable banking regulations governing insider lending.
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Requirements that public companies disclose whether they have a code of ethics for their
senior financial officers and if not, why not, and that management periodically assess and
report on the adequacy of the companys internal controls.
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The imposition of new and accelerated public company disclosure requirements,
requirements to report off balance sheet transactions and of accelerated reporting of
insider transactions in company stock.
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The SEC has extended compliance dates for non-accelerated filers and smaller reporting companies
with respect to management reporting and outside auditors attestation regarding the adequacy of
internal controls over financial reporting (Section 404 of the Sarbanes-Oxley Act). The Company is
considered a smaller reporting company filer with the SEC and, under current law, began to comply
with the management reporting component of Section 404 for its year ended December 31, 2007, while
the outside auditors attestation component of Section 404 is currently scheduled to be required
for the year ending December 31, 2009.
TROUBLED ASSET RELIEF PROGRAM AND EMERGENCY ECONOMIC STABILIZATION ACT
The Emergency Economic Stabilization Act of 2008 (EESA), enacted on October 3, 2008, provides
authority to the Treasury to restore liquidity and stability to the United States financial system.
The EESA authorizes the Treasury to establish a Troubled Asset Relief Program (TARP) and,
pursuant to TARP, the Treasury established the Capital Purchase Program (CPP) to purchase senior
preferred stock from eligible financial institutions under standardized terms. Eligible
institutions could apply to receive an equity investment from the Treasury in an amount equal to
between 1% and 3% of each institutions risk-weighted assets. The American Recovery and
Reinvestment Act of 2009 (ARRA), enacted on February 17, 2009, amends certain provisions of EESA,
further regulates executive compensation for certain recipients of CPP funds and includes a
provision that, subject to consultation with the appropriate Federal banking agency, directs the
Treasury to permit financial institutions from whom the Treasury purchased preferred stock to
redeem such preferred stock without regard to whether such financial institution has replaced such
funds and not subject to any waiting period. The statute also directs the Treasury to enact
regulations to implement the directives set forth in ARRA; however, these regulations have not yet
been published. As disclosed elsewhere in this Annual Report on Form 10-K, on December 12, 2008,
the Company issued and sold (i) 15,000 shares of senior cumulative perpetual preferred stock,
Series B, (Senior Preferred), with a liquidation preference of $1,000 per share and (ii) ten-year
warrants to purchase up to 209,497 shares of the Companys common stock at an exercise price of
$10.74 per share, to the Treasury as part of CPP, for an aggregate purchase price of $15,000,000,
and is therefore subject to the regulations that have been enacted and will be subject to any
further regulations that relate to CPP participants.
SECURITIES AND EXCHANGE COMMISSION FILINGS ON COMPANYS WEB SITE
Under Section 13 of the Securities Exchange Act of 1934, the Company files periodic and current
reports with the SEC. The Company electronically files the following reports with the SEC: Form 10-K (Annual Report), Form
10-Q (Quarterly Report), Form 8-K (Report of Unscheduled Material Events), Forms 3, 4 & 5
(Statements of Ownership), Forms S-3, S-8 and 8-A (Registration Statements), and Form DEF 14A
(Proxy Statement). The Company may file additional forms. The SEC maintains an Internet site,
www.sec.gov, at which all forms filed electronically may be accessed. The Companys website:
www.riverbk.com has a section for SEC filings available free of charge and provides a link under
www.riverbk.com/stockholder-info.asp. Information contained on our website and the SEC website is
not incorporated by reference into this Form 10-K. We have included our web address and the SEC
website address only as inactive textual references and do not intend them to be active links to
our website or the SEC website.
MASSACHUSETTS BANK REGULATION
As a Massachusetts-chartered savings bank, the Bank is subject to supervision, regulation and
examination by the Massachusetts Division of Banks (the Division) and to various Massachusetts
statutes and regulations which govern, among other things, investment powers, lending and
deposit-taking activities, borrowings, maintenance of surplus and reserve accounts, distribution of
earnings, and payment of dividends. In addition, the Bank is subject to Massachusetts consumer
protection laws and regulations. The
7
Divisions approval is required for a Massachusetts bank to
establish or close branches, merge with other banks, and undertake certain other activities.
Regulatory Enforcement Authority
. Any Massachusetts bank that does not operate in accordance with
the regulations, policies and directives of the Commissioner may be subject to sanctions for
non-compliance. The Commissioner may under certain circumstances suspend or remove officers or
directors who have violated the law, conducted a banks business in a manner which is unsafe,
unsound or contrary to the depositors interests, or been negligent in the performance of their
duties. In addition, upon finding that a bank has engaged in an unfair or deceptive act or
practice, the Commissioner may issue an order to cease and desist and impose a fine on the bank.
Finally, Massachusetts consumer protection statutes applicable to a bank permit private individual
and class action law suits and provide for the rescission of consumer transactions, including
loans, and the recovery of statutory and punitive damages and attorneys fees in the case of
certain violations.
Massachusetts law has recently been amended to restrict certain home mortgage lending practices.
The law applies to banks that make so-called high cost mortgage loans and, among other
provisions, requires credit counseling for borrowers, requires that banks have a reasonable
belief that borrowers are able to make required payments out of current income, and limits the
financing of points and fees.
Massachusetts law prohibits all mortgage lenders, including savings banks, from knowingly making a
home mortgage loan in Massachusetts for the purpose of re-financing an existing home mortgage loan
closed within the preceding five years, or re-financing any other debt of the borrower regardless
of when it was incurred, unless the refinancing is in the borrowers interest. The Commissioner
recently issued regulations further clarifying the factors to be considered by a lender in
determining whether a refinancing is in the borrowers interest and the procedures a bank must
follow to demonstrate its compliance with the law.
Massachusetts enacted legislation effective in March 2005 that revised and recodified a wide range
of Massachusetts banking laws. Among other things, the law revised Massachusetts branching and
lending laws, eliminating rigid restrictions on lending, but requiring Massachusetts banks to enact
comprehensive loan policies that carefully describe loan programs and the loan-to-value ratios,
amortization requirements, and other elements of those programs.
Parity Regulation
. Massachusetts regulations allow Massachusetts banks to exercise additional or
more flexible parallel powers granted to national banks, federal savings banks and out of-state
state-chartered banks with branches in Massachusetts which are otherwise not permitted under state
law. Specifically, these regulations permit a Massachusetts-chartered bank that is either
adequately capitalized or well capitalized, is not in troubled condition, and has received as
least a satisfactory CRA rating during its most recent regulatory examination to establish
temporary branch offices, make certain investments in corporate affiliates and subsidiaries, engage
in lease financing transactions, engage in finder and certain electronic banking activities, invest
in community development and public welfare projects, and provide tax planning and preparation,
payroll and financial planning services, among others. The applicable procedures and requirements
vary according to the nature of the activity to be engaged in and the capitalization of the bank.
As of the date of this report, the Bank was well capitalized, had received a CRA rating of
satisfactory and was not in troubled condition and was therefore eligible to engage in certain
of the above-referenced activities, subject to the applicable procedures and requirements of
Massachusetts regulation.
In January 2005, the U.S. District Court for the District of Massachusetts ruled that the GLB Act
preempts four provisions of Massachusetts law regulating the way banks sell insurance as agent or
broker. The preempted rules are the so-called referral prohibition, the referral fee
prohibition, the waiting period restriction and the separation restriction. The referral
prohibition allows bank employees to refer customers to the banks insurance agency only if the
customer first inquires about insurance, and as a result prohibits a bank teller from initiating a
discussion about insurance with a customer. The referral fee prohibition forbids banks from
paying additional compensation to unlicensed bank employees including tellers who make referrals to
the banks insurance agency. The waiting period restriction allows banks to solicit the sale of
insurance from loan applicants only after the loan application has been approved and only after the commitment letter
has been issued in the case of a mortgage loan. Finally, the separation restriction generally
requires banks to keep insurance activities physically separated from a banks loan and deposit
activities, although regulations now permit tellers who refer customers to licensed insurance
producers to receive a one-time, nominal fee of a fixed dollar amount for each referral.
Depositors Insurance Fund
. All Massachusetts-chartered savings banks, including the Bank, are
required to be members of the Depositors Insurance Fund (DIF), a corporation that insures savings
bank deposits that are not otherwise covered by federal deposit insurance. The DIF is authorized to
charge savings banks an annual assessment of up to 1/16th of 1% of a savings banks deposits.
ITEM 1A. RISK FACTORS
Changes in interest rates could adversely impact the Companys financial condition and results of
operations.
The Companys ability to make a profit, like that of most financial institutions,
substantially depends upon its net interest income, which is the difference between the interest
income earned on interest earning assets, such as loans and investment securities, and the interest
expense paid on interest-bearing liabilities, such as deposits and borrowings. However, certain
assets and liabilities may react
8
differently to changes in market interest rates. Further, interest
rates on some types of assets and liabilities may fluctuate prior to changes in broader market
interest rates, while rates on other types of assets may lag behind. Additionally, some assets such
as adjustable-rate mortgages have features and rate caps which restrict changes in their interest
rates.
Factors such as inflation, recession, unemployment, fluctuations in the money supply, global
disorder such as that experienced as a result of the terrorist activity on September 11, 2001,
instability in domestic and foreign financial markets, and other factors beyond the Companys
control may affect interest rates. Changes in market interest rates will also affect the level of
voluntary prepayments on loans and the receipt of payments on mortgage-backed securities, resulting
in the receipt of proceeds that may have to be reinvested at a lower rate than the loan or
mortgage-backed security being prepaid. Although the Company pursues an asset-liability management
strategy designed to control its risk from changes in market interest rates, changes in interest
rates can still have a material adverse effect on the Companys business, financial condition,
results of operations and cash flows. For example, if rates paid on deposits and borrowings
reprice more quickly than the assets in a rising interest rate environment, the Company would
experience a compression of its net interest spread and net interest margin. Alternatively, in a
declining interest rate environment, if assets reprice more quickly than its liabilities, net
interest margin compression would occur.
If the Company has higher loan losses than it has allowed for, its earnings could materially
decrease
.
The Companys loan customers may not repay loans according to their terms, and the
collateral securing the payment of loans may be insufficient to assure repayment. The Company may
therefore experience significant credit losses which could have a material adverse effect on its
operating results. The Company makes various assumptions and judgments about the collectibility of
its loan portfolio, including the creditworthiness of borrowers and the value of the real estate
and other assets serving as collateral for the repayment of loans. In determining the size of the
allowance for loan losses, the Company relies on its experience and its evaluation of economic
conditions. If one or more of the assumptions prove to be incorrect, its current allowance for loan
losses may not be sufficient to cover losses inherent in its loan portfolio and adjustment may be
necessary to allow for different economic conditions or adverse developments in its loan portfolio.
Consequently, a problem with one or more loans could require the Company to significantly increase
the level of its provision for loan losses. In addition, federal and state regulators periodically
review the Companys allowance for loan losses and may require it to increase its provision for
loan losses or recognize further loan charge-offs. Material additions to the allowance would
materially reduce the Companys net income and could adversely affect its financial condition.
Moreover, when a loan is placed on non-accrual status, all interest previously accrued but not
collected is reversed against current period interest income.
A significant amount of the Companys loans are concentrated in northeastern Massachusetts and
southern New Hampshire, and adverse conditions in this area could negatively impact its operations.
Substantially all of the loans the Company originates are secured by properties located in or are
made to businesses which operate in northeastern Massachusetts or southern New Hampshire. Because
of the current concentration of the Companys loan origination activities in northeastern
Massachusetts and southern New Hampshire, in the event of adverse economic conditions, downward
pressure on housing prices, political or business developments or natural hazards adversely
affecting northeastern Massachusetts or southern New Hampshire and the ability of property owners
and businesses in that area to make payments of principal and interest on the underlying loans,
could cause the Company to experience higher rates of loss and delinquency on its loans than if its
loans were more geographically diversified. Additionally, a decline in real estate values
generally, or in northeastern Massachusetts and southern New Hampshire specifically, could cause
some of our real estate loans to become inadequately collateralized, which would expose the Company
to a greater risk of loss. Additionally, a decline in real estate values could result in a decline
in the origination of such loans. Such higher rates of loss and delinquency and declines in real
estate values could have a material adverse effect on the Companys results of operations or
financial condition.
The Company operates in a highly regulated environment and may be adversely impacted by changes in
law and regulations
. The Company is subject to extensive regulation, supervision and examination.
See Supervision and Regulation in Item 1 hereof, Business. Due to the current economic climate, we may face increased regulation of
our industry. Compliance with such regulation may increase our costs and limit our ability to
pursue business opportunities. Any change in the laws or regulations or failure by the Company to
comply with applicable law and regulation, or change in regulators supervisory policies or
examination procedures, whether by the Division, the FDIC, the FRB, other state or federal
regulators, the United States Congress, or the Massachusetts legislature could have a material
adverse effect on the Companys business, financial condition, results of operations, and cash
flows.
The Companys FDIC premiums have materially increased and could continue to do so, which could
materially affect the Companys earnings.
FDIC insurance premiums would have been $230,000 in
2008, however the Company was able to apply credits of $175,000 resulting in a net expense of
$55,000. In December, 2008, the FDIC board approved a 7 basis points (bps) increase in premiums
charged to banks for deposit insurance, boosting the rate to between 12 cents and 50 cents per $100
of domestic deposits from a range of five cents to 43 cents due to market developments that have
significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured
deposits. On February 27, 2009, the FDIC passed an interim rule that allows it to charge banks a
special assessment of 20 bps on insured deposits to replenish the deposit insurance fund. This
special assessment will be collected in the third quarter of 2009. Additionally, beginning April 1,
2009, the FDIC will increase its base fees on insured deposits, the combination of which would
increase the Companys 2009 deposit insurance premiums to approximately $1.2 million. See Federal
Deposit Insurance Premiums in Supervision and Regulation in Item I hereof, Business, for more
information on the FDIC insurance premiums. There can be no assurance that the Companys FDIC
premiums will not increase further and, if so, that its earnings would not materially decrease as a
result.
9
The impact on the Company of recently enacted legislation, in particular the Emergency Economic
Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009 and their
implementing regulations as well as the Presidents Financial Stability Plan, and the Companys
participation in programs thereunder, cannot be predicted at this time.
Beginning in the fourth
quarter of 2008, the U.S. government has responded to the ongoing financial crisis and economic
slowdown by enacting new legislation and expanding or establishing a number of programs and
initiatives. The Treasury, the FDIC and the Federal Reserve Board each have developed programs and
facilities, including the CPP and other efforts designed to increase inter-bank lending, improve
funding for consumer receivables and restore consumer and counterparty confidence in the banking
sector. In addition, the recently enacted ARRA is intended to expand and establish government
spending programs and provide tax cuts to stimulate the economy. Congress and the U.S. government
continue to evaluate and develop various programs and initiatives designed to stabilize the
financial and housing markets and stimulate the economy, including the Treasurys recently
announced Financial Stability Plan and the governments recently announced foreclosure prevention
program. As discussed elsewhere in this Annual Report on Form 10-K, the Company has participated
in the CPP, but has opted not the participate in the FDICs Temporary Liquidity Guarantee Program.
The effects of participating or not participating in any such programs and the extent of the
Companys participation in such programs cannot be determined at this time.
The impact of further contemplated legislative and regulatory changes cannot be predicted at this
time.
The Obama Administration and Congress are actively considering a broad restructuring of the
regulatory landscape for financial institutions. On March 5, 2009, House Financial Services
Committee Chairman Barney Frank issued the following statement, While we will continue to work
with the Obama Administration on stabilization, it is now essential that we continue work on our
reform agenda and address the need for financial regulatory restructuring to diminish systemic risk
and to enhance market integrity. The Company cannot reliably predict at this time whether any of
these legislative initiatives will be enacted, and if so, what impact, if any, it would have on the
Companys financial condition, operating results or business.
The terms governing the issuance of the Preferred Stock to the Treasury may be changed, the effect
of which may have an adverse effect on the Companys operations.
The Securities Purchase Agreement
that was entered into with the Treasury provides that the Treasury may unilaterally amend any
provision of the agreement to the extent required to comply with any change in applicable federal
statutes that may occur in the future. The ARRA placed more stringent limits on executive
compensation than were applicable at the time the Company entered into the Securities Purchase
Agreement, including a prohibition on the payment of bonuses and severance to certain officers and
a requirement that compensation paid to our executives be presented annually to shareholders in a
non-binding vote. There can be no assurance that further changes in the terms of the transaction
will not occur in the future. Such changes may place further restrictions on the Companys business
or results of operation, which may adversely affect the market price of its common stock.
The Company has strong competition within its market area which may limit the Companys growth and
profitability
. The Company faces significant competition both in attracting deposits and in the
origination of loans. See Competition in Item 1 hereof, Business. Commercial banks, credit unions,
savings banks and savings and loan associations operating in our primary market area have
historically provided most of our competition for deposits. Mutual funds and internet-only bank
providers contribute additional competition in the quest for deposits. Competition for the
origination of real estate and other loans comes from other commercial, savings and cooperative
banks, thrift institutions, insurance companies, finance companies, other
institutional lenders and mortgage companies.
The success of the Company is dependent on retaining certain key personnel or attracting and
retaining additional, qualified personnel
. The Companys performance is largely dependent on the
talents and efforts of highly skilled individuals. The Company relies on key personnel, including
executive officers, to manage and operate its business, including major revenue generating
functions such as loan and deposit generation. The loss of key staff may adversely affect the
Companys ability to maintain and manage these functions effectively, which could negatively affect
the Companys revenues. In addition, loss of key personnel could result in increased recruiting and
hiring expenses, which could cause a decrease in the Companys net income. The Companys continued
ability to compete effectively depends on its ability to attract new employees and to retain and
motivate its existing employees.
The limitations on executive compensation imposed through the Companys participation in the
Capital Purchase Program may restrict its ability to attract, retain and motivate key employees,
which could adversely affect our operations.
As part of the CPP transaction, the Company agreed to
be bound by certain executive compensation restrictions, including limitations on severance
payments and the clawback of any bonus and incentive compensation that were based on materially
inaccurate financial statements or any other materially inaccurate performance metric criteria.
Subsequent to the issuance of the Senior Preferred, the ARRA imposed more stringent limitations on
severance pay and the payment of bonuses. To the extent that these compensation restrictions do not
permit the Company to provide a comprehensive compensation package to our key employees that is
competitive in its market area, the Company may have difficulty in attracting, retaining and
motivating key employees, which could have an adverse effect on the Companys results of
operations.
10
The Company continues to encounter technological change, and may have fewer resources than many of
its larger competitors to continue to invest in technological improvements.
The financial services
industry is undergoing rapid technological changes, with frequent introductions of new
technology-driven products and services. The effective use of technology increases efficiency and
enables financial institutions to serve their customers better and to reduce costs. The Companys
success will depend, in part, upon its ability to address the needs of its customers by using
technology to provide products and services that will satisfy customer demands for convenience, as
well as to create additional efficiencies in its operations. Many of the Companys larger
competitors have substantially greater resources to invest in technological improvements. The
Company may not be able to effectively implement new technology-driven products and services or be
successful in marketing these products and services to its customers.
The Company relies on dividends from the Bank for substantially all of its revenue
. The Company is
a separate and distinct legal entity from the Bank. It receives substantially all of its revenue
from dividends paid by the Bank. These dividends are the principal source of funds used to pay
dividends on the Companys common stock. Various federal and state laws and regulations limit the
amount of dividends that the Bank may pay to the Company. If the Bank is unable to pay dividends
to the Company, then the Company will be unable to pay its obligations or pay dividends on the
Companys common stock. The inability to receive dividends from the Bank could have a material
adverse effect on the Companys business, financial condition and results of operations.
Market fluctuations and changes in interest rates have had, and may continue to have, significant
and negative effects on the Companys investment portfolio and stockholders equity.
The Companys
results of operations depend in part on the performance of its invested assets. The Company had an
investment portfolio with a fair value of $264.6 million at December 31, 2008, that is subject to:
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market value risk, which is the risk that invested assets will decrease in value due to
a change in the prevailing market yields on our investments, an unfavorable change in the
liquidity of an investment or an unfavorable change in the financial prospects or a
downgrade in the credit rating of the issuer of an investment or one or more other factors;
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reinvestment risk, which is the risk that interest rates will decline, an investment
will be redeemed and the Company will not be able to reinvest the proceeds in a comparable
investment that provides a yield equal to or greater than the investment which was
redeemed; and
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liquidity risk, which is the risk that the Company may have to sell assets at an
undesirable time and/or price to provide funds for its business.
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If the Companys investment portfolio were to be impaired by market or issuer-specific conditions
to a substantial degree, its liquidity, financial position and operating results could be
materially adversely affected.
Management may assess a decline in fair value as being temporary when in fact it is
other-than-temporary and, consequently, not charge the impairment to the Companys earnings, which
could have a significant impact on its future operating results.
The carrying values of investment securities available for sale are derived from market prices
supplied by the Companys investment custodian or, when no price is provided by the custodian, from
a third party valuation. Fair value is based on quoted market prices. Unrealized investment gains
and losses on such securities, to the extent that there is no other-than-temporary
impairment of value, are credited or charged, net of any tax effect, to a separate component of
stockholders equity, known as net accumulated other comprehensive income (loss), until realized.
If a security is deemed other-than-temporarily impaired, management would adjust the securitys
cost basis to fair value through a realized loss on the income statement. After a security has
been written down for an other-than-temporary impairment, the new cost basis is used thereafter to
determine the amount of any unrealized holding gains and losses which are credited or charged, net
of any tax effect, to net accumulated other comprehensive income (loss), until realized.
Management considers available evidence in evaluating whether unrealized losses on individual
securities are other-than-temporary. This evaluation often involves estimating the outcome of
future events and judgment is required in determining whether factors exist that indicate that an
impairment loss has been incurred at the date of the financial statements. These factors are both
subjective and objective and include knowledge and experience about past and current events and
assumptions about future events. Managements knowledge about past and current events regarding a
security and its issuer may be incomplete, or its assumptions about future events regarding a
security and its issue may prove to be incorrect. Accordingly, there is a risk that management may
assess a decline in fair value as being temporary when in fact it is other-than-temporary, or
subsequent events occur that cause management to conclude that a decline in fair value is other
than temporary, resulting in an impairment charge that could have a significant impact on the
Companys future operating results and financial condition.
When the Company becomes subject to the full SEC requirements under Section 404 of the
Sarbanes-Oxley Act of 2002, it will likely incur significant costs in connection with first
providing internal control reports.
Under current SEC regulations, as a smaller reporting
company under the federal securities laws, the Company became subject to the management reporting
component for its year ended December 31, 2007 and will become subject to the outside auditors
attestation component of Section 404 of the Sarbanes-Oxley Act of 2002 for its year ending December
31, 2009. Section 404 requires that the Company prepare a management
11
report on its internal control over financial reporting and obtain an attestation on that report from its auditors in
connection with its most recent consolidated financial statements included with its annual report.
During the past several years, many SEC reporting companies have incurred significant costs in
connection with first providing internal control reports. The Company will likely incur
significant costs in connection with obtaining the outside auditors attestation report of the
Companys internal control reports. If the Company does incur such costs, the costs could have an
adverse effect on the Companys results of operations.
When the Company becomes subject to the full SEC requirements under Section 404 of the
Sarbanes-Oxley Act of 2002, if its internal control reports disclose significant deficiencies or
material weaknesses, its stockholders and lenders could lose confidence in its financial reporting,
which would likely harm the trading price of its stock, its access to additional capital, and its
liquidity.
During the past several years, various SEC reporting companies, when first providing
internal control reports, disclosed significant deficiencies or material weaknesses in their
internal control over financial reporting. If the Companys internal control reports disclose
material weaknesses, the Companys stockholders could lose confidence in its financial reporting,
which would likely harm the trading price of its stock, its access to additional capital, and its
liquidity.
If the Companys investment in the Federal Home Loan Bank of Boston becomes impaired, its earnings
and stockholders equity could decrease
. The Company is required to own common stock of the FHLBB
to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds
under the FHLBBs advance program. The aggregate cost and fair value of the FHLBB common stock as
of December 31, 2008 was $11.8 million based on its cost. FHLBB common stock is not a marketable
security. The FHLBB has reported a net loss of $73.2 million for the year ended December 31, 2008,
primarily attributable to a $339.1 million charge related to the other-than-temporary impairment of
certain private-label mortgage-backed securities as of December 31, 2008. Further, the FHLBB has
voted to suspend dividends for the quarter ended December 31, 2008 and has disclosed that, based on
current information, dividend payments in 2009 are unlikely. These and other developments could
put into question whether the fair value of FHLBB stock owned by the Company was less than its
carrying value. Consequently, the Company believes that there is a risk that its investment in
FHLBB common stock could be deemed impaired at some time in the future, and if this occurs, it
would cause its earnings and stockholders equity to decrease by the amount of the impairment
charge.
The tightening of available liquidity could limit the Companys ability to replace deposits and
fund loan demand, which could adversely affect its earnings and capital levels.
A tightening of
the credit market and the inability to obtain adequate money to replace deposits and fund continued
loan growth may negatively affect asset growth and, therefore earnings capability, and capital
levels. In addition to any deposit growth, maturity of investment securities and loan payments, we
rely on certain wholesale funding sources and uncommitted FHLBB advances to fund loans and replace
deposits. In the event of a further downturn in the economy, these additional funding sources could
be negatively affected which could limit the funds available to the Company. FHLBB has publicly
disclosed that, over time, current market trends may have a negative impact on FHLBBs own
liquidity. Further, the twelve Federal Home Loan Banks are jointly and severally liable for each
others debt, which means that the FHLBBs liquidity could be adversely affected by losses, capital
weaknesses or other financial problems at one or more of other regional Federal Home Loan Banks.
The Companys liquidity position would be significantly constrained if we were unable to access
funds from the FHLBB or other funding sources.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
The Company conducts its business at its corporate offices in North Andover and multiple branch
locations listed here. The Company believes that all of its properties are well maintained and are
suitable for banking needs and operations.
The following table sets forth certain information about the Banks offices as of December 31,
2008:
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Lease
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Year
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Current
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Acquired
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Square
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Owned/
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Term
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Renewal
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Or Leased
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Feet
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Leased
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Expires
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Options
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CORPORATE OFFICES AND
MAIN BANKING OFFICE
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30 Massachusetts Ave.
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1992
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45,315
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Owned
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No. Andover, MA 01845
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BRANCH BANKING OFFICES
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Massachusetts
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342 North Main Street
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1995
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(1)
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2,449
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Leased
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|
|
2010
|
|
|
Two (5 yrs.)
|
Andover, MA 01810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300 Essex
|
|
|
1998
|
(2)
|
|
|
3,432
|
|
|
Leased
|
|
|
2009
|
|
|
Two (1 yr.)
|
Lawrence, MA 01840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20 Jackson Street
|
|
|
1968
|
|
|
|
2,369
|
|
|
Leased
|
|
|
2010
|
|
|
|
|
|
Methuen, MA 01844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148 Lowell Street
|
|
|
1979
|
|
|
|
5,234
|
|
|
Owned
|
|
|
|
|
|
|
|
|
Methuen, MA 01844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Hampshire
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51 Crystal Ave.
|
|
|
2007
|
(3)
|
|
|
2,600
|
|
|
Leased
|
|
|
2027
|
|
|
Four (5 yrs.)
|
Derry, NH 03038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401-403 Main Street, Ste. 105
|
|
|
2004
|
|
|
|
2,500
|
|
|
Leased
|
|
|
2014
|
|
|
Two (5 yrs.)
|
Salem, NH 03079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The Bank has occupied the branch since 1979 and performed a sale-leaseback transaction in 1995.
|
|
(2)
|
|
Prior to moving to this location, the Bank occupied a branch office at 255 Essex Street.
|
|
(3)
|
|
The Bank opened a full service branch at this location in January 2009.
|
ITEM 3. LEGAL PROCEEDINGS
The Bank and the Company are, from time to time, involved as either a plaintiff or defendant in
various legal actions which are ordinary routine litigation incident to its business. None of
these actions are believed to be material, either individually or collectively, to the results of
operations and financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
13
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The Companys stock trades on the Nasdaq Global Market under the symbol LSBX. Sales prices of the
stock are reported in the
Wall Street Journal
as LSBCorp. On February 28, 2009, the
closing price of LSB Corporation common stock was $8.49.
The following table sets forth for the fiscal periods indicated certain information with respect to
the sales prices of the Companys common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Prices
|
|
Cash
|
Fiscal Year
|
|
High
|
|
Low
|
|
Dividends
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
12.99
|
|
|
$
|
7.25
|
|
|
$
|
0.15
|
|
Third Quarter
|
|
|
17.50
|
|
|
|
9.05
|
|
|
|
0.15
|
|
Second Quarter
|
|
|
16.68
|
|
|
|
14.86
|
|
|
|
0.14
|
|
First Quarter
|
|
|
16.95
|
|
|
|
15.50
|
|
|
|
0.14
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
17.47
|
|
|
$
|
15.30
|
|
|
$
|
0.14
|
|
Third Quarter
|
|
|
17.14
|
|
|
|
15.50
|
|
|
|
0.14
|
|
Second Quarter
|
|
|
17.49
|
|
|
|
15.85
|
|
|
|
0.14
|
|
First Quarter
|
|
|
16.92
|
|
|
|
16.40
|
|
|
|
0.14
|
|
The Company anticipates that it will continue to pay dividends during 2009. On March 6, 2009, there
were approximately 789 holders of common stock. This number does not reflect the number of persons
or entities who hold their stock in nominee or street name through various brokerage firms.
During the year ended December 31, 2008, there were 64,620 shares of stock repurchased under the
Companys previously announced stock buyback program.
Prior to December 12, 2011, unless the Company has redeemed the Senior Preferred or the Treasury
has transferred the Senior Preferred to a third party, the consent of the Treasury will be required
for the Company to (i) declare or pay any dividend or make any distribution on common stock (other
than the regular quarterly cash dividend or not more than $0.15 per share) or (ii) redeem, purchase
or acquire any shares of the Companys common stock, other than in connection with benefit plans
consistent with past practice and certain other circumstances specified in the CPP.
In determining whether to declare or pay any dividends, whether regular or special, the Board of
Directors will take into account the Companys financial condition and results of operations, tax
considerations, capital requirements, industry standards and economic conditions. The regulatory
restrictions that affect the payment of dividends by the Bank to the Company discussed below will
also be considered. The Company cannot guarantee that it will not reduce or eliminate dividends in
the future.
Dividends from the Company will depend, primarily, upon receipt of dividends from the Bank because
the Company has no significant source of income other than dividends from the Bank. Massachusetts
banking law and FDIC regulations limit distributions from the Bank to the Company. For example,
the Bank could not pay dividends if it were not in compliance with applicable regulatory capital
requirements. In addition, the Company is subject to the Federal Reserve Boards policy that
dividends should be paid only out of current earnings and only if the prospective rate of earnings
retention by the Company appears consistent with its capital needs, asset quality and overall
financial condition. See
Supervision and Regulation
for further information.
Information on equity compensation plans required by Item 5 is incorporated by reference herein
from the section in the Companys Proxy Statement entitled Equity Compensation Plan Information.
The following information pertains to any purchase made by or on behalf of LSB Corporation or any
affiliated purchaser, as defined in 204.10b-18(a)(3) under the Securities Exchange Act of 1934,
of shares of LSB Corporation common stock during the indicated periods. On April 26, 2007, the
Company announced a common stock repurchase program to repurchase up to 230,000 shares. The
Company has no deadline on the duration of the repurchase program. Under the previously approved
common stock repurchase program, the Company repurchased 154,976 shares, or approximately 3% of the
Companys outstanding common stock, at an average cost of $16.12 per share, between April 26, 2007
and June 30, 2008. As a result of the other-than temporary impairment charges recorded during
2008, the Company suspended its stock repurchase program and is not permitted to reinstate the
repurchase program while the Treasurys $15 million preferred stock investment is outstanding.
There were no stock repurchases during the fourth quarter of 2008. See Note 9 to the Consolidated
Financial Statements for further information.
14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
(Dollars in Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
761,324
|
|
|
$
|
621,651
|
|
|
$
|
542,965
|
|
|
$
|
521,800
|
|
|
$
|
518,477
|
|
Loans, gross
|
|
|
452,621
|
|
|
|
358,113
|
|
|
|
288,163
|
|
|
|
234,611
|
|
|
|
232,810
|
|
Allowance for loan losses
|
|
|
5,885
|
|
|
|
4,810
|
|
|
|
4,309
|
|
|
|
4,126
|
|
|
|
4,140
|
|
Federal funds sold
|
|
|
6,469
|
|
|
|
56
|
|
|
|
11,871
|
|
|
|
198
|
|
|
|
209
|
|
Investment securities
|
|
|
264,561
|
|
|
|
230,596
|
|
|
|
218,682
|
|
|
|
260,046
|
|
|
|
263,303
|
|
Deposits
|
|
|
408,663
|
|
|
|
322,083
|
|
|
|
295,662
|
|
|
|
303,087
|
|
|
|
299,106
|
|
Borrowed funds
|
|
|
276,490
|
|
|
|
235,351
|
|
|
|
184,782
|
|
|
|
153,380
|
|
|
|
157,263
|
|
Stockholders equity
|
|
|
72,142
|
|
|
|
60,298
|
|
|
|
58,531
|
|
|
|
59,922
|
|
|
|
57,838
|
|
|
Year Ended December 31
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
38,755
|
|
|
$
|
35,008
|
|
|
$
|
28,956
|
|
|
$
|
25,558
|
|
|
$
|
22,331
|
|
Interest expense
|
|
|
21,880
|
|
|
|
19,681
|
|
|
|
15,160
|
|
|
|
11,638
|
|
|
|
8,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
16,875
|
|
|
|
15,327
|
|
|
|
13,796
|
|
|
|
13,920
|
|
|
|
13,811
|
|
Provision (credit) for loan losses
|
|
|
1,285
|
|
|
|
645
|
|
|
|
160
|
|
|
|
|
|
|
|
(300
|
)
|
Impairment write-downs on securities
|
|
|
(10,105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses on sales of investment securities
|
|
|
|
|
|
|
|
|
|
|
(2,417
|
)
|
|
|
|
|
|
|
|
|
Gains on pension plan termination
|
|
|
|
|
|
|
762
|
|
|
|
602
|
|
|
|
|
|
|
|
|
|
Other non-interest income
|
|
|
2,116
|
|
|
|
1,922
|
|
|
|
1,410
|
|
|
|
1,555
|
|
|
|
1,553
|
|
Lawsuit judgment collected
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,233
|
|
|
|
2,280
|
|
Salaries and employee benefits expense
|
|
|
6,706
|
|
|
|
6,836
|
|
|
|
7,399
|
|
|
|
6,899
|
|
|
|
6,507
|
|
Other non-interest expense
|
|
|
5,170
|
|
|
|
4,721
|
|
|
|
5,621
|
|
|
|
4,245
|
|
|
|
4,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(4,275
|
)
|
|
|
5,809
|
|
|
|
211
|
|
|
|
6,564
|
|
|
|
7,280
|
|
Income tax (benefit) expense
|
|
|
(1,552
|
)
|
|
|
2,091
|
|
|
|
85
|
|
|
|
2,407
|
|
|
|
2,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,723
|
)
|
|
$
|
3,718
|
|
|
$
|
126
|
|
|
$
|
4,157
|
|
|
$
|
4,680
|
|
|
Basic earnings (loss) per share
|
|
$
|
(0.61
|
)
|
|
$
|
0.81
|
|
|
$
|
0.03
|
|
|
$
|
0.94
|
|
|
$
|
1.09
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.61
|
)
|
|
$
|
0.81
|
|
|
$
|
0.03
|
|
|
$
|
0.92
|
|
|
$
|
1.05
|
|
|
|
At or for the year ended December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio
|
|
|
62.54
|
%
|
|
|
67.00
|
%
|
|
|
85.66
|
%
|
|
|
72.19
|
%
|
|
|
69.72
|
%
|
Interest rate spread
|
|
|
2.14
|
|
|
|
2.19
|
|
|
|
2.22
|
|
|
|
2.34
|
|
|
|
2.64
|
|
Net interest margin on average earning
assets
|
|
|
2.50
|
|
|
|
2.72
|
|
|
|
2.68
|
|
|
|
2.66
|
|
|
|
2.91
|
|
Return (loss) on average assets (net income loss/
average assets)
|
|
|
(0.39
|
)
|
|
|
0.64
|
|
|
|
0.02
|
|
|
|
0.77
|
|
|
|
0.96
|
|
Return (loss) on average equity (net income loss/
average stockholders equity)
|
|
|
(4.63
|
)
|
|
|
6.35
|
|
|
|
0.22
|
|
|
|
7.14
|
|
|
|
8.33
|
|
Dividend payout ratio (dividends declared per
share divided by diluted earnings per share)
|
|
|
n/m
|
|
|
|
69.14
|
|
|
|
n/m
|
|
|
|
60.87
|
|
|
|
49.52
|
|
Average stockholders equity to average
assets ratio
|
|
|
8.41
|
|
|
|
10.10
|
|
|
|
10.80
|
|
|
|
10.81
|
|
|
|
11.53
|
|
Cash dividends declared and paid per
common share
|
|
$
|
0.58
|
|
|
$
|
0.56
|
|
|
$
|
0.56
|
|
|
$
|
0.56
|
|
|
$
|
0.52
|
|
Book value per share at year end with CPP
|
|
|
16.14
|
|
|
|
13.35
|
|
|
|
12.74
|
|
|
|
13.42
|
|
|
|
13.33
|
|
Book value per share at year end excluding CPP
|
|
|
12.78
|
|
|
|
13.35
|
|
|
|
12.74
|
|
|
|
13.42
|
|
|
|
13.33
|
|
Tangible book value per share with CPP at
year end (excludes accumulated other
comprehensive income/loss)
|
|
|
15.40
|
|
|
|
13.26
|
|
|
|
13.05
|
|
|
|
13.58
|
|
|
|
13.43
|
|
Tangible book value per share excluding CPP
|
|
|
12.04
|
|
|
|
13.26
|
|
|
|
13.05
|
|
|
|
13.58
|
|
|
|
13.43
|
|
Market value per share at year end
|
|
|
7.31
|
|
|
|
16.00
|
|
|
|
16.57
|
|
|
|
17.35
|
|
|
|
18.52
|
|
15
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
FORWARD-LOOKING STATEMENTS AND FACTORS WHICH MAY AFFECT FUTURE RESULTS
Certain statements in this Managements Discussion and Analysis are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 and are made based upon, among other things, the Companys current
assumptions, expectations and beliefs concerning future developments and their potential effect on
the Company. Additional information regarding the treatment of forward-looking statements is
included at the beginning of Part 1 above.
OVERVIEW
2008 was an unprecedented year for the banking industry. Margin issues, credit issues and
liquidity, as well as securities impairment, all consumed significant resources for the industry.
In the midst of these challenges, the Company has been successful in growing local deposits and
increasing total loans.
The Companys financial results are dependent on the following areas of the income statement: net
interest income, provision for loan losses, non-interest income, non-interest expense and provision
for income taxes. Net interest income is the primary earnings of the Company and the main focus of
management. Net interest income is the difference between interest earned on loans and investment
securities and interest paid on deposits and borrowings. Deposits and borrowings have short
durations and the cost of these funds do not rise and fall in tandem with earnings on loans and
investment securities. There are many risks involved in managing net interest income including but
not limited to credit risk, interest rate risk and duration risk. These risks have a direct impact
on the level of net interest income. The Company manages these risks through credit review by an
outside firm and regular meetings of its Asset and Liability Management Committee (ALCO). The
credit review process reviews loans for underwriting and grading of loan quality while ALCO reviews
liquidity, interest rate risk and capital resources. Loan quality has a direct impact on the amount
of provisions for loan losses the Company reports.
Non-interest income includes net gains or losses on investment securities and various fees.
Customers loan and deposit accounts generate various amounts of fee income depending on the
product selected. The Company receives fee income from servicing loans that were sold in previous
periods. Non-interest income is primarily impacted by the volume of customers transactions, which
could change in response to changes in interest rates, pricing and competition.
Non-interest expenses include salaries and employee benefits, occupancy and equipment,
professional, data processing and other expenses of the Company, which generally are directly
related to business volume and are managed by a budget process. FDIC insurance premiums would have
been $230,000 in 2008, however, the Company was able to apply credits of $175,000 for a net expense
of $55,000. In December, 2008, the FDIC board approved a 7 basis points (bps) increase in premiums
charged to banks for deposit insurance, boosting the rate to between 12 cents and 50 cents per $100
of domestic deposits from a range of five cents to 43 cents due to market developments that have
significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured
deposits. On February 27, 2009, the FDIC passed an interim rule that allows it to charge banks a
special assessment of 20 bps on insured deposits to replenish the deposit insurance fund. This
special assessment will be collected in the third quarter of 2009. Additionally, beginning April 1,
2009, the FDIC will increase its base fees on insured deposits, the combination of which would
increase the Companys 2009 deposit premiums approximately $1.2 million. See Federal Deposit
Insurance Premiums in Supervision and Regulation in Item 1 hereof, Business, for more information
on the FDIC premiums.
Provisions for income taxes are directly related to earnings of the Company. Changes in the
statutory tax rates and the earnings of the Company, the Bank and its subsidiaries, as well as the
mix of earnings among the different entities would affect the amount of income tax expense reported
and the overall effective income tax rate recorded.
For the past several years, short-term market interest rates (which are used as a general guide in
pricing deposits) have decreased while longer-term market interest rates (which are used to
benchmark the pricing on loans) have not changed by similar amounts. While the Bank has had
success in changing the mix of the asset structure into higher yielding commercial real estate and
construction loans and away from lower yielding investments, it is still challenged in generating
deposit balances, and in particular, lower costing core deposit accounts. This compression is felt
throughout the banking industry, but the Company is particularly vulnerable since a relatively
large portion of its earning assets are funded by wholesale borrowings. The Company is committed
to maintaining its current strategy of improving the overall yield of the assets while carefully
managing its cost of funds to the best of its abilities.
Lastly, there are areas of the Consolidated Financial Statements where significant estimates or
assumptions are used, including the provision and allowance for loan losses, the provision for
income taxes, and the evaluation of investment securities for other-than-temporary impairment.
Management regularly monitors the application of the Companys Critical Accounting Policies in
relation to the nature and impact of these estimates and assumptions on earnings. The Critical
Accounting Policies are discussed below.
16
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those policies that involve significant judgments and
uncertainties, and could potentially result in materially different results under different
assumptions and conditions. The preparation of the financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis,
management evaluates its estimates, including those related to the allowance for loan losses,
income taxes and impairment of securities. Actual results could differ from the amount derived
from managements estimates and assumptions using different conditions. The Companys critical
accounting policies are as follows:
ALLOWANCE FOR LOAN LOSSES
The allowance balance reflects managements 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 Companys
regular review of individual loans, and economic conditions are primary factors in establishing the
allowance. The allowance for loan losses reflects all information available at the end of the year.
The allowance is increased by provisions for loan losses, which are a charge to the income
statement, and by recoveries on loans previously charged-off. The allowance is reduced by loans
charged-off and by negative (credit) provisions to the allowance. For a further discussion of the
Companys methodology of assessing the adequacy of the allowance for loan losses, see Financial
Condition-Allowance For Loan Losses, Results of Operations and Note 1 to the Consolidated Financial
Statements for more details on establishing the allowance for loan losses.
INCOME TAXES
Deferred tax assets and liabilities are recognized for estimated future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. Deferred tax valuation
allowances are established and based on managements judgment as to whether it is more likely than
not that all or some portion of the future tax benefits of prior operating losses will be realized.
For example, a deferred tax valuation allowance is required to reduce the potential deferred tax
asset when it is more likely than not that all or some portion of the potential deferred tax asset
will not be realized due to the lack of sufficient taxable income in the carry-forward period.
Factors beyond managements control, such as the general state of the economy and real estate
values, can affect future levels of taxable income and no assurance can be given that sufficient
taxable income will be generated to fully absorb gross deductible temporary differences. For a
further discussion on income taxes, see Results of Operations Income Taxes, below and Notes 1 & 8
to the Consolidated Financial Statements.
INVESTMENT SECURITIES
The evaluation of the impairment of the securities portfolio requires a process that considers both
the historical and current financial performance and environment of the security, credit worthiness
of the issuer, and potential recovery measures of each impaired investment. Management
periodically reviews all impaired securities to identify those for which impairment may be
other-than-temporary. Impaired securities are monitored and evaluated based upon the above
considerations and if the decline in fair value is judged to be other-than-temporary, the cost
basis is written down to the current fair value and the amount of the write-down is included in the
results of operations. For a further discussion on investment securities, see Financial Condition
of Investment Securities, below, and Notes 1 & 2 to the Consolidated Financial Statements.
FINANCIAL CONDITION
OVERVIEW
Total assets increased to $761.3 million at December 31, 2008 up from $621.7 million at December
31, 2007. The increase in asset size is mainly attributable to strong loan growth since year end
2007 of $94.5 million, an increase of $34.0 million in investment securities available for sale
portfolio and an increase in federal funds sold amounting to $6.4 million. The funding of the
asset growth was derived from an increase of $41.1 million in total borrowed funds coupled with an
increase in deposits of $86.6 million since 2007.
INTEREST EARNING ASSETS
The Company manages its earning assets by utilizing available capital resources in a manner
consistent with the Companys credit, investment and leverage policies. Loans, the Treasury and
government-sponsored enterprise obligations, mortgage-backed securities, other investment
securities, and short-term investments comprise the Companys earning assets. Total earning assets
averaged $675.6 million in 2008, an increase of $113.0 million or 20.1% from 2007.
One of the Companys primary objectives continues to be the origination of loans that are soundly
underwritten and collateralized. The Companys average loan portfolios increased $77.8 million in
2008 to $404.0 million.
17
The Company increases the investment portfolio through funds obtained from depositors, the FHLBB,
repurchase agreements and other borrowings when it is profitable to do so. The average balance of
investment securities, including the Treasury and government-sponsored enterprise obligations,
mortgage-backed securities, other bonds and equity securities, and short-term investments amounted
to $271.6 million in 2008 as compared to $236.4 million in 2007. These securities represent 38.9%
of the Companys total average assets at December 31, 2008 versus 40.8% of total average assets at
December 31, 2007.
INVESTMENT SECURITIES
The investment portfolio totaled $264.6 million and $230.6 million, respectively, at December 31,
2008 and 2007, reflecting an increase of $34.0 million or 14.7% in 2008. The change in 2008
resulted from an increase in mortgage-backed securities totaling $50.5 million partially offset by
decreases of $13.1 million and $3.7 million in collateralized mortgage obligations and equity
securities, respectively. For more information on investment securities, see Note 2 of the
Consolidated Financial Statements.
The fair value and percentage distribution of investment securities available for sale at December
31, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Treasury obligations
|
|
$
|
6,004
|
|
|
|
2.3
|
%
|
|
$
|
5,541
|
|
|
|
2.4
|
%
|
Government-sponsored enterprise
obligations
|
|
|
15,722
|
|
|
|
5.9
|
%
|
|
|
15,810
|
|
|
|
6.9
|
%
|
Mortgage-backed securities
|
|
|
187,206
|
|
|
|
70.8
|
%
|
|
|
136,703
|
|
|
|
59.3
|
%
|
Collateralized mortgage obligations
|
|
|
47,059
|
|
|
|
17.8
|
%
|
|
|
60,147
|
|
|
|
26.1
|
%
|
Corporate obligations
|
|
|
5,683
|
|
|
|
2.1
|
%
|
|
|
5,820
|
|
|
|
2.5
|
%
|
Mutual funds
|
|
|
958
|
|
|
|
0.4
|
%
|
|
|
959
|
|
|
|
0.4
|
%
|
Equity securities
|
|
|
1,929
|
|
|
|
0.7
|
%
|
|
|
5,616
|
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
264,561
|
|
|
|
100.0
|
%
|
|
$
|
230,596
|
|
|
|
100.0
|
%
|
|
There were no securities held to maturity during 2008 and 2007.
The maturities and weighted average yields of investment securities available for sale at December
31, 2008, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
Weighted
|
|
One to
|
|
Weighted
|
|
Five
|
|
Weighted
|
|
Over
|
|
|
|
|
|
|
|
|
|
|
One
|
|
Average
|
|
Five
|
|
Average
|
|
to Ten
|
|
Average
|
|
Ten
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Year
|
|
Yield
|
|
Years
|
|
Yield
|
|
Years
|
|
Yield
|
|
Years
|
|
Yield
|
|
Total
|
|
Yield
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Treasury bonds and
government-sponsored
enterprise obligations
|
|
$
|
5,568
|
|
|
|
3.22
|
%
|
|
$
|
16,158
|
|
|
|
3.76
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
21,726
|
|
|
|
3.62
|
%
|
Mortgage-backed
securities
|
|
|
713
|
|
|
|
3.64
|
%
|
|
|
11,853
|
|
|
|
3.74
|
%
|
|
|
10,616
|
|
|
|
4.78
|
%
|
|
|
164,024
|
|
|
|
5.78
|
%
|
|
|
187,206
|
|
|
|
5.59
|
%
|
Collateralized mortgage
obligations
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
5.88
|
%
|
|
|
9,740
|
|
|
|
4.04
|
%
|
|
|
37,231
|
|
|
|
4.79
|
%
|
|
|
47,059
|
|
|
|
4.64
|
%
|
Corporate obligations
|
|
|
1,964
|
|
|
|
5.44
|
%
|
|
|
3,719
|
|
|
|
5.48
|
%
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
|
|
5,683
|
|
|
|
5.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,245
|
|
|
|
3.79
|
%
|
|
$
|
31,818
|
|
|
|
3.96
|
%
|
|
$
|
20,356
|
|
|
|
4.43
|
%
|
|
$
|
201,255
|
|
|
|
5.60
|
%
|
|
$
|
261,674
|
|
|
|
5.25
|
%
|
|
LOANS
Total loans at December 31, 2008 and 2007 amounted to $452.6 million and $358.1 million,
respectively, reflecting an increase of $94.5 million or 26.4% in 2008. Corporate loans increased
$64.2 million or 25.3% during 2008. Commercial real estate loans increased $45.0 million or 25.3%
and commercial and construction loans increased $5.3 million or 18.7% and $13.9 million or 29.0%,
respectively. Retail loans increased $30.3 million or 29.2%. Residential real estate loans and
home equity loans increased $29.5 million or 37.0% and $926,000 or 4.0%, respectively, while
consumer loans decreased $176,000 or 17.5%. The Company believes that the increase in the
portfolios was primarily due to customers taking advantage of the low interest rate environment.
For more information on loans, see Item 7A Quantitative and Qualitative Disclosures About Market
Risk, Interest Rate Sensitivity and Note 4 to the Consolidated Financial Statements.
18
The components of the loan portfolio at December 31, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
Balance
|
|
Percent
|
|
Balance
|
|
Percent
|
|
Balance
|
|
Percent
|
|
Balance
|
|
Percent
|
|
Balance
|
|
Percent
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
$
|
68,040
|
|
|
|
15.0
|
%
|
|
$
|
49,513
|
|
|
|
13.8
|
%
|
|
$
|
39,076
|
|
|
|
13.5
|
%
|
|
$
|
34,028
|
|
|
|
14.5
|
%
|
|
$
|
33,061
|
|
|
|
14.2
|
%
|
Adjustable rate
|
|
|
41,236
|
|
|
|
9.1
|
|
|
|
30,230
|
|
|
|
8.4
|
|
|
|
30,800
|
|
|
|
10.7
|
|
|
|
28,159
|
|
|
|
12.0
|
|
|
|
26,996
|
|
|
|
11.6
|
|
Loans held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
472
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,276
|
|
|
|
24.1
|
|
|
|
79,743
|
|
|
|
22.2
|
|
|
|
69,876
|
|
|
|
24.2
|
|
|
|
62,659
|
|
|
|
26.7
|
|
|
|
60,057
|
|
|
|
25.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
|
12,398
|
|
|
|
2.7
|
|
|
|
13,821
|
|
|
|
3.9
|
|
|
|
11,170
|
|
|
|
3.9
|
|
|
|
3,592
|
|
|
|
1.5
|
|
|
|
3,535
|
|
|
|
1.5
|
|
Adjustable rate
|
|
|
11,574
|
|
|
|
2.6
|
|
|
|
9,225
|
|
|
|
2.6
|
|
|
|
9,169
|
|
|
|
3.2
|
|
|
|
6,820
|
|
|
|
2.9
|
|
|
|
5,334
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,972
|
|
|
|
5.3
|
|
|
|
23,046
|
|
|
|
6.5
|
|
|
|
20,339
|
|
|
|
7.1
|
|
|
|
10,412
|
|
|
|
4.4
|
|
|
|
8,869
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
831
|
|
|
|
0.2
|
|
|
|
1,007
|
|
|
|
0.3
|
|
|
|
975
|
|
|
|
0.3
|
|
|
|
468
|
|
|
|
0.2
|
|
|
|
699
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retail loans
|
|
|
134,079
|
|
|
|
29.6
|
|
|
|
103,796
|
|
|
|
29.0
|
|
|
|
91,190
|
|
|
|
31.6
|
|
|
|
73,539
|
|
|
|
31.3
|
|
|
|
69,625
|
|
|
|
29.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction loans
|
|
|
61,769
|
|
|
|
13.6
|
|
|
|
47,885
|
|
|
|
13.4
|
|
|
|
43,283
|
|
|
|
15.0
|
|
|
|
24,137
|
|
|
|
10.3
|
|
|
|
15,211
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
|
57,757
|
|
|
|
12.8
|
|
|
|
33,920
|
|
|
|
9.5
|
|
|
|
17,434
|
|
|
|
6.1
|
|
|
|
14,793
|
|
|
|
6.3
|
|
|
|
18,629
|
|
|
|
8.0
|
|
Adjustable rate
|
|
|
165,220
|
|
|
|
36.5
|
|
|
|
144,048
|
|
|
|
40.2
|
|
|
|
125,386
|
|
|
|
43.5
|
|
|
|
112,824
|
|
|
|
48.1
|
|
|
|
112,976
|
|
|
|
48.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222,977
|
|
|
|
49.3
|
|
|
|
177,968
|
|
|
|
49.7
|
|
|
|
142,820
|
|
|
|
49.6
|
|
|
|
127,617
|
|
|
|
54.4
|
|
|
|
131,605
|
|
|
|
56.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
33,796
|
|
|
|
7.5
|
|
|
|
28,464
|
|
|
|
7.9
|
|
|
|
10,870
|
|
|
|
3.8
|
|
|
|
9,318
|
|
|
|
4.0
|
|
|
|
16,369
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate loans
|
|
|
318,542
|
|
|
|
70.4
|
|
|
|
254,317
|
|
|
|
71.0
|
|
|
|
196,973
|
|
|
|
68.4
|
|
|
|
161,072
|
|
|
|
68.7
|
|
|
|
163,185
|
|
|
|
70.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
452,621
|
|
|
|
100.0
|
%
|
|
|
358,113
|
|
|
|
100.0
|
%
|
|
|
288,163
|
|
|
|
100.0
|
%
|
|
|
234,611
|
|
|
|
100.0
|
%
|
|
|
232,810
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
5,885
|
|
|
|
|
|
|
|
4,810
|
|
|
|
|
|
|
|
4,309
|
|
|
|
|
|
|
|
4,126
|
|
|
|
|
|
|
|
4,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
446,736
|
|
|
|
|
|
|
$
|
353,303
|
|
|
|
|
|
|
$
|
283,854
|
|
|
|
|
|
|
$
|
230,485
|
|
|
|
|
|
|
$
|
228,670
|
|
|
|
|
|
|
The maturity distribution for construction and commercial loans at December 31, 2008, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due After
|
|
|
|
|
|
|
|
|
Due Within
|
|
One Through
|
|
Due After
|
|
|
|
|
|
|
One Year
|
|
Five Years
|
|
Five Years
|
|
Total
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
42,821
|
|
|
$
|
12,979
|
|
|
$
|
5,969
|
|
|
$
|
61,769
|
|
Commercial
|
|
|
12,265
|
|
|
|
14,676
|
|
|
|
6,855
|
|
|
|
33,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
55,086
|
|
|
$
|
27,655
|
|
|
$
|
12,824
|
|
|
$
|
95,565
|
|
|
Of construction loans and commercial loans maturing more than one year after December 31, 2008,
$5.9 million have fixed rates and $43.8 million have floating or variable rates.
At December 31, 2008, the Bank had commercial loan balances participated out to various banks
amounting to $11.1 million, compared to $8.2 million at December 31, 2007. These balances
participated out to other institutions are not carried as assets on the Companys financial
statements. Loans originated by other banks in which the Bank is the participating institution are
carried at the Banks pro rata share of ownership and amounted to $11.4 million and $14.0 million,
respectively, at December 31, 2008 and December 31, 2007. The Bank performs an independent credit
analysis of each commitment prior to participation in the loan.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained through the provision for loan losses which is a charge
to operations. The allowance balance reflects managements assessment of estimated credit losses
inherent in the Banks loan portfolio 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 Companys regular review of individual loans,
and economic conditions are primary factors in establishing the allowance. The Company believes
that the allowance for loan losses reflects all information available at the end of each year. The
Company considers the current year end 2008 level of the allowance for loan losses to be
appropriate and adequate. The allowance as a percentage of total loans was 1.30% at December 31,
2008 and 1.34% at December 31, 2007. Notwithstanding the increase in non-performing loans at
December 31, 2008 and December 31, 2007, which were primarily due to a single borrower with
multiple loans with the Bank, the corporate loan portfolio had moderate delinquencies throughout
the year. The low levels of delinquent loans and
19
sustained asset quality of the loan portfolio combined with the minimal levels of loan charge-offs
contributed to the reasonableness of the allowance coverage to decline to 1.30% as of December 31,
2008. See Note 1 to the Consolidated Financial Statements for a discussion of the accounting policy
related to the allowance for loan losses.
Impaired loans are corporate loans and individually significant residential mortgage loans for
which it is probable that the Company will not be able to collect all amounts due according to the
contractual terms of the loan agreement. Impaired loans are not the same as non-accrual loans,
although the two categories overlap. Non-accrual loans include impaired loans and are those on
which the accrual of interest is discontinued when principal or interest has become contractually
past due 90 days. The Company may choose to place a loan on non-accrual status due to payment
delinquency or the uncertainty of collectibility, while not classifying the loan as impaired, if
(i) it is probable that the Company will collect all amounts due in accordance with the contractual
terms of the loan or (ii) the loan is not a commercial or commercial real estate loan. Factors
considered by management in determining impairment include payment status and collateral value. The
amount of impairment is determined by the difference between the present value of the expected cash
flows related to the loan, using the original contractual interest rate, and its recorded value,
or, as a practical expedient in the case of collateral dependent loans, the difference between the
fair value of the collateral and the recorded amount of the loan. When foreclosure is probable,
impairment is based on the fair value of the collateral.
The level of loan growth during 2008 experienced in all corporate loan categories, combined with
the increase in the levels of total corporate loans in proportion to total loans as well as an
increase in total loan charge-offs resulted in a provision for loan losses of $1.3 million in the
year 2008 compared to a provision in 2007 in the amount of $645,000. The Company had net
charge-offs of $210,000 in 2008 compared to $144,000 in 2007.
The following table summarizes changes in the allowance for loan losses for the years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
4,810
|
|
|
$
|
4,309
|
|
|
$
|
4,126
|
|
|
$
|
4,140
|
|
|
$
|
4,220
|
|
Charge-offs by loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
Commercial
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
(111
|
)
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
(3
|
)
|
|
|
(36
|
)
|
|
|
(30
|
)
|
|
|
(25
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(214
|
)
|
|
|
(157
|
)
|
|
|
(30
|
)
|
|
|
(25
|
)
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries by loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
3
|
|
|
|
3
|
|
|
|
32
|
|
|
|
2
|
|
|
|
254
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
1
|
|
|
|
10
|
|
|
|
21
|
|
|
|
9
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
4
|
|
|
|
13
|
|
|
|
53
|
|
|
|
11
|
|
|
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries
|
|
|
(210
|
)
|
|
|
(144
|
)
|
|
|
23
|
|
|
|
(14
|
)
|
|
|
220
|
|
Provision (credit) for loan losses
|
|
|
1,285
|
|
|
|
645
|
|
|
|
160
|
|
|
|
|
|
|
|
(300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
5,885
|
|
|
$
|
4,810
|
|
|
$
|
4,309
|
|
|
$
|
4,126
|
|
|
$
|
4,140
|
|
|
Ratio of net (charge-offs) recoveries to average loans
outstanding during the period
|
|
|
(0.05
|
)%
|
|
|
(0.04
|
)%
|
|
|
0.01
|
%
|
|
|
(0.01
|
)%
|
|
|
0.10
|
%
|
|
Allowance as a % of total loans
|
|
|
1.30
|
%
|
|
|
1.34
|
%
|
|
|
1.50
|
%
|
|
|
1.76
|
%
|
|
|
1.78
|
%
|
|
The following table sets forth the breakdown of the allowance for loan losses by loan category for
the years ended December 31. The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to absorb losses in any
category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
of loans
|
|
|
|
|
|
of loans
|
|
|
|
|
|
of loans
|
|
|
|
|
|
of loans
|
|
|
|
|
|
of loans
|
|
|
|
|
|
|
in each
|
|
|
|
|
|
in each
|
|
|
|
|
|
in each
|
|
|
|
|
|
in each
|
|
|
|
|
|
in each
|
|
|
|
|
|
|
category
|
|
|
|
|
|
category
|
|
|
|
|
|
category
|
|
|
|
|
|
category
|
|
|
|
|
|
category
|
|
|
|
|
|
|
to total
|
|
|
|
|
|
to total
|
|
|
|
|
|
to total
|
|
|
|
|
|
to total
|
|
|
|
|
|
to total
|
|
|
Amount
|
|
loans
|
|
Amount
|
|
loans
|
|
Amount
|
|
loans
|
|
Amount
|
|
loans
|
|
Amount
|
|
loans
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, commercial and
commercial real estate
|
|
$
|
5,392
|
|
|
|
70.4
|
%
|
|
$
|
4,338
|
|
|
|
71.0
|
%
|
|
$
|
3,606
|
|
|
|
68.4
|
%
|
|
$
|
3,530
|
|
|
|
68.7
|
%
|
|
$
|
3,408
|
|
|
|
70.1
|
%
|
Residential mortgage and home equity
|
|
|
444
|
|
|
|
29.4
|
|
|
|
353
|
|
|
|
28.7
|
|
|
|
297
|
|
|
|
31.3
|
|
|
|
290
|
|
|
|
31.1
|
|
|
|
273
|
|
|
|
29.6
|
|
Consumer
|
|
|
43
|
|
|
|
0.2
|
|
|
|
36
|
|
|
|
0.3
|
|
|
|
39
|
|
|
|
0.3
|
|
|
|
21
|
|
|
|
0.2
|
|
|
|
30
|
|
|
|
0.3
|
|
Unallocated
|
|
|
6
|
|
|
|
N/A
|
|
|
|
83
|
|
|
|
N/A
|
|
|
|
367
|
|
|
|
N/A
|
|
|
|
285
|
|
|
|
N/A
|
|
|
|
429
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,885
|
|
|
|
100.0
|
%
|
|
$
|
4,810
|
|
|
|
100.0
|
%
|
|
$
|
4,309
|
|
|
|
100.0
|
%
|
|
$
|
4,126
|
|
|
|
100.0
|
%
|
|
$
|
4,140
|
|
|
|
100.0
|
%
|
|
20
In determining the adequacy of the allowance for loan losses, the Company aggregates estimated
credit losses on individual loans, pools of loans and other pools of risk having geographic,
industry or other common exposures where inherent losses are identified or anticipated.
Construction, commercial and commercial real estate loans are reviewed individually for impairment
and are evaluated for collectibility and an allocation is made based on an assessment of the net
realizable value of any collateral. The Company categorizes non-impaired loans into different
pools of risk. Each risk level allocation factor has been determined based upon the Companys
estimate of expected loss for loans with similar credit characteristics based upon historical loss
experience, together with the Companys assessment of economic conditions and other relevant
factors that may have an impact on or may affect repayment of loans in these pools.
Residential mortgages, home equity loans, equity lines of credit, second mortgages and all other
small consumer loans are considered in the aggregate and an allocation factor is assessed based
upon the Companys historical loss experience together with an assessment of future economic
trends, conditions and other relevant factors that may have an impact on repayment of the loans in
these pools.
On a quarterly basis, the Company evaluates all allocation factors for appropriateness, considering
(i) significant changes in the nature and volume of the loan portfolio, (ii) the Companys
assessment of local and national economic business conditions, and (iii) any other relevant factor
that it considers may have an impact on loan portfolio risk.
Based upon these evaluations, changes to the reserve provision may be made to maintain the overall
level of the reserve at a level that the Company deems appropriate and adequate to cover the
estimated credit losses inherent in the Companys loan portfolio.
POTENTIAL PROBLEM LOANS
The Company has a loan review and grading system. During the loan review process, deteriorating
conditions of certain loans are identified in which erosion of the borrowers ability to comply
with the original terms of the loan agreement could potentially result in the future classification
of the loan as a risk asset. This may result from deteriorating conditions such as cash flows,
collateral values or creditworthiness of the borrower. There were no potential problem loans
identified at December 31, 2008 or December 31, 2007 other than those already classified as
non-performing or impaired for the respective periods.
RISK ASSETS
Risk assets consist of non-performing loans and OREO. The components of risk assets at December 31,
follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
276
|
|
|
$
|
281
|
|
|
$
|
37
|
|
|
$
|
32
|
|
|
$
|
|
|
Consumer
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
1,951
|
|
|
|
1,242
|
|
|
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
2,606
|
|
|
|
1,523
|
|
|
|
1,057
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
OREO valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other real estate owned
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk assets
|
|
$
|
2,726
|
|
|
$
|
1,523
|
|
|
$
|
1,057
|
|
|
$
|
32
|
|
|
$
|
|
|
|
Risk assets as a percent of total loans and OREO
|
|
|
0.6
|
%
|
|
|
0.4
|
%
|
|
|
0.4
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
Risk assets as a percent of total assets
|
|
|
0.4
|
%
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
Non-performing loans consist of both (i) loans 90 days or more past due, and (ii) loans placed on a
non-accrual status because full collection of the principal balance is in doubt. All loans 90 days
or more past due are on non-accrual for the periods presented. Non-performing loans at December
31, 2008 and 2007 were $2.6 million and $1.5 million, respectively. Impaired loans at December 31,
2008 and 2007 were $3.1 million and $1.5 million, respectively.
The Company actively monitors risk assets. The Company attempts to work with delinquent borrowers
in order to bring loans current. If the borrower is not able to bring the loan current, the Company
commences collection efforts. Valuation of property at foreclosure, and periodically thereafter, is
based upon appraisals and managements best estimates of fair value less selling costs. The
Companys policy is to sell such property as quickly as possible at fair value.
21
INTEREST BEARING LIABILITIES
The Companys earning assets are primarily funded with deposits, securities sold under agreements
to repurchase, FHLBB advances and stockholders equity. The Company manages its interest bearing
liabilities to maintain a stable source of funds while providing competitively priced deposit
accounts. Interest bearing deposits include regular savings accounts, NOW and Super NOW accounts,
money market accounts, and certificates of deposit. Another source of funds is brokered
certificates of deposit.
In 2008 total average interest bearing liabilities increased $119.0 million or 24.4% from $488.1
million in 2007. Average total interest bearing deposits of $335.7 million comprised 55.3% of
interest bearing liabilities in 2008 while in 2007 such deposits totaling $283.7 million comprised
58.1% of interest bearing liabilities.
Changing interest rates can affect the mix and level of various deposit categories. The lower
average interest rate paid on certificates of deposit and money market accounts had an impact on
the overall interest rate paid on deposits and caused a decrease of 48 basis points in 2008 from
the prior year as the average rates paid on these accounts declined from 2007. The average balance
of money market accounts increased by $6.6 million to $81.1 million in 2008 from the prior year.
The average balance of NOW and Super NOW accounts decreased by $146,000 to $17.9 million in 2008
from the prior year. Savings accounts increased by $11.1 million to $42.0 million in 2008 from
2007. The average balance of certificates of deposit increased by $34.5 million to $194.8 million
in 2008 from 2007.
Average borrowed funds in 2008 and 2007 were $271.4 million and $204.4 million, respectively,
including advances from the FHLBB and other borrowed funds. The increase of $66.9 million in 2008
resulted from an increase in borrowings to fund the continued strong loan growth during 2008.
DEPOSITS
Total deposits increased $86.6 million or 26.9% during 2008 to $408.7 million at December 31, 2008
from $322.1 million at December 31, 2007. Certificates of deposit had the largest increase of
$58.7 million or 34.1% from the prior year. Also increasing were money market accounts by $2.0
million in 2008 and savings accounts by $27.8 million. These increases were partially offset by
decreases in NOW accounts of $638,000 and demand deposits of $1.3 million. For more information,
see Note 6 to the Consolidated Financial Statements.
BORROWED FUNDS
Total borrowed funds increased $41.1 million or 17.5% during 2008 to $276.5 million at December 31,
2008, from $235.4 million at December 31, 2007. Long-term FHLBB advances totaled $219.2 million in
2008 versus $202.4 million in 2007, an increase of $16.9 million due to utilization of available
credit in a low interest rate environment. Long-term wholesale repurchase agreements totaled $40.0
million in 2008 and $25.0 million in 2007.
Short-term borrowed funds are comprised of FHLBB Ideal Way advances totaling zero in 2008 and
$800,000 in 2007, FHLBB short-term advances which totaled $11.0 million at December 31, 2008, and
customer repurchase agreements which totaled $6.3 million and $7.2 million, respectively, in 2008
and 2007. See Note 7 to the Consolidated Financial Statements for further information on the
long-term and short-term borrowings.
RESULTS OF OPERATIONS
OVERVIEW
The Companys net loss totaled $2.7 million or $0.61 diluted loss per share for the year ended
December 31, 2008, compared to net earnings of $3.7 million or $0.81 diluted earnings per share for
the year ended December 31, 2007. During 2008, the largest factor in the annual results was the
other-than-temporary impairment write-downs of investments in Fannie Mae and Freddie Mac preferred
stock, the value of which was adversely affected by events surrounding the September 7, 2008
appointment of a conservator for Fannie Mae and Freddie Mac. An impairment loss of $9.4 million
was taken in the third quarter of 2008 with a further impairment charge of $722,000 taken in the
fourth quarter of 2008. This fourth quarter impairment charge leaves the Fannie Mae and Freddie
Mac investments at minimal values, reducing the likelihood of further write-downs of these
investments into 2010. In total, these non-cash impairment charges reduced earnings by $10.1
million on a pre-tax basis, or $(2.25) per diluted share, for the year ended December 31, 2008. On
October 3, 2008, the Emergency Economic Stabilization Act (EESA) was enacted with a provision
permitting banks to recognize losses related to Fannie Mae and Freddie Mac preferred stock as
ordinary losses. Accordingly, the Company recognized tax benefits in the fourth quarter of 2008 of
$3.5 million, or $0.79 per diluted share, related to the Companys other-than-temporary non-cash
impairment charges that were recognized on the Fannie Mae and Freddie Mac preferred stock during
the quarters ended September 30, 2008 and December 31, 2008. On an after-tax basis, these non-cash
impairment charges reduced 2008 earnings by a total of $6.6 million, or $(1.46) per diluted share.
Excluding the non-cash impairment charges and the related tax benefits on the Fannie Mae and
Freddie Mac preferred stock reflected in the GAAP results above, the Company would have recorded
net income of $3.8 million, or $0.86 per diluted share, for the twelve months ended December 31,
2008. This compares favorably to the earnings in the twelve months ended December 31, 2007 of $3.3
22
million, or $0.71 per diluted share, respectively, excluding the settlement gains on the pension
plan recognized in that period. The non-GAAP annual net income for 2008 reflects a 17.9%
improvement over the comparable non-GAAP 2007 results.
The largest factors responsible for the increased normalized non-GAAP results for the year ended
December 31, 2008 were attributable to an increase in net interest income of $1.5 million, an
increase in other non-interest income of $194,000 and a decrease in salaries and benefits expense
of $130,000. These factors more than offset the effects of the decline in the Companys net
interest margin, the increase in the provision for loan losses and an increase in other
non-interest expenses.
Reconciliation Table Non-GAAP Financial Information
|
|
|
|
|
|
|
|
|
For the twelve months ended December 31,
|
|
2008
|
|
2007
|
|
(Dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
Net income (loss) per GAAP
|
|
$
|
(2,723
|
)
|
|
$
|
3,718
|
|
Add: Impairment of investments, net of tax
|
|
|
6,567
|
|
|
|
|
|
Less: Settlement gains on pension, net of tax
|
|
|
|
|
|
|
(457
|
)
|
|
|
|
|
|
|
|
|
|
Normalized net income (non-GAAP)
|
|
$
|
3,844
|
|
|
$
|
3,261
|
|
|
|
|
|
|
|
|
|
|
|
Diluted normalized earnings per share
|
|
$
|
0.86
|
|
|
$
|
0.71
|
|
|
Return on average assets, normalized
|
|
|
0.55
|
%
|
|
|
0.56
|
%
|
Return on average equity, normalized
|
|
|
6.54
|
%
|
|
|
5.57
|
%
|
|
In 2007, the Company recorded the final settlement gain of $762,000 in connection with the pension
plan termination, recorded a provision for loan losses of $645,000 due to continued corporate loan
growth and also recorded $200,000 in increases to cash surrender value of the BOLI purchased during
2007. Non-interest expenses declined by $1.5 million in 2007.
The Companys net interest income, which is the difference between interest earned on assets and
interest paid on liabilities, totaled $16.9 million in 2008 and $15.3 million in 2007. The
increase in 2008 versus 2007 was attributed to higher average volumes of loans and investment
securities. These increases to net interest income were negatively impacted by higher average
deposit and borrowed funds volumes.
The Company chose to provide investors with the preceding non-GAAP information regarding the
Companys results because the losses on Fannie Mae and Freddie Mac stock in 2008 and the
termination of the Companys pension plan in 2007 result from events that the Company believes are
either unique or extremely unlikely to recur. Management believes this information is useful to
the investor in evaluating the Companys results because of the circumstances relating to these
one-time events and the magnitude of the events. This information should not be viewed as a
substitute for operating results determined in accordance with GAAP, nor is it necessarily
comparable to non-GAAP information which may be presented by other companies.
The Bank recorded a provision for loan losses of $1.3 million and $645,000 in 2008 and 2007,
respectively. The increases in the provision were made due to the continued and sustained
corporate and retail loan growth during these years accompanied by a $1.1 million increase in
non-performing loans over 2007 levels. Annual net loan charge-offs as a percentage of average
loans totaled 5 basis points for 2008 as compared to 4 basis points for 2007.
Non-interest loss amounted to $8.0 million in 2008 versus non-interest income of $2.7 million in
2007. Excluding the impairment of investments and settlement gains noted above, non-interest
income increased by $194,000 in 2008 to $2.1 million from $1.9 million, respectively, in 2008 from
2007.
Non-interest expense totaled $11.9 million in 2008 and $11.6 million in 2007. The increase in 2008
was the result of expenses relating to other real estate owned, increased professional fees and
increases to occupancy and equipment expenses.
The Company recognized income tax benefit of $1.6 million in 2008 while incurring income tax
expense of $2.1 million in 2007. The effective tax rate was 36.3% in 2008 and 36.0% in 2007.
23
AVERAGE BALANCES, NET INTEREST INCOME AND AVERAGE INTEREST RATES
The table below presents the Companys average balance sheet, net interest income and average
interest rates for the years ended December 31. Average loans include non-performing loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
96,228
|
|
|
$
|
5,403
|
|
|
|
5.61
|
%
|
|
$
|
73,122
|
|
|
$
|
4,132
|
|
|
|
5.65
|
%
|
Home equity
|
|
|
22,987
|
|
|
|
1,198
|
|
|
|
5.21
|
|
|
|
20,946
|
|
|
|
1,332
|
|
|
|
6.36
|
|
Consumer
|
|
|
976
|
|
|
|
65
|
|
|
|
6.66
|
|
|
|
874
|
|
|
|
59
|
|
|
|
6.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retail loans
|
|
|
120,191
|
|
|
|
6,666
|
|
|
|
5.55
|
|
|
|
94,942
|
|
|
|
5,523
|
|
|
|
5.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
53,720
|
|
|
|
3,380
|
|
|
|
6.29
|
|
|
|
51,940
|
|
|
|
4,720
|
|
|
|
9.09
|
|
Commercial real estate
|
|
|
202,144
|
|
|
|
13,654
|
|
|
|
6.75
|
|
|
|
157,769
|
|
|
|
11,554
|
|
|
|
7.32
|
|
Commercial
|
|
|
27,895
|
|
|
|
1,705
|
|
|
|
6.11
|
|
|
|
21,454
|
|
|
|
1,697
|
|
|
|
7.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate loans
|
|
|
283,759
|
|
|
|
18,739
|
|
|
|
6.60
|
|
|
|
231,163
|
|
|
|
17,971
|
|
|
|
7.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
403,950
|
|
|
|
25,405
|
|
|
|
6.29
|
|
|
|
326,105
|
|
|
|
23,494
|
|
|
|
7.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government-
sponsored enterprise obligations
|
|
|
23,448
|
|
|
|
915
|
|
|
|
3.90
|
|
|
|
33,777
|
|
|
|
1,349
|
|
|
|
3.99
|
|
Other bonds and equity securities
|
|
|
25,901
|
|
|
|
1,383
|
|
|
|
5.34
|
|
|
|
18,626
|
|
|
|
1,108
|
|
|
|
5.95
|
|
CMOs and mortgage-backed
securities
|
|
|
210,565
|
|
|
|
10,857
|
|
|
|
5.16
|
|
|
|
170,526
|
|
|
|
8,386
|
|
|
|
4.92
|
|
Short-term investments
|
|
|
11,696
|
|
|
|
195
|
|
|
|
1.67
|
|
|
|
13,489
|
|
|
|
671
|
|
|
|
4.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
271,610
|
|
|
|
13,350
|
|
|
|
4.92
|
|
|
|
236,418
|
|
|
|
11,514
|
|
|
|
4.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
675,560
|
|
|
|
38,755
|
|
|
|
5.74
|
%
|
|
|
562,523
|
|
|
|
35,008
|
|
|
|
6.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(5,172
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,505
|
)
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
28,115
|
|
|
|
|
|
|
|
|
|
|
|
21,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
698,503
|
|
|
|
|
|
|
|
|
|
|
$
|
579,241
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular savings accounts
|
|
$
|
41,994
|
|
|
$
|
575
|
|
|
|
1.37
|
%
|
|
$
|
30,917
|
|
|
$
|
154
|
|
|
|
0.50
|
%
|
NOW and super NOW accounts
|
|
|
17,867
|
|
|
|
35
|
|
|
|
0.20
|
|
|
|
18,013
|
|
|
|
33
|
|
|
|
0.18
|
|
Money market accounts
|
|
|
81,085
|
|
|
|
1,908
|
|
|
|
2.35
|
|
|
|
74,484
|
|
|
|
2,256
|
|
|
|
3.03
|
|
Certificates of deposit
|
|
|
194,800
|
|
|
|
7,780
|
|
|
|
3.99
|
|
|
|
160,289
|
|
|
|
7,639
|
|
|
|
4.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
335,746
|
|
|
|
10,298
|
|
|
|
3.07
|
|
|
|
283,703
|
|
|
|
10,082
|
|
|
|
3.55
|
|
Borrowed funds
|
|
|
271,357
|
|
|
|
11,582
|
|
|
|
4.27
|
|
|
|
204,431
|
|
|
|
9,599
|
|
|
|
4.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
607,103
|
|
|
|
21,880
|
|
|
|
3.60
|
%
|
|
|
488,134
|
|
|
|
19,681
|
|
|
|
4.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
|
29,071
|
|
|
|
|
|
|
|
|
|
|
|
29,444
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
3,579
|
|
|
|
|
|
|
|
|
|
|
|
3,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
639,753
|
|
|
|
|
|
|
|
|
|
|
|
520,725
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
58,750
|
|
|
|
|
|
|
|
|
|
|
|
58,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
698,503
|
|
|
|
|
|
|
|
|
|
|
$
|
579,241
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread
|
|
|
|
|
|
|
|
|
|
|
2.14
|
%
|
|
|
|
|
|
|
|
|
|
|
2.19
|
%
|
Net interest income
|
|
|
|
|
|
$
|
16,875
|
|
|
|
|
|
|
|
|
|
|
$
|
15,327
|
|
|
|
|
|
|
Net interest margin on average earning assets
|
|
|
|
|
|
|
|
|
|
|
2.50
|
%
|
|
|
|
|
|
|
|
|
|
|
2.72
|
%
|
|
24
RATE-VOLUME ANALYSIS
The effect on net interest income of changes in interest rates and in the amounts of interest
earning assets and interest bearing liabilities is shown in the following table. Information is
provided on changes for the years indicated attributable to (i) changes in volume (change in
average balance multiplied by prior year rate) and (ii) changes in interest rate (change in rate
multiplied by prior year average balance).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
Change due to
|
|
Total
|
|
|
Volume
|
|
Rate
|
|
Change
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
1,298
|
|
|
$
|
(27
|
)
|
|
$
|
1,271
|
|
Equity
|
|
|
122
|
|
|
|
(256
|
)
|
|
|
(134
|
)
|
Consumer
|
|
|
7
|
|
|
|
(1
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retail loans
|
|
|
1,427
|
|
|
|
(284
|
)
|
|
|
1,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
157
|
|
|
|
(1,497
|
)
|
|
|
(1,340
|
)
|
Commercial real estate
|
|
|
3,052
|
|
|
|
(952
|
)
|
|
|
2,100
|
|
Commercial
|
|
|
444
|
|
|
|
(436
|
)
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate loans
|
|
|
3,653
|
|
|
|
(2,885
|
)
|
|
|
768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest on loans
|
|
|
5,080
|
|
|
|
(3,169
|
)
|
|
|
1,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government-sponsored
enterprise obligations
|
|
|
(404
|
)
|
|
|
(30
|
)
|
|
|
(434
|
)
|
Other bonds and equity securities
|
|
|
398
|
|
|
|
(123
|
)
|
|
|
275
|
|
Mortgage-backed securities
|
|
|
2,048
|
|
|
|
423
|
|
|
|
2,471
|
|
Short-term investments
|
|
|
(79
|
)
|
|
|
(397
|
)
|
|
|
(476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
1,963
|
|
|
|
(127
|
)
|
|
|
1,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
7,043
|
|
|
|
(3,296
|
)
|
|
|
3,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular savings accounts
|
|
|
72
|
|
|
|
349
|
|
|
|
421
|
|
NOW and Super NOW accounts
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
Money market accounts
|
|
|
187
|
|
|
|
(535
|
)
|
|
|
(348
|
)
|
Certificates of deposit
|
|
|
1,493
|
|
|
|
(1,352
|
)
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
1,752
|
|
|
|
(1,536
|
)
|
|
|
216
|
|
Borrowed funds
|
|
|
2,991
|
|
|
|
(1,008
|
)
|
|
|
1,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
4,743
|
|
|
|
(2,544
|
)
|
|
|
2,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
2,300
|
|
|
$
|
(752
|
)
|
|
$
|
1,548
|
|
|
NET INTEREST INCOME
Net interest income is the difference between the interest income earned on earning assets and the
interest expense paid on interest bearing liabilities. Interest income and interest expense are
affected by changes in earning assets and interest bearing liability balances in addition to
changes in interest rates. The Companys net interest income increased from $15.3 million in 2007
to $16.9 million in 2008.
During most of 2008, the Company operated in a falling rate environment which resulted in lower
yields on assets and a declining cost of funds. The average yield on earning assets in 2008
decreased 48 basis points from 6.22% in 2007 to 5.74% in 2008. The average rate paid on interest
bearing liabilities decreased 43 basis points during 2008 from 4.03% in 2007, compared to 3.60% in
2008. As a result of the foregoing, the net interest rate spread in 2008 was 2.14%, a 5 basis
point decrease from 2.19% in 2007. The Companys net-interest margin decreased to 2.50% in 2008
compared to 2.72% in 2007.
Interest income rose $3.7 million or 10.7% during 2008 from $35.0 million to $38.8 million in 2007
and 2008, respectively, primarily due to an increase in average loan volumes partially offset by a
decrease in loan rates.
Average loan interest rates decreased 91 basis points or 12.6% from 7.20% in 2007 to 6.29% in 2008
reducing interest income by $3.2 million mainly a result of corporate loan rates decreasing income
by $2.9 million. Average loan balances rose $77.8 million or 23.9% from $326.1 million to $404.0
million in 2007 and 2008, respectively, increasing interest income by $5.1 million mainly a result
of corporate loan volume increasing interest income $3.7 million.
25
Average investment securities interest rates increased 5 basis points from 4.87% in 2007 to 4.92%
in 2008. Due to a change in the mix of investment securities, this modest basis point increase
resulted in a decrease to interest income of $127,000, primarily due to short-term investments and
other bonds and equities decreasing interest income by $397,000 and $123,000, respectively,
partially offset by mortgage-backed securities increasing interest income by $423,000. Average
investment securities balances increased $35.2 million or 14.9% from $236.4 in 2007 to $271.6 in
2008, which contributed $2.0 million to interest income, and was primarily the result of
mortgage-backed securities which increased interest income by $2.0 million.
Interest expense rose $2.2 million or 11.2% during 2008 from $19.7 million to $21.9 million in 2007
and 2008, respectively, primarily due to an increase in the average volumes of borrowed funds and
certificates of deposit, offset by declines in average rates paid on deposits and borrowed funds.
Average deposit interest rates decreased 48 basis points, or 13.5%, from 3.55% to 3.07% in 2007 and
2008, respectively, reducing interest expense by $1.5 million. The decrease was mainly
attributable to declines in certificates of deposit of $1.4 million and money market or $535,000.
Average interest-bearing deposit balances increased by $52.0 million, or 18.3% from $283.7 million
to $335.7 million in 2007 and 2008, respectively, contributing $1.8 million to interest expense.
The increase was mainly attributable to certificates of deposit of $1.5 million.
Average borrowed funds interest rates declined 43 basis points, or 9.1% from 4.70% to 4.27% in 2007
and 2008, respectively, reducing interest expense by $1.0 million. Average borrowed funds balances
rose 32.7% from $204.4 million to $271.4 million in 2007 and 2008, respectively, contributing $3.0
million to interest expense.
PROVISION FOR LOAN LOSSES
The Company made a provision for loan losses in 2008 and 2007 in the amount of $1.3 million and
$645,000, respectively. The level of loan growth experienced, primarily in the corporate loan
categories, during 2008 and 2007, resulted in the increase to the provisions for loan losses in
2008 and 2007. Other considerations, which did not have a significant impact in either year,
included the level of delinquent loans and risk assets as well as the level of loan charge-offs.
NON-INTEREST INCOME (LOSS)
The Companys non-interest loss totaled $8.0 million for 2008 as compared to a non-interest income
of $2.7 million for 2007. The decrease in 2008 was primarily the result of $10.1 million in
other-than-temporary impairment write-downs incurred in 2008.
Deposit account fees remained stable at $1.0 million in 2008 and 2007. There was a slight increase
in 2008 that was due mainly to an increase in overdraft fees of $56,000 and was partially offset by
decreases in NOW and savings account fees of $25,000. Loan servicing fees decreased to $153,000
for the year ended 2008, from $189,000 in 2007. The decrease in 2008 was due primarily to a
reduction in corporate loan prepayment fees of $68,000 partially offset by a reduction in
amortization of loans previously sold of $33,000.
Impairment of investments totaled $10.1 million in 2008 and zero in 2007. The other-than temporary
impairment write-downs of investments in Fannie Mae and Freddie Mac preferred stock occurred due to
the decrease in value which was adversely affected by events surrounding the September 2008
appointment of a conservator of Fannie Mae and Freddie Mac.
Gains on the pension plan termination totaled zero in 2008 and $762,000 in 2007, due to the plan
being terminated in 2007.
Income on bank owned life insurance increased to $442,000 during 2008 compared to $200,000 in 2007
due to the purchase of the insurance in mid-2007 and the increase in cash surrender value of 12
months in 2008 versus 7 months in 2007.
Other income decreased to $479,000 from $524,000 for the years ended 2008 and 2007, respectively.
The decrease in 2008 resulted from a reduction in income from a change in the third party official
check vendor of $76,000 and a reduction in income from the Depositors Insurance Fund of $26,000
partially offset by an increase in ATM and debit card fees of $49,000.
NON-INTEREST EXPENSE
Non-interest expense increased to $11.9 million in 2008, from $11.6 million in 2007. The increase
in 2008 was mainly the
result of an increase in OREO expense accompanied by a related increase in professional expense.
Salaries and employee benefits expense totaled $6.7 million in 2008 and $6.8 million in 2007.
There were 93.5 full-time equivalent employees at December 31, 2008, while there were 91 at
December 31, 2007. The decrease in 2008 was mainly attributable to a reduction in bonuses of
$99,000 coupled with an increase of $282,000 in salary deferrals due to the growth in the loan
portfolios, partially offset by an increase in salaries of $129,000 and insurance and retirement of
$84,000.
26
Occupancy and equipment expenses increased to $1.3 million in 2008, compared to $1.2 million in
2007 due to renovations on the West Methuen branch as well as rent expenses on a new branch
location in Derry, New Hampshire. Data processing expenses declined to $938,000 compared to $1.0
million in 2007. Data processing expenses include the Companys service contract for on-line
deposit accounting, loan accounting and item processing services and the installation of new
communication lines for its Wide Area Network (WAN) in 2007. Professional expenses totaled
$580,000 and $463,000, in 2008 and 2007, respectively. Insurance expenses totaled $164,000 and
$137,000 in 2008 and 2007, respectively, and other expenses remained relatively consistent at $1.5
million in 2008 and 2007. Based on changes on FDIC deposit insurance premiums, the Company
anticipates a significant increase in its deposit insurance expense of $1.1 million in 2009.
INCOME TAXES
The Company incurred an income tax benefit of $1.6 million in 2008 while incurred income tax
expense of $2.1 million in 2007 due primarily to the loss before income taxes in 2008 versus income
in 2007. The effective income tax rates for the years ended December 31, 2008 and 2007 amounted to
36.3%, and 36.0%, respectively.
Permanent differences such as officers life insurance, tax exempt income, and the dividends
received deduction can have an impact on the effective income tax rate as it relates to pre-tax
income. See Note 8 to the Consolidated Financial Statements for further information regarding
income taxes.
On July 3, 2008, the state of Massachusetts enacted a law that reduced the tax rate on net income
applicable to financial institutions. The rate drops from the current rate of 10.5% to 10% for tax
years beginning on January 1, 2010, 9.5% for tax years beginning on or after January 1, 2011, and
9% for tax years beginning on or after January 1, 2012 and thereafter. Based on these changes in
the third quarter of 2008, the Company incurred an $177,000 charge to adjust deferred income
expense and the net value of the Companys deferred tax asset.
LIQUIDITY
Managing liquidity involves planning to meet anticipated funding needs at a reasonable cost, as
well as contingency plans to meet unanticipated funding needs or a loss of funding sources. The
following factors are considered in managing liquidity: marketability of assets, the sources and
stability of funding and the level of unfunded commitments. The Companys only source of funds to
meet its expenses, repay indebtedness, and pay dividends to stockholders is the receipt of
dividends from the Bank. The Banks loans and investments are primarily funded by deposits,
Federal Home Loan Bank advances, securities sold under agreements to repurchase and stockholders
equity.
The investment portfolio is one of the primary sources of liquidity for the Bank. Maturities of
securities provide a flow of funds which are available for cash needs such as loan originations and
net deposit outflows. In addition, the investment portfolio consists of high quality, and,
therefore, readily marketable, Treasury and government-sponsored enterprise obligations. At
December 31, 2008, the Banks investment securities and mortgage-backed securities available for
sale totaled $264.6 million which are available to meet the Banks liquidity needs.
Loan maturities and amortization as well as deposit growth provide for a constant flow of funds. In
addition, the Bank has one overnight line of credit totaling $3.0 million to meet short-term
liquidity needs. The Bank had $69.1 million available for borrowing purposes at December 31, 2008.
At December 31, 2008, the Bank had $219.2 million of outstanding borrowings from FHLBB, and the
ability to borrow an additional $69.1 million. FHLBB has publicly disclosed that, over time,
current market trends may have a negative impact on FHLBBs own liquidity.
The liquidity position of the Company is managed by the Asset/Liability Management Committee
(ALCO). The duties of ALCO include periodically reviewing the Companys level of liquidity under
prescribed policies and procedures. It is the responsibility of ALCO to report to the Board of
Directors on a regular basis the Companys liquidity position as it relates to these policies and
procedures. At December 31, 2008, management believes that the Bank has adequate liquidity to meet
current and future liquidity demands.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company enters into off-balance sheet contractual obligations and commitments in the normal
course of business. The Company has contractual obligations such as payments on FHLBB advances,
operating lease obligations and customer repurchase agreements. The Company has commitments in the
form of financial instruments that are for loan originations, lines of credit, letters of credit
and to sell mortgage loans. These commitments have various expiration dates.
27
The following tables summarize the expiration dates of the Banks off balance sheet contractual
obligations and funding commitments, respectively, at December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
|
|
|
Less than
|
|
One to
|
|
Three to
|
|
After
|
Contractual obligations
|
|
Total
|
|
One Year
|
|
Three Years
|
|
Five Years
|
|
Five Years
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLBB long- term
advances
|
|
$
|
219,228
|
|
|
$
|
10,000
|
|
|
$
|
77,000
|
|
|
$
|
23,000
|
|
|
$
|
109,228
|
|
Wholesale repurchase
agreements
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
|
|
Short-term borrowings
|
|
|
17,262
|
|
|
|
17,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease obligations
|
|
|
1,526
|
|
|
|
245
|
|
|
|
226
|
|
|
|
206
|
|
|
|
849
|
|
Data processing vendor
|
|
|
1,195
|
|
|
|
686
|
|
|
|
509
|
|
|
|
|
|
|
|
|
|
Employee benefit
payments (1)
|
|
|
1,528
|
|
|
|
118
|
|
|
|
235
|
|
|
|
235
|
|
|
|
940
|
|
|
Total contractual cash
obligations
|
|
$
|
280,739
|
|
|
$
|
28,311
|
|
|
$
|
77,970
|
|
|
$
|
63,441
|
|
|
$
|
111,017
|
|
|
|
|
|
(1)
|
|
The amounts shown reflect expected employee benefits paid by the Company under its
supplemental executive retirement plans through December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiring By Period
|
|
|
|
|
|
|
Less than
|
|
One to
|
|
Three to
|
|
After
|
Commitments
|
|
Total
|
|
One Year
|
|
Three Years
|
|
Five Years
|
|
Five Years
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan originations
|
|
$
|
21,524
|
|
|
$
|
21,524
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Lines of credit
|
|
|
73,151
|
|
|
|
37,213
|
|
|
|
13,929
|
|
|
|
185
|
|
|
|
21,824
|
|
Commitment
to purchase loans
|
|
6,837
|
|
|
|
6,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit
|
|
|
1,610
|
|
|
|
1,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments
|
|
$
|
103,122
|
|
|
$
|
67,184
|
|
|
$
|
13,929
|
|
|
$
|
185
|
|
|
$
|
21,824
|
|
|
OFF-BALANCE SHEET ARRANGEMENTS
The Company is a party to financial instruments with off-balance sheet risk. These instruments, in
the form of commitments to extend credit and financial and standby letters of credit, are offered
in the normal course of business to meet the financing needs of customers. The Companys
off-balance sheet arrangements are discussed in Note 13 to the Consolidated Financial Statements,
which is incorporated herein by reference.
CAPITAL ADEQUACY
The Company and the Bank are required to maintain a leverage capital ratio of 5% and risk-based
capital ratios of at least 10% in order to be categorized as well capitalized in accordance with
definitions in regulatory guidelines promulgated by the FDIC and FRB. At December 31, 2008 and
2007, the Companys and the Banks leverage and risk-based capital ratios exceeded the required
levels for the category of well-capitalized institutions as defined by their respective
regulatory agencies.
The Company and the Bank may not declare or pay cash dividends on their outstanding common stock if
the effect thereof would reduce their respective stockholders equity below applicable capital
requirements or otherwise violate regulatory requirements. See Note 9 to the Consolidated
Financial Statements for further information regarding capital adequacy.
The Company repurchased 64,620 and 90,356 shares of its common stock during 2008 and 2007,
respectively. The Companys book value per share was $16.14 at December 31, 2008. The book value
per share increased from $13.35 at December 31, 2007 due to the issuance of $15.0 million in
cumulative perpetual preferred stock, Series B, to the Treasury, an increase in market value of
investment securities available for sale (net of taxes) in the amount of $2.9 million, the exercise
of stock options of $117,000, stock awards of $156,000 and a tax benefit of $4,000 associated with
stock transactions, partially offset by the payment of dividends of $2.6 million, the net loss of
$2.7 million and the reduction in shares outstanding of $1.0 million.
28
RECENT ACCOUNTING DEVELOPMENTS
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS Statement No. 157,
Fair Value Measurements (SFAS 157) to provide consistency and comparability in determining fair
value measurements and to provide for expanded disclosures about fair value measurements. The
definition of fair value maintains the exchange price notion in earlier definitions of fair value
but focuses on the exit price of the asset or liability. The exit price is the price that would be
received to sell the asset or paid to transfer the liability adjusted for certain inherent risks
and restrictions. Expanded disclosures are also required about the use of fair value to measure
assets and liabilities. In February 2008, the FASB issued a Staff Position which delays the
effective date of SFAS 157 for non-financial assets and non-financial liabilities, except for items
that are recognized or disclosed at fair value in the financial statements on a recurring basis, to
fiscal years beginning after November 15, 2008. The Company adopted this Statement, except for
items covered by the Staff Position, as of January 1, 2008 and the adoption of SFAS 157 did not
have a material impact on the Companys Consolidated Financial Statements.
See Note 14.
In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3 clarifies the
application of SFAS 157 in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the market for that
financial asset is not active. FSP 157-3 was effective immediately upon issuance, and includes
prior periods for which financial statements have not been issued. The Company applied the guidance
contained in FSP 157- 3 in determining fair values at December 31, 2008, and it did not have a
material impact on the Companys Consolidated Financial Statements.
Effective January 1, 2008, the Company adopted FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits entities to measure
certain financial assets and financial liabilities at fair value with unrealized gains and losses
on items for which the fair value option is elected to be reported in earnings. The Companys
adoption of SFAS 159 did not have a material impact on the Companys Consolidated Financial
Statements.
In June 2007, the FASB ratified EITF Issue No. 06-11, Accounting for Income Tax Benefits of
Dividends on Share-based Payment Awards, which requires an entity to recognize, as an increase to
additional paid-in capital, the income tax benefits related to dividends that are charged to
retained earnings for nonvested equity shares or options. This EITF was adopted on January 1, 2008
and did not have a material impact on the Companys Consolidated Financial Statements.
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements An Amendment of ARB No. 51 (SFAS 160) and Statement No. 141R Business
Combinations (SFAS 141R). The two standards were issued to improve, simplify and converge
international and United States accounting standards for business combinations and the reporting of
noncontrolling interests in consolidated financial statements. SFAS 160 and SFAS 141R are
effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 160 and SFAS
141R is not expected to have a material impact on the Companys Consolidated Financial Statements.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 changes the
disclosure requirements for derivative instruments and hedging activities and is intended to
enhance the current disclosure framework in SFAS 133. The Statement requires that objectives for
using derivative instruments be disclosed in terms of the underlying risk and accounting
designation and to improve disclosures about credit derivatives by requiring more information about
the potential adverse effects of changes in credit risk on the financial position, financial
performance and cash flows of the sellers of credit derivatives. This Statement is effective for
fiscal years and interim periods beginning after November 15, 2008 and is not expected to have a
material impact on the Companys Consolidated Financial Statements.
In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS 162). SFAS 162 identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally accepted accounting
principles (GAAP) in the United States and become effective 60 days after the SECs approval. SFAS
162 is not expected to have a material impact on the Companys Consolidated Financial Statements.
In May 2008, the FASB issued Statement No. 163, Accounting for Financial Guarantee Insurance
Contracts-an Interpretation of FASB Statement No. 60 (SFAS 163). SFAS 163 is limited to
financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued
by enterprises included within the scope of Statement 60. Accordingly, this Statement does not
apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement
60 or to some insurance contracts that seem similar to financial guarantee insurance contracts
issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade
receivables). This Statement is effective for fiscal years beginning after December 15, 2008 and
is not expected to have a material impact on the Companys Financial Statements.
29
In January 2009, the FASB issued Staff Position FSP EITF 99-20-1, Amendment to the Impairment
Guidance of Issue No. 99-20. This guidance clarifies and aligns the impairment guidance
previously issued under Issue No. 99-20, Statement No. 115 Accounting for Certain Investments in
Debt and Equity Securities and Statement No. 157 Fair Value Measurements. The Staff Position is
effective for reporting periods ending after December 15, 2008 and did not impact the Companys
Consolidated Financial Statements.
IMPACT OF INFLATION AND CHANGING PRICES
The Companys asset and liability structure is substantially different from that of an industrial
company in that virtually all assets and liabilities of the Company are monetary in nature.
Management believes the impact of inflation on financial results depends upon the Companys ability
to react to changes in interest rates and by such reaction reduce the impact of inflation on asset
quality and performance. Interest rates do not necessarily move in the same direction, or at the
same magnitude, as the prices of other goods and services. As discussed previously, management
seeks to manage the relationship between interest-sensitive assets and liabilities in order to
protect against wide net interest income fluctuations, including those resulting from inflation.
Various information shown elsewhere in this Annual Report will assist in the understanding of how
well the Company is positioned to react to changing interest rates and inflationary trends. In
particular, refer to the information provided under the headings Investment Securities, Loans,
and Interest Rate Sensitivity respectively for an understanding of the Companys approach to
changing prices and inflation trends, the summary of net interest income, the maturity
distributions, the compositions of the loan and security portfolios and the data on the interest
rate sensitivity of loans and deposits.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT
Managing interest rate risk is fundamental to banking. The Company has continued to manage its
liquidity, capital, and GAP position so as to control its exposure to interest rate risk. As of
December 31, 2008, the Company had interest rate sensitive assets which repriced or matured within
one year of $404.1 million and interest rate sensitive liabilities which repriced or matured within
one year of $247.1 million. As of December 31, 2007, the Company had interest rate sensitive
assets which matured or repriced within one year of $258.1 million and interest rate sensitive
liabilities which repriced or matured within one year of $262.4 million.
INTEREST RATE SENSITIVITY
The Company actively manages its interest rate sensitivity position. The objectives of interest
rate risk management are to control exposure of net interest income to risks associated with
interest rate movements and to achieve a stable and rising flow of net interest income. The ALCO,
using policies approved by the Board of Directors, is responsible for managing the Banks rate
sensitivity position.
The asset/liability management policy establishes guidelines for acceptable exposure to interest
rate risk, liquidity, and capital. The objective of ALCO is to manage earning assets and
liabilities to produce results which are consistent with the Companys policy for net interest
income, liquidity and capital and identify acceptable levels of growth, risk and profitability.
ALCO establishes and monitors origination and pricing strategies consistent with ALCO policy.
ALCO meets regularly to review the current economic environment, income simulation model and GAP
analysis and implements appropriate changes in strategy that will manage the Companys exposure to
interest rate risk, liquidity and capital.
ALCO manages the Companys interest rate risk, using both income simulation and GAP analysis.
Income simulation is used to quantify interest rate risk inherent in the Companys consolidated
balance sheet by showing the effect of a change in net interest income over a 24-month period. The
income simulation model uses parallel interest rate shocks of up 200 basis points (bp) or down 200
bp for earning assets and liabilities in the first year of the model. Interest rates are not
shocked in the second year of the model. The simulation takes into account the dates for
repricing, maturing, prepaying and call options assumptions of various financial categories which
may vary under different interest rate scenarios. Prepayment speeds are estimates for the loans
and are adjusted according to the degree of rate changes. Call options and prepayment speeds for
investment securities are estimates using industry standards for pricing and prepayment
assumptions. The assumptions of financial instrument categories are reviewed before each
simulation by ALCO in light of current economic trends. 2008 net interest income simulation model
applies a 100 bp decline due to the extremely low interest environment. As of December 31, 2008,
the income simulation model reflects negative exposure to net interest income in a declining
interest rate environment from flat rates to down 100 bp, which would result from assets repaying
faster than the long-term borrowings from the FHLBB. Margins would narrow as deposits and
borrowings are typically slower to reprice downward in response to lower interest rates than
interest earning assets which can reprice immediately. The interest rate scenario used does not
necessarily reflect ALCOs view of the most likely change in interest rates over the models
period. Furthermore, the model assumes a static consolidated balance sheet. These results do not
reflect the anticipated future net interest income of the Company for the same periods.
30
The following table summarizes the net interest income for the 24-month period of the Companys
consolidated balance sheet for earning assets and liabilities for the years ended December 31:
Net Interest Income Simulation Model Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Shock
|
|
|
|
|
|
|
|
Down
|
|
|
Up
|
|
2008
|
|
Flat Rates
|
|
|
100 bp
|
|
|
200 bp
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year One
|
|
$
|
16,861
|
|
|
$
|
16,480
|
|
|
$
|
17,866
|
|
Year Two
|
|
|
17,861
|
|
|
|
16,769
|
|
|
|
20,038
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest income for 2 year period
|
|
$
|
34,722
|
|
|
$
|
33,249
|
|
|
$
|
37,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Shock
|
|
|
|
|
|
|
|
Down
|
|
|
Up
|
|
2007
|
|
Flat Rates
|
|
|
200 bp
|
|
|
200 bp
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year One
|
|
$
|
15,317
|
|
|
$
|
14,174
|
|
|
$
|
15,570
|
|
Year Two
|
|
|
14,899
|
|
|
|
9,962
|
|
|
|
15,985
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest income for 2 year period
|
|
$
|
30,216
|
|
|
$
|
24,136
|
|
|
$
|
31,555
|
|
|
Another measure of interest rate risk is GAP analysis. GAP measurement attempts to analyze any
mismatches in the timing of interest rate repricing between assets and liabilities. It identifies
those balance sheet sensitivity areas which are vulnerable to unfavorable interest rate movements.
As a tool of asset/liability management, the GAP position is compared with potential changes in
interest rate levels in an attempt to measure the favorable and unfavorable effect such changes
would have on net interest income. For example, when the GAP is positive, (i.e., assets reprice
faster than liabilities) a rise in interest rates will increase net interest income; and,
conversely, if the GAP is negative, a rise in interest rates will decrease net interest income. The
accuracy of this measure is limited by unpredictable loan prepayments and the lags in the interest
rate indices used for repricing variable rate loans or investment securities. The Companys
one-year cumulative GAP to total assets changed from negative 0.01% at December 31, 2007, to 0.21%
at December 31, 2008.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
Page
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
|
32
|
|
|
|
|
|
|
CONSOLIDATED BALANCE SHEETS
|
|
|
33
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
34
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|
|
|
35
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
36
|
|
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
37
|
|
31
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
LSB Corporation:
We have audited the accompanying consolidated balance sheets of LSB Corporation and subsidiary (the
Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations,
changes in stockholders equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of LSB Corporation and subsidiary as of December 31, 2008
and 2007, and the results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of America.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
March 17, 2009
32
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
December 31,
|
|
2008
|
|
|
2007
|
|
(
In Thousands, Except Share Data)
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
6,859
|
|
|
$
|
7,494
|
|
Federal funds sold
|
|
|
6,469
|
|
|
|
56
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
13,328
|
|
|
|
7,550
|
|
Investment securities available for sale, at fair value,
amortized cost of $259,057 in 2008 and $229,885 in 2007 (notes 2 and 7)
|
|
|
264,561
|
|
|
|
230,596
|
|
Federal Home Loan Bank stock, at cost (note 3)
|
|
|
11,825
|
|
|
|
10,185
|
|
Loans, net of allowance for loan losses of $5,885 in 2008
and $4,810 in 2007 (notes 4 and 7)
|
|
|
446,736
|
|
|
|
353,303
|
|
Premises and equipment, net (note 5)
|
|
|
5,528
|
|
|
|
3,590
|
|
Accrued interest receivable
|
|
|
2,720
|
|
|
|
2,453
|
|
Deferred income tax asset, net (note 8)
|
|
|
4,447
|
|
|
|
2,485
|
|
Bank-owned life insurance
|
|
|
10,641
|
|
|
|
10,200
|
|
Other real estate owned
|
|
|
120
|
|
|
|
|
|
Other assets
|
|
|
1,418
|
|
|
|
1,289
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
761,324
|
|
|
$
|
621,651
|
|
|
Liabilities and Stockholders Equity
:
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest bearing deposits (note 6)
|
|
$
|
381,117
|
|
|
$
|
293,232
|
|
Non-interest bearing deposits (note 6)
|
|
|
27,546
|
|
|
|
28,851
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
408,663
|
|
|
|
322,083
|
|
Long-term borrowed funds (note 7)
|
|
|
259,228
|
|
|
|
227,378
|
|
Short-term borrowed funds (note 7)
|
|
|
17,262
|
|
|
|
7,973
|
|
Other liabilities
|
|
|
4,029
|
|
|
|
3,919
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
689,182
|
|
|
|
561,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (notes 5, 12 and 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (notes 9 and 11):
|
|
|
|
|
|
|
|
|
Preferred stock, Series A, $.10 par value; 5,000,000
shares authorized, none issued
|
|
|
|
|
|
|
|
|
Cumulative perpetual preferred stock, Series B,
(liquidation preference $1,000 per share), 15,000 shares
authorized and issued
|
|
|
14,455
|
|
|
|
|
|
Common stock, $.10 par value; 20,000,000
shares authorized; 4,470,941 and 4,516,561 shares issued
and outstanding in 2008 and 2007, respectively
|
|
|
447
|
|
|
|
452
|
|
Additional paid-in capital
|
|
|
60,179
|
|
|
|
60,382
|
|
Accumulated deficit
|
|
|
(6,250
|
)
|
|
|
(934
|
)
|
Accumulated other comprehensive income
|
|
|
3,311
|
|
|
|
398
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
72,142
|
|
|
|
60,298
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
761,324
|
|
|
$
|
621,651
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
33
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2008
|
|
|
2007
|
|
(In Thousands, Except Share Data)
|
|
|
|
|
|
|
|
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
25,405
|
|
|
$
|
23,494
|
|
Investment securities available for sale (note 2)
|
|
|
12,727
|
|
|
|
10,181
|
|
Federal Home Loan Bank stock (note 3)
|
|
|
428
|
|
|
|
662
|
|
Other interest income
|
|
|
195
|
|
|
|
671
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
38,755
|
|
|
|
35,008
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Deposits (note 6)
|
|
|
10,298
|
|
|
|
10,082
|
|
Long-term borrowed funds
|
|
|
11,396
|
|
|
|
8,885
|
|
Short-term borrowed funds
|
|
|
186
|
|
|
|
714
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
21,880
|
|
|
|
19,681
|
|
|
Net interest income
|
|
|
16,875
|
|
|
|
15,327
|
|
Provision for loan losses (note 4)
|
|
|
1,285
|
|
|
|
645
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
15,590
|
|
|
|
14,682
|
|
|
Non-interest income (loss):
|
|
|
|
|
|
|
|
|
Deposit account fees
|
|
|
1,043
|
|
|
|
1,009
|
|
Loan servicing fees, net
|
|
|
153
|
|
|
|
189
|
|
Impairment write-downs on securities
|
|
|
(10,105
|
)
|
|
|
|
|
Gain on pension plan termination (note 10)
|
|
|
|
|
|
|
762
|
|
Income on bank-owned life insurance
|
|
|
441
|
|
|
|
200
|
|
Other income
|
|
|
479
|
|
|
|
524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income (loss)
|
|
|
(7,989
|
)
|
|
|
2,684
|
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
Salaries and employee benefits (notes 10 and 11)
|
|
|
6,706
|
|
|
|
6,836
|
|
Occupancy and equipment (note 5)
|
|
|
1,330
|
|
|
|
1,221
|
|
Data processing
|
|
|
938
|
|
|
|
1,019
|
|
Professional
|
|
|
580
|
|
|
|
463
|
|
Marketing
|
|
|
472
|
|
|
|
397
|
|
Insurance
|
|
|
164
|
|
|
|
137
|
|
Other real estate owned
|
|
|
139
|
|
|
|
|
|
Other
|
|
|
1,547
|
|
|
|
1,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
11,876
|
|
|
|
11,557
|
|
|
Income (loss) before income taxes
|
|
|
(4,275
|
)
|
|
|
5,809
|
|
Income tax expense (benefit) (note 8)
|
|
|
(1,552
|
)
|
|
|
2,091
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,723
|
)
|
|
$
|
3,718
|
|
|
|
|
|
|
|
|
|
|
|
Average basic shares outstanding
|
|
|
4,468,484
|
|
|
|
4,575,197
|
|
Common stock equivalents
|
|
|
16,066
|
|
|
|
27,509
|
|
|
|
|
|
|
|
|
Average diluted shares outstanding
|
|
|
4,484,550
|
|
|
|
4,602,706
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
(0.61
|
)
|
|
$
|
0.81
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.61
|
)
|
|
$
|
0.81
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
34
Consolidated Statements of Changes in
Stockholders Equity
Years Ended December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Compre-
|
|
|
Stock-
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
hensive
|
|
|
holders
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Equity
|
|
(In Thousands, Except Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
|
|
|
$
|
459
|
|
|
$
|
61,578
|
|
|
$
|
(2,090
|
)
|
|
$
|
(1,416
|
)
|
|
$
|
58,531
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,718
|
|
|
|
|
|
|
|
3,718
|
|
Other comprehensive income -
Unrealized gain on securities
available for sale (tax effect $1,416)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,264
|
|
|
|
2,264
|
|
Pension plan settlement gain
(tax effect $312)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(450
|
)
|
|
|
(450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,532
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
121
|
|
Exercise of stock options and tax benefits
(13,300 shares)
|
|
|
|
|
|
|
2
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
139
|
|
Common stock repurchased (90,356 shares)
|
|
|
|
|
|
|
(9
|
)
|
|
|
(1,454
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,463
|
)
|
Dividends declared and paid ($0.56 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,562
|
)
|
|
|
|
|
|
|
(2,562
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
|
452
|
|
|
|
60,382
|
|
|
|
(934
|
)
|
|
|
398
|
|
|
|
60,298
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,723
|
)
|
|
|
|
|
|
|
(2,723
|
)
|
Other comprehensive income -
Unrealized gain on securities
available for sale (tax effect $1,935)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,913
|
|
|
|
2,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
156
|
|
Issuance of preferred stock,
net of discount of $549
|
|
|
14,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,451
|
|
Accretion of discount on preferred stock
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
Fair value of warrants issued with preferred
stock
|
|
|
|
|
|
|
|
|
|
|
549
|
|
|
|
|
|
|
|
|
|
|
|
549
|
|
Exercise of stock options and tax benefits
(9,500 shares)
|
|
|
|
|
|
|
1
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
121
|
|
Common stock repurchased (64,620 shares)
|
|
|
|
|
|
|
(6
|
)
|
|
|
(1,028
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,034
|
)
|
Dividends declared and paid ($0.58 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,589
|
)
|
|
|
|
|
|
|
(2,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
14,455
|
|
|
$
|
447
|
|
|
$
|
60,179
|
|
|
$
|
(6,250
|
)
|
|
$
|
3,311
|
|
|
$
|
72,142
|
|
|
|
|
|
|
|
|
|
|
|
Disclosure of reclassification amount
|
|
|
|
|
|
|
for securities available for sale:
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2008
|
|
|
2007
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
Gross unrealized (losses) gains
arising during the period
|
|
$
|
(5,312
|
)
|
|
$
|
3,680
|
|
Tax effect
|
|
|
1,656
|
|
|
|
(1,416
|
)
|
|
|
|
|
|
|
|
Unrealized holding (losses) gains, net of tax
|
|
|
(3,656
|
)
|
|
|
2,264
|
|
|
|
|
|
|
|
|
Reclassification adjustment for losses
included in income
|
|
|
10,105
|
|
|
|
|
|
Tax effect
|
|
|
(3,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on securities,
net of reclassification amount
|
|
$
|
2,913
|
|
|
$
|
2,264
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
35
Consolidated Statements
of Cash Flows
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2008
|
|
|
2007
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,723
|
)
|
|
$
|
3,718
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
1,285
|
|
|
|
645
|
|
Impairment write-downs on securities
|
|
|
10,105
|
|
|
|
|
|
Net losses on sales of other real estate owned
|
|
|
72
|
|
|
|
|
|
Gains on pension plan termination
|
|
|
|
|
|
|
(762
|
)
|
Net accretion of investment securities
|
|
|
(496
|
)
|
|
|
(203
|
)
|
Depreciation and amortization of premises and equipment
|
|
|
605
|
|
|
|
606
|
|
Increase in accrued interest receivable
|
|
|
(267
|
)
|
|
|
(194
|
)
|
Deferred income tax expense (benefit)
|
|
|
(3,842
|
)
|
|
|
16
|
|
Stock-based compensation
|
|
|
156
|
|
|
|
121
|
|
Increase in cash surrender value of bank-owned life insurance
|
|
|
(441
|
)
|
|
|
(200
|
)
|
Decrease (increase) in other assets
|
|
|
(129
|
)
|
|
|
655
|
|
(Decrease) increase in other liabilities
|
|
|
138
|
|
|
|
(132
|
)
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
4,463
|
|
|
|
4,270
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from maturities of investment securities available for sale
|
|
|
15,741
|
|
|
|
23,545
|
|
Purchases of investment securities available for sale
|
|
|
(97,235
|
)
|
|
|
(60,074
|
)
|
Purchases of bank-owned life insurance
|
|
|
|
|
|
|
(10,000
|
)
|
Purchases of FHLBB stock
|
|
|
(1,640
|
)
|
|
|
(204
|
)
|
Redemption of FHLBB stock
|
|
|
|
|
|
|
65
|
|
Principal payments on investment securities available for sale
|
|
|
42,713
|
|
|
|
28,499
|
|
Increase in loans, net
|
|
|
(96,668
|
)
|
|
|
(70,094
|
)
|
Proceeds from sales of other real estate owned
|
|
|
1,758
|
|
|
|
|
|
Purchases of premises and equipment
|
|
|
(2,543
|
)
|
|
|
(389
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(137,874
|
)
|
|
|
(88,652
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
|
86,580
|
|
|
|
26,421
|
|
Additions to long-term borrowed funds
|
|
|
63,000
|
|
|
|
173,000
|
|
Payments on long-term borrowed funds
|
|
|
(31,150
|
)
|
|
|
(89,141
|
)
|
Net (decrease) increase in short-term borrowed funds
|
|
|
9,289
|
|
|
|
(33,290
|
)
|
Net increase (decrease) in mortgagors escrow accounts
|
|
|
(28
|
)
|
|
|
61
|
|
Proceeds from issuance of preferred stock and warrants
|
|
|
15,000
|
|
|
|
|
|
Dividends paid
|
|
|
(2,589
|
)
|
|
|
(2,562
|
)
|
Proceeds from exercise of stock options
|
|
|
117
|
|
|
|
117
|
|
Tax benefits from exercise of stock options
|
|
|
4
|
|
|
|
22
|
|
Repurchases of common stock
|
|
|
(1,034
|
)
|
|
|
(1,463
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
139,189
|
|
|
|
73,165
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
5,778
|
|
|
|
(11,217
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
7,550
|
|
|
|
18,767
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
13,328
|
|
|
$
|
7,550
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
$
|
10,276
|
|
|
$
|
10,067
|
|
Interest on borrowed funds
|
|
|
11,511
|
|
|
|
9,357
|
|
Income taxes
|
|
|
2,405
|
|
|
|
2,101
|
|
Supplemental non-cash investing activities:
|
|
|
|
|
|
|
|
|
Transfers to other real estate owned
|
|
|
1,950
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
36
NOTES TO CONSOLIDATED
Financial Statements
Years Ended December 31, 2008 and 2007
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION.
LSB Corporation (the Corporation or the Company) is a Massachusetts
corporation and the holding company of its wholly-owned subsidiary River 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
Corporation is supervised by the Board of Governors of the Federal Reserve System (FRB), and the
Massachusetts Division of Banks (the Division), while the Bank is subject to the regulations of,
and periodic examination by, the Federal Deposit Insurance Corporation (FDIC) and the Division.
The Banks deposits are insured by the Bank Insurance Fund of the FDIC up to $250,000 per account
for non-retirement accounts with maturities through December 31, 2009 and up to $100,000
thereafter, and up to $250,000 for certain retirement accounts, as defined by the FDIC. For
balances in excess of the FDIC deposit insurance limits, coverage is provided by the Depositors
Insurance Fund, Inc. (DIF).
The Consolidated Financial Statements include the accounts of LSB Corporation, River Bank, and its
wholly-owned subsidiaries, Shawsheen Security Corporation, Shawsheen Security Corporation II 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 reclassified to conform to the current presentation.
LSB Corporations Consolidated Financial Statements have been prepared in conformity with U.S.
generally accepted accounting principles. 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
impairment of investment securities.
CASH AND CASH EQUIVALENTS.
For the purpose of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and federal funds sold. Generally,
federal funds are sold with overnight maturities.
INVESTMENT SECURITIES.
Debt securities that the Company has the intent and ability to
hold to maturity are classified as held to maturity and reported at amortized cost; debt and
equity securities that are bought and held principally for the purpose of selling in the near term
are classified as trading and reported at fair value, with unrealized gains and losses included
in earnings; and debt and equity securities not classified as either held to maturity or trading
are classified as available for sale and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as other comprehensive income, net of estimated income taxes.
Dividend income on equity securities is recorded when dividends are declared.
Premiums and discounts on debt securities are amortized or accreted into income by use of the
interest method over the terms of the securities. For declines in the fair value of held to
maturity and available for sale securities below their amortized cost basis that are deemed to be
other than temporary, the cost basis of the investment is written down to fair value and the amount
of the write-down is included as a charge to earnings. Gains and losses on the sale of securities
are recognized on the trade date using the specific identification basis.
In estimating other-than-temporary impairment losses, management considers (1) the length of time
and the extent to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its
investment in the issuer for a period of time sufficient to allow for any anticipated recovery in
fair value.
FEDERAL HOME LOAN BANK STOCK
. Federal Home Loan Bank of Boston (FHLBB) stock has no quoted
market value and is carried at cost, based on the redemption provisions of the FHLBB. Management
reviews for impairment based on the ultimate recoverability of the cost basis in the FHLBB stock.
As of December 31, 2008, no impairment has been recognized.
INTEREST ON LOANS .
Interest on loans is accrued as earned. Loans on which the accrual
of interest has been discontinued are designated as non-accrual loans. It is managements policy to
discontinue the accrual of interest on a loan when there is a reasonable doubt as to its
collectibility. Interest on loans 90 days or more contractually delinquent is generally excluded
from interest income. When a loan is placed on non-accrual status, all interest previously accrued
but not collected is reversed against current period interest income. Interest accruals are resumed
on loans that have been 90 days or more past due only when they are brought fully current with
respect to interest and principal and when, in the judgment of management, the loans are expected
to be fully collectible as to both principal and interest.
LOAN FEES.
Loan origination fees, net of direct loan acquisition costs, are deferred and
recognized over the contractual life of the loan as an adjustment of the loans yield using the
interest method. Amortization of loan fees is discontinued once a loan is placed on
non-accrual status. When loans are sold or paid-off, the unamortized portion of net fees and costs
is credited to income.
37
TRANSFER AND SERVICING OF ASSETS AND EXTINGUISHMENTS OF LIABILITIES.
The Company
accounts and reports for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial components approach that focuses on
control. This approach distinguishes transfers of financial assets that are sales from transfers
that are secured borrowings. After a transfer of financial assets, the Company recognizes all
financial and servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been extinguished. This financial
components approach focuses on the assets and liabilities that exist after the transfer. Many of
these assets and liabilities are components of financial assets that existed prior to the transfer.
If a transfer does not meet the criteria for recognition as a sale, the Company accounts for the
transfer as a secured borrowing with a pledge of collateral.
ALLOWANCE FOR LOAN LOSSES.
Losses on loans are provided for under the allowance method
of accounting. The allowance is increased by provisions charged to operations on the basis of many
factors including the risk characteristics of the portfolio, current economic conditions and trends
in loan delinquencies and charge-offs. When management believes that the collection of a loans
principal balance is unlikely, the principal amount is charged against the allowance. Recoveries
on loans which have been previously charged off are credited to the allowance as received.
Managements methodology for assessing the appropriateness of the allowance consists of several key
elements, which include a general allowance, specific allowances for impaired loans and an
unallocated allowance.
The general allowance is calculated by applying loss factors to pools of outstanding non-impaired
loans. In the case of commercial loans, changes in risk grades affect the amount of the general
allowance. Loss factors are based on the Banks historical loss experience, as well as other
qualitative factors and consider regulatory guidance.
Specific allowances are established in cases where management has identified significant conditions
related to a credit such that management believes it probable that a loss has been incurred in
excess of the amount determined by the general allowance.
The unallocated allowance recognizes the model and estimation risk associated with the general and
specific allowances as well as managements evaluation of various conditions, the effects of which
are not directly measured in the determination of the general and specific allowances. The
evaluation of the inherent loss with respect to these conditions is subject to a higher degree of
uncertainty because they are not identified with specific problem credits.
In addition, various regulatory agencies, including the FDIC and the Massachusetts Division of
Banks, as an integral part of their examination process, periodically review the Banks allowance
for loan losses. Such agencies may require the Bank to recognize additions to the allowance for
loan losses based on judgments different from those of management.
Impaired loans are corporate loans and individually significant residential mortgage loans for
which it is probable that the Company will not be able to collect all amounts due according to the
contractual terms of the loan agreement. Factors considered by management in determining
impairment include payment status and collateral value. The amount of impairment is determined by
the difference between the present value of the expected cash flows related to the loan, using the
original contractual interest rate, and its recorded value, or, as a practical expedient in the
case of collateral dependent loans, the difference between the fair value of the collateral and the
recorded amount of the loan. When foreclosure is probable, impairment is based on the fair value of
the collateral. Larger groups of smaller balance homogenous loans are collectively evaluated for
impairment.
PREMISES AND EQUIPMENT.
Premises and equipment are stated at cost less allowances for
depreciation and amortization. Depreciation and amortization are computed principally on the
straight-line method over the estimated useful lives of the assets or the expected terms of the
leases, if shorter.
BANK-OWNED LIFE INSURANCE
. Bank-owned life insurance policies are reflected on the consolidated
balance sheet at cash surrender value. Changes in cash surrender value are reflected in other
non-interest income and are not subject to income taxes.
OTHER REAL ESTATE OWNED.
Other real estate owned (OREO) is comprised of foreclosed
properties where the Bank has formally received title or has possession of the collateral.
Properties are carried at the lower of the investment in the related loan or the estimated fair
value of the property or collateral less selling costs. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower of carrying amount or
fair value less cost to sell. Revenue and expenses from operations and changes in the valuation
allowance are included in net expenses from foreclosed assets.
SHARE-BASED COMPENSATION PLANS.
The Company measures and recognizes compensation expense
for its awards on a straight-line basis over the requisite service period for the entire award
(straight-line attribution method), ensuring that the amount of compensation cost recognized at any
date at least equals the portion of the grant-date fair value of the award that is vested at that
time. The Company uses the Black-Scholes option-pricing model to determine the fair value of stock
options granted.
38
INCOME TAXES.
Deferred tax assets and liabilities are recognized for estimated future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred assets and liabilities are
measured using enacted tax rates in effect for the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment date. Deferred tax
valuation allowances are established and based on managements judgment as to whether it is more
likely than not that all or some portion of the future tax benefits of prior operating losses will
be realized.
EARNINGS PER SHARE
. Basic EPS is calculated based on the weighted average number of
common shares outstanding during each period. Diluted earnings per share reflects additional
common shares that would have been outstanding if dilutive potential common shares had been issued,
as well as any adjustment to income that would result from the assumed issuance. Potential common
shares that may be issued by the Company relate to outstanding stock options and restricted stock
awards and are determined using the treasury stock method. Stock options and restricted stock that
would have an anti-dilutive effect on earnings per share are excluded from this calculation. For
the years ended December 31, 2008 and 2007, 248,100 and 136,100 shares, respectively, were
anti-dilutive.
RECENT ACCOUNTING DEVELOPMENTS
. In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement No. 157, Fair Value Measurements (SFAS 157) to provide consistency
and comparability in determining fair value measurements and to provide for expanded disclosures
about fair value measurements. The definition of fair value maintains the exchange price notion in
earlier definitions of fair value but focuses on the exit price of the asset or liability. The
exit price is the price that would be received to sell the asset or paid to transfer the liability
adjusted for certain inherent risks and restrictions. Expanded disclosures are also required about
the use of fair value to measure assets and liabilities. In February 2008, the FASB issued a Staff
Position which delays the effective date of SFAS No. 157 for non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis, to fiscal years beginning after November 15, 2008. The Company
adopted this Statement, except for items covered by the Staff Position, as of January 1, 2008 and
the adoption of SFAS 157 did not have a material impact on the Companys Consolidated Financial
Statements. See Note 14 for further information.
In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3 clarifies
the application of SFAS 157 in a market that is not active and provides an example to illustrate
key considerations in determining the fair value of a financial asset when the market for that
financial asset is not active. FSP 157-3 was effective immediately upon issuance, and includes
prior periods for which financial statements have not been issued. The Company applied the guidance
contained in FSP 157- 3 in determining fair values at December 31, 2008, and it did not have a
material impact on the Companys Consolidated Financial Statements.
Effective January 1, 2008, the Company adopted FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits entities to measure
certain financial assets and financial liabilities at fair value with unrealized gains and losses
on items for which the fair value option is elected to be reported in earnings. The Companys
adoption of SFAS 159 did not have a material impact on the Companys Consolidated Financial
Statements.
In June 2007, the FASB ratified EITF Issue No. 06-11, Accounting for Income Tax Benefits of
Dividends on Share-based Payment Awards, which requires an entity to recognize, as an increase to
additional paid-in capital, the income tax benefits related to dividends that are charged to
retained earnings for nonvested equity shares or options. This EITF was adopted on January 1, 2008
and did not have a material impact on the Companys Consolidated Financial Statements.
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements An Amendment of ARB No. 51 (SFAS 160) and Statement No. 141R, Business
Combinations (SFAS 141R). The two standards were issued to improve, simplify and converge
international and United States accounting standards for business combinations and the reporting of
noncontrolling interests in consolidated financial statements. SFAS 160 and SFAS 141R are
effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 160 and SFAS
141R is not expected to have a material impact on the Companys Consolidated Financial Statements.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 changes the
disclosure requirements for derivative instruments and hedging activities and is intended to
enhance the current disclosure framework in SFAS 133. The Statement requires that objectives for
using derivative instruments be disclosed in terms of the underlying risk and accounting
designation and to improve disclosures about credit derivatives by requiring more information about
the potential adverse effects of changes in credit risk on the financial position, financial
performance and cash flows of the sellers of credit derivatives. This Statement is effective for
fiscal years and interim periods beginning after November 15, 2008 and is not expected to have a
material impact on the Companys Consolidated Financial Statements.
39
In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS 162). SFAS 162 identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally accepted accounting
principles (GAAP) in the United States and becomes effective 60 days after the SECs approval.
SFAS 162 is not expected to have a material impact on the Companys Consolidated Financial
Statements.
In May 2008, the FASB issued Statement No. 163, Accounting for Financial Guarantee Insurance
Contracts-an Interpretation of FASB Statement No. 60 (SFAS 163). SFAS 163 is limited to
financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued
by enterprises included within the scope of Statement 60. Accordingly, this Statement does not
apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement
60 or to some insurance contracts that seem similar to financial guarantee insurance contracts
issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade
receivables). This Statement is effective for fiscal years beginning after December 15, 2008 and
is not expected to have a material impact on the Companys Consolidated Financial Statements.
In January 2009, the FASB issued Staff Position FSP EITF 99-20-1, Amendment to the Impairment
Guidance of Issue No. 99-20. This guidance clarifies and aligns the impairment guidance
previously issued under Issue No. 99-20 with Statement No. 115 Accounting for Certain Investments
in Debt and Equity Securities and Statement No. 157, Fair Value Measurements. The Staff
Position is effective for reporting periods ending after December 15, 2008 and did not impact the
Companys Consolidated Financial Statements.
(2) INVESTMENT SECURITIES
The amortized cost and fair value of investment securities available for sale at December 31, follows:
|
|
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Amortized
|
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Unrealized
|
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Fair
|
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|
Cost
|
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Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations
|
|
$
|
5,578
|
|
|
$
|
426
|
|
|
$
|
|
|
|
$
|
6,004
|
|
|
$
|
5,589
|
|
|
$
|
4
|
|
|
$
|
(52
|
)
|
|
$
|
5,541
|
|
Government-sponsored
enterprise obligations (1)
|
|
|
15,485
|
|
|
|
240
|
|
|
|
(3
|
)
|
|
|
15,722
|
|
|
|
15,748
|
|
|
|
95
|
|
|
|
(33
|
)
|
|
|
15,810
|
|
Mortgage-backed securities
|
|
|
181,367
|
|
|
|
5,919
|
|
|
|
(80
|
)
|
|
|
187,206
|
|
|
|
134,969
|
|
|
|
2,208
|
|
|
|
(474
|
)
|
|
|
136,703
|
|
Collateralized mortgage
obligations
|
|
|
46,725
|
|
|
|
379
|
|
|
|
(45
|
)
|
|
|
47,059
|
|
|
|
60,660
|
|
|
|
169
|
|
|
|
(682
|
)
|
|
|
60,147
|
|
Corporate obligations
|
|
|
6,433
|
|
|
|
|
|
|
|
(750
|
)
|
|
|
5,683
|
|
|
|
6,373
|
|
|
|
30
|
|
|
|
(583
|
)
|
|
|
5,820
|
|
Mutual funds
|
|
|
1,000
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
958
|
|
|
|
1,000
|
|
|
|
|
|
|
|
(41
|
)
|
|
|
959
|
|
Equity securities
|
|
|
2,469
|
|
|
|
|
|
|
|
(540
|
)
|
|
|
1,929
|
|
|
|
5,546
|
|
|
|
70
|
|
|
|
|
|
|
|
5,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
259,057
|
|
|
$
|
6,964
|
|
|
$
|
(1,460
|
)
|
|
$
|
264,561
|
|
|
$
|
229,885
|
|
|
$
|
2,576
|
|
|
$
|
(1,865
|
)
|
|
$
|
230,596
|
|
|
|
|
|
(1)
|
|
Government-sponsored enterprise obligations include investment securities issued by
government sponsored enterprises (GSEs) such as Federal National Mortgage Association
(FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and the Federal Home Loan Bank
(FHLB). These investment securities do not represent obligations of the U.S. Government
and are not backed by the full faith and credit of the Treasury.
|
Interest and dividend income on investment securities available for sale for the years ended 2008
and 2007 totaled $12.7 million and $10.2 million, respectively, including dividend income on
equity securities available for sale of $605,000 in 2008 and $56,000 in 2007.
There were no sales of investment securities for the year ended December 31, 2008 or 2007.
40
Securities pledged at December 31, follow:
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|
|
|
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|
Wholesale
|
|
|
Customer
|
|
|
|
|
|
|
Repurchase Agreements
|
|
|
Repurchase Agreements
|
|
|
FHLBB Advances
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,074
|
|
|
$
|
5,494
|
|
Government-sponsored
enterprise obligations
|
|
|
|
|
|
|
|
|
|
|
5,986
|
|
|
|
6,136
|
|
|
|
9,499
|
|
|
|
9,586
|
|
Mortgage-backed securities
|
|
|
47,219
|
|
|
|
48,835
|
|
|
|
|
|
|
|
|
|
|
|
119,589
|
|
|
|
123,544
|
|
Collateralized mortgage obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,707
|
|
|
|
47,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,589
|
|
|
$
|
5,541
|
|
Government-sponsored
enterprise obligations
|
|
|
|
|
|
|
|
|
|
|
7,945
|
|
|
|
7,991
|
|
|
|
7,803
|
|
|
|
7,819
|
|
Mortgage-backed securities
|
|
|
27,144
|
|
|
|
27,887
|
|
|
|
|
|
|
|
|
|
|
|
107,825
|
|
|
|
108,816
|
|
Collateralized mortgage obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,660
|
|
|
|
60,147
|
|
|
Other-than-temporarily impaired securities.
The following table shows the gross unrealized losses and fair value of the Companys investments
with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by
investment category and length of time that individual securities have been in a continuous
unrealized loss position, at December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
2008
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored
enterprise obligations
|
|
$
|
2,500
|
|
|
$
|
(3
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,500
|
|
|
$
|
(3
|
)
|
Mortgage-backed securities
|
|
|
303
|
|
|
|
(1
|
)
|
|
|
6,864
|
|
|
|
(79
|
)
|
|
|
7,167
|
|
|
|
(80
|
)
|
Collateralized mortgage
Obligations
|
|
|
2,006
|
|
|
|
(1
|
)
|
|
|
7,085
|
|
|
|
(44
|
)
|
|
|
9,091
|
|
|
|
(45
|
)
|
Corporate obligations
|
|
|
1,800
|
|
|
|
(677
|
)
|
|
|
3,883
|
|
|
|
(73
|
)
|
|
|
5,683
|
|
|
|
(750
|
)
|
Mutual funds
|
|
|
|
|
|
|
|
|
|
|
958
|
|
|
|
(42
|
)
|
|
|
958
|
|
|
|
(42
|
)
|
Equity securities
|
|
|
1,500
|
|
|
|
(540
|
)
|
|
|
|
|
|
|
|
|
|
|
1,500
|
|
|
|
(540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily
impaired
securities
|
|
$
|
8,109
|
|
|
$
|
(1,222
|
)
|
|
$
|
18,790
|
|
|
$
|
(238
|
)
|
|
$
|
26,899
|
|
|
$
|
(1,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
2007
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,036
|
|
|
$
|
(52
|
)
|
|
$
|
5,036
|
|
|
$
|
(52
|
)
|
Government-sponsored
enterprise obligations
|
|
|
|
|
|
|
|
|
|
|
4,958
|
|
|
|
(33
|
)
|
|
|
4,958
|
|
|
|
(33
|
)
|
Mortgage-backed securities
|
|
|
37
|
|
|
|
(1
|
)
|
|
|
25,559
|
|
|
|
(473
|
)
|
|
|
25,596
|
|
|
|
(474
|
)
|
Collateralized mortgage
obligations
|
|
|
|
|
|
|
|
|
|
|
47,536
|
|
|
|
(682
|
)
|
|
|
47,536
|
|
|
|
(682
|
)
|
Corporate obligations
|
|
|
1,451
|
|
|
|
(508
|
)
|
|
|
1,874
|
|
|
|
(75
|
)
|
|
|
3,325
|
|
|
|
(583
|
)
|
Mutual funds
|
|
|
|
|
|
|
|
|
|
|
959
|
|
|
|
(41
|
)
|
|
|
959
|
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities
|
|
$
|
1,488
|
|
|
$
|
(509
|
)
|
|
$
|
85,922
|
|
|
$
|
(1,356
|
)
|
|
$
|
87,410
|
|
|
$
|
(1,865
|
)
|
|
U. S. Treasury and government-sponsored enterprise obligations.
The unrealized losses on the
Companys investment in U.S.
41
Government and Government-sponsored enterprise obligations were caused by interest rate
increases. These investments are guaranteed by the U.S. Government or an enterprise thereof.
Accordingly, it is expected that the securities would not be settled at a price less than the par
value of the investment. Because the decline in market value is attributable to changes in
interest rates and not to credit quality, and because the Company has the ability and intent to
hold these investments until a recovery of fair value, which may be maturity, the Company does not
consider these investments to be other-than-temporarily impaired at December 31, 2008.
Mortgage-backed securities and collateralized mortgage obligations.
The unrealized losses on the
Companys investment in these securities were caused by interest rate increases. The contractual
cash flows of these investments are guaranteed by U.S. government agencies and government-sponsored
enterprises. Accordingly, it is expected that the securities would not be settled at a price less
than the amortized cost of the Companys investment. Because the decline in market value is
attributable to changes in interest rates and not credit quality and because the Company has the
ability and intent to hold these investments until a recovery of fair value, which may be at
maturity, the Company does not consider these investments to be other-than-temporarily impaired at
December 31, 2008.
Corporate obligations.
The Companys unrealized losses on investments in corporate bonds relate to
investments in companies within the financial services sector. The unrealized losses are primarily
caused by (a) recent decreases in profitability and near-term profit forecasts by industry analysts
resulting from the sub-prime mortgage market and (b) recent downgrades by several industry
analysts. The contractual maturities of these investments range from September 15, 2009 to
November 1, 2010. Although the companies credit ratings have decreased from A to BBB (S&P), the
Company currently does not believe it is probable that it will be unable to collect all amounts due
according to the contractual terms of the investments. Therefore, it is expected that the bonds
would not be settled at a price less than the par value of the investment. Because the Company has
the ability and intent to hold these investments until a recovery of fair value, which may be
maturity, it does not consider these investments to be other-than-temporarily impaired at December
31, 2008.
Equity securities and mutual funds.
The unrealized losses on equity securities and mutual funds
are a result of specific conditions and circumstances that are unique to each company represented
in the portfolio. When needed, management monitors its holdings for impairment by reviewing the
financial condition of the issuer, company specific events, industry developments, and general
economic conditions. In evaluating the severity and duration of impairment, management also reviews
corporate financial reports, press releases and other publicly available information. Based upon
this evaluation and the Companys ability and intent to hold its remaining equity securities and
mutual fund investments for a reasonable period of time sufficient for a forecasted recovery of
fair value, the Company does not consider these investments to be other-than-temporarily impaired
at December 31, 2008.
The impairment write-downs on securities in 2008 related to its preferred stock holdings issued by
FNMA and FHLMC.
The following table is a summary of the contractual maturities of investment securities available
for sale at December 31, 2008. These amounts exclude mutual funds and equity securities, which
have no contractual maturities. Mortgage-backed securities consist of FHLMC, FNMA, and GNMA
certificates. Mortgage-backed securities and collateralized mortgage obligations are shown at
their final contractual maturity date but are expected to have shorter average lives.
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
December 31, 2008
|
|
Cost
|
|
|
Value
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
U.S. Treasury and government-sponsored enterprise obligations:
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
5,501
|
|
|
$
|
5,568
|
|
2 to 3 years
|
|
|
4,999
|
|
|
|
5,129
|
|
3 to 5 years
|
|
|
10,563
|
|
|
|
11,029
|
|
|
|
|
|
|
|
|
|
|
|
21,063
|
|
|
|
21,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
|
716
|
|
|
|
713
|
|
1 to 2 years
|
|
|
2,084
|
|
|
|
2,036
|
|
2 to 3 years
|
|
|
120
|
|
|
|
125
|
|
3 to 5 years
|
|
|
9,658
|
|
|
|
9,692
|
|
5 to 10 years
|
|
|
10,388
|
|
|
|
10,616
|
|
After 10 years
|
|
|
158,401
|
|
|
|
164,024
|
|
|
|
|
|
|
|
|
|
|
|
181,367
|
|
|
|
187,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
3 to 5 years
|
|
|
83
|
|
|
|
88
|
|
5 to 10 years
|
|
|
9,749
|
|
|
|
9,740
|
|
After 10 years
|
|
|
36,893
|
|
|
|
37,231
|
|
|
|
|
|
|
|
|
|
|
|
46,725
|
|
|
|
47,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate obligations:
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
|
1,982
|
|
|
|
1,964
|
|
1 to 2 years
|
|
|
4,451
|
|
|
|
3,719
|
|
|
|
|
|
|
|
|
|
|
|
6,433
|
|
|
|
5,683
|
|
|
|
|
|
|
|
|
|
|
$
|
255,588
|
|
|
$
|
261,674
|
|
|
42
(3) FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the Federal Home Loan Bank of Boston (FHLBB). As part of the Banks
borrowing arrangement with the FHLBB, the Bank is required to invest in FHLBB stock in an amount
determined on the basis of the amount of the Banks residential mortgage loans and its borrowings
from the FHLBB. At December 31, 2008 and 2007, the Bank held $11.8 million and $10.2 million,
respectively, of FHLBB stock. This stock, which is restricted, is redeemable at par and earns
dividends declared at the discretion of the FHLBB which announced in February 2009, the suspension
of dividends for the first quarter of 2009 and beyond. Such dividends amounted to $428,000 and
$662,000 for the years ended December 31, 2008 and 2007, respectively. In December 2008, the FHLBB
announced its moratorium on the repurchase of all excess stock.
(4) LOANS
The components of the loan portfolio at December 31, follow:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(In Thousands)
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
109,276
|
|
|
$
|
79,743
|
|
Home equity
|
|
|
23,972
|
|
|
|
23,046
|
|
Consumer
|
|
|
831
|
|
|
|
1,007
|
|
|
|
|
|
|
|
|
Retail loans
|
|
|
134,079
|
|
|
|
103,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
61,769
|
|
|
|
47,885
|
|
Commercial real estate
|
|
|
222,977
|
|
|
|
177,968
|
|
Commercial business
|
|
|
33,796
|
|
|
|
28,464
|
|
|
|
|
|
|
|
|
Corporate loans
|
|
|
318,542
|
|
|
|
254,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
452,621
|
|
|
|
358,113
|
|
Allowance for loan losses
|
|
|
(5,885
|
)
|
|
|
(4,810
|
)
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
446,736
|
|
|
$
|
353,303
|
|
|
The amounts above include net deferred loan origination fees and costs totaling $204,000 and
$52,000 at December 31, 2008 and 2007, respectively.
Mortgage loans serviced by the Company for others amounted to $23.4 million and $27.5 million at
December 31, 2008 and 2007, respectively.
In the ordinary course of business, the Bank makes loans to its Directors and Officers and their
associates and affiliated companies (related parties) at substantially the same terms and
conditions as those prevailing at the time of origination for comparable transactions with other
borrowers.
An analysis of total related party loans for the years ended December 31, follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(In Thousands)
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
2,112
|
|
|
$
|
2,168
|
|
New loans granted
|
|
|
1,145
|
|
|
|
638
|
|
Retirement/reduction of directors and officers
|
|
|
(249
|
)
|
|
|
|
|
Repayment of principal
|
|
|
(186
|
)
|
|
|
(694
|
)
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
2,822
|
|
|
$
|
2,112
|
|
|
The activity in the allowance for loan losses for the years ended December 31, follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(In Thousands)
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
4,810
|
|
|
$
|
4,309
|
|
Total charge-offs
|
|
|
(214
|
)
|
|
|
(157
|
)
|
Total recoveries
|
|
|
4
|
|
|
|
13
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(210
|
)
|
|
|
(144
|
)
|
Provision for loan losses
|
|
|
1,285
|
|
|
|
645
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
5,885
|
|
|
$
|
4,810
|
|
|
Non-accrual loans totaled $2.6 million and $1.5 million at December 31, 2008 and 2007,
respectively.
43
Information related to impaired loans at or for the years ended December 31, follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(In Thousands)
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
3,121
|
|
|
$
|
1,523
|
|
Impaired loans with reserve
|
|
|
|
|
|
|
|
|
Impaired loan reserve
|
|
|
|
|
|
|
|
|
Impaired loans without reserve
|
|
|
3,121
|
|
|
|
1,523
|
|
Impaired loans average balance
|
|
|
611
|
|
|
|
399
|
|
Interest income in accordance with original loan terms
|
|
|
38
|
|
|
|
37
|
|
Interest income recognized
|
|
|
|
|
|
|
|
|
|
No additional funds are committed to be advanced in connection with impaired loans.
(5) PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
|
2008
|
|
|
2007
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
Premises
|
|
10 39 years
|
|
$
|
5,143
|
|
|
$
|
4,164
|
|
Equipment
|
|
3 5 years
|
|
|
5,642
|
|
|
|
4,078
|
|
Leasehold improvements
|
|
3 10 years
|
|
|
1,047
|
|
|
|
1,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,832
|
|
|
|
9,289
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(6,304
|
)
|
|
|
(5,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,528
|
|
|
$
|
3,590
|
|
|
Depreciation and amortization of premises and equipment totaled $605,000 and $606,000,
respectively, for the years ended December 31, 2008 and 2007.
In December 2008, the Company entered into a purchase and sales agreement for the purchase of land
to relocate an existing branch which is subject to various state, local and regulatory approvals.
Rent expense for leased premises for the years ended December 31, 2008 and 2007 amounted to
$263,000 and $213,000, respectively. The increase in rent expense in 2008 was due to the new branch
that opened in January 2009 in Derry, New Hampshire. The Company enters into operating leases in
which office space is rented to other businesses at the corporate headquarters. Rental income for
the years ended December 31, 2008 and 2007 amounted to $231,000 and $235,000, respectively.
A summary of future minimum rental expense and income under non-cancelable operating leases at
December 31, 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
Minimum
|
|
|
|
Rental
|
|
|
Rental
|
|
|
|
Expense
|
|
|
Income
|
|
|
(In Thousands)
|
|
|
|
|
|
|
2009
|
|
$
|
245
|
|
|
$
|
224
|
|
2010
|
|
|
123
|
|
|
|
149
|
|
2011
|
|
|
103
|
|
|
|
127
|
|
2012
|
|
|
103
|
|
|
|
19
|
|
2013
|
|
|
103
|
|
|
|
|
|
Thereafter
|
|
|
849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,526
|
|
|
$
|
519
|
|
|
The leases contain options to extend for periods of one to twenty years. The cost of such rentals
is not included above.
44
(6) DEPOSITS
The following table shows the components of deposits at December 31, 2008 and 2007 and the range of
interest rates paid as of December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rates as of
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
Interest bearing accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW acccounts
|
|
|
0.10-0.25
|
%
|
|
$
|
17,239
|
|
|
$
|
17,877
|
|
Savings accounts
|
|
|
0.50-2.96
|
%
|
|
|
56,251
|
|
|
|
28,452
|
|
Money market accounts
|
|
|
0.50-2.96
|
%
|
|
|
76,603
|
|
|
|
74,621
|
|
Certificates of deposit
|
|
|
1.98-5.37
|
%
|
|
|
196,629
|
|
|
|
141,651
|
|
Retirement certificates of deposit
|
|
|
1.98-5.37
|
%
|
|
|
34,395
|
|
|
|
30,631
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
|
|
|
|
381,117
|
|
|
|
293,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand deposit accounts
|
|
|
|
|
|
|
27,546
|
|
|
|
28,851
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
|
|
|
$
|
408,663
|
|
|
$
|
322,083
|
|
|
Interest forfeitures resulting from early withdrawals from certificates of deposits are credited to
interest expense and amounted to $36,000 and $42,000 for the years ended December 31, 2008 and
2007, respectively.
The amount and weighted average interest rate on certificates of deposit, including retirement
accounts, by periods to maturity at December 31, 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equal to
|
|
|
|
|
|
|
Weighted
|
|
|
|
Less
|
|
|
and greater
|
|
|
|
|
|
|
Average
|
|
|
|
than
|
|
|
than
|
|
|
|
|
|
|
Interest
|
|
|
|
$100,000
|
|
|
$100,000
|
|
|
Total
|
|
|
Rate
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months or less
|
|
$
|
18,356
|
|
|
$
|
19,916
|
|
|
$
|
38,272
|
|
|
|
2.97
|
%
|
From three to six months
|
|
|
25,158
|
|
|
|
13,402
|
|
|
|
38,560
|
|
|
|
3.17
|
|
From six to twelve months
|
|
|
23,475
|
|
|
|
13,732
|
|
|
|
37,207
|
|
|
|
3.35
|
|
From one to two years
|
|
|
32,768
|
|
|
|
46,592
|
|
|
|
79,360
|
|
|
|
4.05
|
|
From two to three years
|
|
|
6,307
|
|
|
|
24,008
|
|
|
|
30,315
|
|
|
|
3.64
|
|
Three years and thereafter
|
|
|
4,088
|
|
|
|
3,222
|
|
|
|
7,310
|
|
|
|
4.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
110,152
|
|
|
$
|
120,872
|
|
|
$
|
231,024
|
|
|
|
3.57
|
%
|
|
Brokered deposits totaled $32.8 million and $5.5 million at December 31, 2008 and 2007,
respectively, at a rate of 4.43% and 5.23%, respectively, and are included in certificates of
deposit.
(7) BORROWED FUNDS
The FHLBB permits member institutions to borrow funds for various purposes. The FHLBB requires
member banks to maintain qualified collateral for its advances. Collateral is comprised of the
Banks residential mortgage portfolio, certain commercial real estate loans, home equity lines and
loans and the portion of the investment portfolio that meets FHLBB qualifying collateral
requirements and has been designated as such (see note 2).
The components of long-term borrowed funds at December 31, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Amount
|
|
|
Interest Rate
|
|
|
Amount
|
|
|
Interest Rate
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLBB long-term advances
|
|
$
|
219,228
|
|
|
|
4.27
|
%
|
|
$
|
202,378
|
|
|
|
4.59
|
%
|
Wholesale repurchase agreements
|
|
|
40,000
|
|
|
|
4.36
|
%
|
|
|
25,000
|
|
|
|
4.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
259,228
|
|
|
|
4.28
|
%
|
|
$
|
227,378
|
|
|
|
4.62
|
%
|
|
45
Long-term FHLBB advances outstanding at December 31, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Maturity
|
|
Amount
|
|
|
Interest Rate
|
|
|
Amount
|
|
|
Interest Rate
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
|
|
|
|
|
%
|
|
$
|
25,000
|
|
|
|
4.77
|
%
|
2009
|
|
|
10,000
|
|
|
|
5.14
|
|
|
|
10,000
|
|
|
|
5.14
|
|
2010
|
|
|
44,000
|
|
|
|
5.04
|
|
|
|
38,000
|
|
|
|
5.36
|
|
2011
|
|
|
33,000
|
|
|
|
3.27
|
|
|
|
10,000
|
|
|
|
4.93
|
|
2012
|
|
|
15,000
|
|
|
|
5.18
|
|
|
|
15,000
|
|
|
|
4.72
|
|
2013
|
|
|
8,000
|
|
|
|
3.28
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
109,228
|
|
|
|
4.12
|
|
|
|
104,378
|
|
|
|
4.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
219,228
|
|
|
|
4.27
|
%
|
|
$
|
202,378
|
|
|
|
4.59
|
%
|
|
The FHLBB has the right to call or prepay certain obligations with or without call or prepayment
penalties. This right may cause actual maturities to differ from the contractual maturities
summarized above. As of December 31, 2008, the Company had callable advances totaling $165.0
million and amortizing advances totaling $3.2 million. There were no adjustable rate advances in
2008, while in 2007 adjustable rate advances totaled $12.0 million.
At December 31, 2008, the Company had wholesale repurchase agreements totaling $25.0 million at
4.83% and $15.0 million at 3.58% which mature in 2012 and 2013, respectively, and which have a
weighted average rate of 4.36%. In December 31, 2007, the Company had wholesale repurchase
agreements of $25 million at 4.83% which mature in 2012. These agreements are treated as secured,
long-term borrowings while the obligations to repurchase securities sold are reflected as
liabilities and the securities collateralized by the agreements remain as assets. Generally, the
outstanding collateral consists of obligations of the Treasury and government-sponsored enterprise
obligations and is held by third-party custodians (see note 2).
The components of short-term borrowed funds at December 31, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Amount
|
|
|
Interest Rate
|
|
|
Amount
|
|
|
Interest Rate
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLBB Ideal Way advances
|
|
$
|
|
|
|
|
|
%
|
|
$
|
800
|
|
|
|
4.20
|
%
|
FHLBB short-term borrowings
|
|
|
11,000
|
|
|
|
2.08
|
|
|
|
|
|
|
|
|
|
Customer repurchase agreements
|
|
|
6,262
|
|
|
|
0.50
|
|
|
|
7,173
|
|
|
|
2.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,262
|
|
|
|
1.51
|
%
|
|
$
|
7,973
|
|
|
|
4.36
|
%
|
|
Information relating to short-term borrowed funds for the years ended December 31, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Customer
|
|
|
Short-Term
|
|
|
Customer
|
|
|
Short-Term
|
|
|
|
Repurchase
|
|
|
FHLBB
|
|
|
Repurchase
|
|
|
FHLBB
|
|
|
|
Agreements
|
|
|
Advances
|
|
|
Agreements
|
|
|
Advances
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31
|
|
$
|
6,262
|
|
|
$
|
11,000
|
|
|
$
|
7,173
|
|
|
$
|
800
|
|
Average balance outstanding during the year
|
|
|
5,107
|
|
|
|
5,352
|
|
|
|
5,599
|
|
|
|
9,608
|
|
Maximum outstanding at any month end
|
|
|
7,051
|
|
|
|
16,000
|
|
|
|
7,217
|
|
|
|
31,000
|
|
Weighted average rate at December 31
|
|
|
0.50
|
%
|
|
|
2.08
|
%
|
|
|
2.75
|
%
|
|
|
4.20
|
%
|
Weighted average rate during the year
|
|
|
1.13
|
|
|
|
2.39
|
|
|
|
3.54
|
|
|
|
5.36
|
|
|
At December 31, 2008 and 2007, the Bank had certain investment securities with a fair value of
$240.6 million and $218.2 million, respectively, pledged as collateral against total borrowings
(see note 2).
46
In addition, Federal Home Loan Bank advances are also collateralized by a blanket lien on the
Banks 1-4 family residential loans, equity loans and lines and certain significant commercial real
estate loans. The Banks total borrowing capacity at FHLBB at December 31, 2008 and 2007 was
$299.3 million and $247.6 million based on the total available collateral, respectively, of which
$230.2 million and $203.2 million was outstanding at December 31, 2008 and 2007, respectively,
leaving additional capacity of $69.1 million and $44.4 million at December 31, 2008 and 2007,
respectively.
(8) INCOME
TAXES
An analysis of income tax expense for the years ended December 31, follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(In Thousands)
|
|
|
|
|
|
|
Current expense:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,798
|
|
|
$
|
1,658
|
|
State
|
|
|
492
|
|
|
|
417
|
|
|
|
|
|
|
|
|
Total current expense
|
|
|
2,290
|
|
|
|
2,075
|
|
|
|
|
|
|
|
|
Deferred expense (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(3,358
|
)
|
|
|
17
|
|
State
|
|
|
(1,159
|
)
|
|
|
4
|
|
Change in state rates
|
|
|
177
|
|
|
|
|
|
Change in valuation reserve
|
|
|
498
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
Total deferred expense (benefit)
|
|
|
(3,842
|
)
|
|
|
16
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(1,552
|
)
|
|
$
|
2,091
|
|
|
A reconciliation of the difference between the expected federal income tax expense (benefit)
computed by applying the federal statutory rate of 34% to the amount of actual income tax expense
for the years ended December 31, follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(In Thousands)
|
|
|
|
|
|
|
Expected federal income tax expense (benefit)
|
|
$
|
(1,454
|
)
|
|
$
|
1,975
|
|
Items affecting expected tax:
|
|
|
|
|
|
|
|
|
State income tax, net of federal benefit
|
|
|
(440
|
)
|
|
|
278
|
|
Dividends received deduction
|
|
|
(134
|
)
|
|
|
|
|
Tax exempt income
|
|
|
(49
|
)
|
|
|
(44
|
)
|
Officers life insurance
|
|
|
(150
|
)
|
|
|
(68
|
)
|
Change in state rates
|
|
|
177
|
|
|
|
|
|
Change in valuation reserve
|
|
|
498
|
|
|
|
(5
|
)
|
Other
|
|
|
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(1,552
|
)
|
|
$
|
2,091
|
|
|
The tax effects of temporary differences (the difference between financial statement carrying
amounts of existing assets and liabilities and their respective tax basis that give rise to
deferred tax assets and liabilities) for the years ended December 31, follow:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(In Thousands)
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
2,370
|
|
|
$
|
1,969
|
|
Impairment write-downs on securities
|
|
|
4,036
|
|
|
|
|
|
Pension costs and other post-retirement benefits
|
|
|
103
|
|
|
|
106
|
|
Deferred compensation
|
|
|
502
|
|
|
|
533
|
|
Depreciation
|
|
|
396
|
|
|
|
406
|
|
Other
|
|
|
19
|
|
|
|
12
|
|
|
|
|
|
|
|
|
Gross deferred tax asset
|
|
|
7,426
|
|
|
|
3,026
|
|
Valuation reserve
|
|
|
(498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
|
6,928
|
|
|
|
3,026
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Unrealized gain on investment securities available for sale
|
|
|
(2,193
|
)
|
|
|
(313
|
)
|
Other
|
|
|
(288
|
)
|
|
|
(228
|
)
|
|
|
|
|
|
|
|
Gross deferred tax liability
|
|
|
(2,481
|
)
|
|
|
(541
|
)
|
|
|
|
|
|
|
|
Net deferred income tax asset
|
|
$
|
4,447
|
|
|
$
|
2,485
|
|
|
At December 31, 2008, the Bank would need to generate approximately $12.4 million of future net
taxable income to realize the net deferred income tax asset. Management believes that it is more
likely than not that the net deferred income tax asset at December 31,
47
2008 will be realized based upon recent operating results. It should be noted, however, that
factors beyond managements control, such as the general state of the economy and changes in
interest rates, can affect future levels of taxable income and that no assurance can be given that
sufficient taxable income will be generated to fully absorb gross deductible temporary differences.
The increase in the valuation reserve for the year ended December 31, 2008, is due to managements
assessment of the realizability of state tax benefits relating to the impairment write-downs on
securities. Management believes that it is more likely than not that a portion of the state tax
benefit will not be realized. The change in the valuation reserve for the year ended December 31,
2007 relates to the expiration of the capital loss carryover.
Tax periods ended October 31, 2005 and December 31, 2005, 2006, 2007 and 2008 remain subject to
examination by federal and state taxing authorities.
The unrecaptured base year tax reserves as of October 31, 1998 will not be subject to recapture as
long as the institution continues to carry on the business of banking. In addition, the balance of
the pre-1988 bad debt tax reserves continue to be subject to a provision of the current law that
requires recapture in the case of certain excess distributions to stockholders. The tax effect of
pre-1988 bad debt tax reserves subject to recapture in the case of certain excess distributions is
approximately $1.0 million.
(9) STOCKHOLDERS EQUITY
The Company and the Bank are regulated by federal and state regulatory agencies. Failure by the
Company or the Bank to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by federal or state regulators that, if undertaken, could
have a direct material effect on the Companys Consolidated Financial Statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and
the Bank to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets
and of Tier 1 capital to average assets (Leverage ratio). There are two categories of capital under
the guidelines. Tier 1 capital as it applies to the Company and the Bank, includes stockholders
equity exclusive of the net unrealized gains/losses on investment securities available for sale.
Tier 2 capital includes the allowance for loan losses, subject to guideline limitations.
At December 31, 2008 and 2007, the Company and the Bank exceeded each of the minimum capital
requirements and the Bank also met the definition of well capitalized as defined by the FRB and
the FDIC under the regulatory framework for prompt corrective action. To be categorized as well
capitalized the Company or the Bank must maintain Tier 1, Total, and Leverage ratios as set forth
in the table below. There are no conditions or events that management believes have changed the
Companys or the Banks classification as well capitalized.
The Companys and the Banks minimum required and actual capital ratios at December 31, 2008 and
2007, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Adequately Capitalized
|
|
|
Well Capitalized
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
At December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LSB Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
$
|
74,372
|
|
|
|
14.45
|
%
|
|
$
|
41,183
|
|
|
|
8.0
|
%
|
|
$
|
51,479
|
|
|
|
10.0
|
%
|
Tier 1 risk-based capital
|
|
|
68,487
|
|
|
|
13.30
|
|
|
|
20,592
|
|
|
|
4.0
|
|
|
|
30,887
|
|
|
|
6.0
|
|
Tier 1 leverage capital
|
|
|
68,487
|
|
|
|
9.22
|
|
|
|
29,721
|
|
|
|
4.0
|
|
|
|
37,152
|
|
|
|
5.0
|
|
River Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
$
|
66,774
|
|
|
|
12.97
|
%
|
|
$
|
41,183
|
|
|
|
8.0
|
%
|
|
$
|
51,479
|
|
|
|
10.0
|
%
|
Tier 1 risk-based capital
|
|
|
60,889
|
|
|
|
11.83
|
|
|
|
20,592
|
|
|
|
4.0
|
|
|
|
30,887
|
|
|
|
6.0
|
|
Tier 1 leverage capital
|
|
|
60,889
|
|
|
|
8.18
|
|
|
|
29,777
|
|
|
|
4.0
|
|
|
|
37,222
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LSB Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
$
|
64,686
|
|
|
|
14.53
|
%
|
|
$
|
35,623
|
|
|
|
8.0
|
%
|
|
$
|
44,529
|
|
|
|
10.0
|
%
|
Tier 1 risk-based capital
|
|
|
59,876
|
|
|
|
13.45
|
|
|
|
17,812
|
|
|
|
4.0
|
|
|
|
26,717
|
|
|
|
6.0
|
|
Tier 1 leverage capital
|
|
|
59,876
|
|
|
|
9.72
|
|
|
|
24,635
|
|
|
|
4.0
|
|
|
|
30,794
|
|
|
|
5.0
|
|
River Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
$
|
63,321
|
|
|
|
14.22
|
%
|
|
$
|
35,623
|
|
|
|
8.0
|
%
|
|
$
|
44,529
|
|
|
|
10.0
|
%
|
Tier 1 risk-based capital
|
|
|
58,511
|
|
|
|
13.14
|
|
|
|
17,812
|
|
|
|
4.0
|
|
|
|
26,717
|
|
|
|
6.0
|
|
Tier 1 leverage capital
|
|
|
58,511
|
|
|
|
9.49
|
|
|
|
24,654
|
|
|
|
4.0
|
|
|
|
30,817
|
|
|
|
5.0
|
|
|
Senior Cumulative Perpetual Preferred Stock, Series B
On December 12, 2008, the Company issued and sold (i) 15,000 shares of Senior Cumulative Perpetual
Preferred Stock, Series B, (Senior Preferred), with a liquidation preference of $1,000 per share
and (ii) ten-year warrants to purchase up to 209,497 shares of
48
the Companys common stock at an exercise price of $10.74 per share, to the Treasury as part
of the CPP, for an aggregate purchase price of $15,000,000.
The Company accounted for this transaction in accordance with Accounting Principles Board Opinion
No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants (APB 14).
APB 14 requires the proceeds from the issuance to be allocated between the Senior Preferred and the
warrants based on relative fair value. Accordingly, the fair value of the warrants, in the amount
of $549,000, was recorded as an increase to Additional Paid-In Capital. A discount in the amount
of $549,000 was recorded on the Senior Preferred and is being accreted over an estimated period of
five years using the effective interest method. The accretion of the discount on the Senior
Preferred is treated as a deemed dividend and is a reduction to net income available to common
shareholders for purposes of calculating earnings per common share. The accretion of the discount
in 2008 had no impact on earnings per share.
The fair value of the warrants was calculated based on the Black Scholes valuation model.
Significant inputs to the model are as follows:
|
|
|
|
|
Expected dividends
|
|
|
5.6
|
%
|
Expected term
|
|
10 years
|
Expected volatility
|
|
|
53.0
|
%
|
Risk-free interest rate
|
|
|
2.6
|
%
|
Senior Preferred Terms
The Senior Preferred has no maturity date and is ranked senior to the common stock with respect to
the payment of dividends, distributions and amounts payable upon liquidation, dissolution and
winding up of the Company. Cumulative dividends on the Senior Preferred accrue at an annual rate
of 5% per year for the first five years and at an annual rate of 9% thereafter. Dividends are
payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year. Under
the terms of the Companys agreement with the Treasury, after December 12, 2011, the Company may
redeem the Senior Preferred in whole or in part at any time at 100% of its issue price, or $1,000
per share. Prior to this date, the Company may redeem the Senior Preferred only if (i) the Company
has raised aggregate proceeds in one or more Qualified Equity Offerings in excess of $15,000,000
and (ii) the aggregate redemption price does not exceed the aggregate net proceeds from such
Qualified Equity Offerings. Any redemption is subject to the approval of the Federal Reserve. A
Qualified Equity Offering is defined as a sale and issuance for cash by the Company, to persons
other than the Company or any Company subsidiary after the closing, of shares of perpetual
Preferred Stock, Common Stock or any combination of such stock, that, in each case, qualify as and
may be included in Tier 1 capital of the Company under the risk-based capital guidelines of the
Federal Reserve.
The ARRA provides, however, that, subject to consultation with the Federal Reserve, the Treasury
must permit the Company to redeem the Senior Preferred without regard to any waiting period or to
whether the Company has replaced such funds from any other source. According to regulations
published by the Treasury, if the Company wishes to redeem any part of its CPP funding, the Company
must redeem a minimum of 25% of the issue price of the Senior Preferred.
The Senior Preferred is non-voting. However, if dividends on the Senior Preferred are not paid in
full for six dividend periods, whether or not consecutive, the Senior Preferred holders will have
the right to elect two directors. The right to elect directors will end when full dividends have
been paid for four consecutive periods.
Warrant Terms
The warrants are exercisable immediately. The Treasury may only transfer or exercise an aggregate
of one-half of the shares under the warrants prior to the earlier of (i) December 12, 2009 or (ii)
the date on which the Senior Preferred has been redeemed in whole or the Treasury has transferred
all of its Senior Preferred to third parties. In the event the Company completes one or more
Qualified Equity Offerings on or prior to December 31, 2009, that result in the Company receiving
aggregate proceeds of not less than $15,000,000, the number of shares of common stock underlying
the portion of the warrants then held by the Treasury will be reduced by one-half of the shares of
common stock originally covered by the warrants.
Dividend and Repurchase Restrictions
Prior to December 12, 2011, unless the Company has redeemed the Senior Preferred or the Treasury
has transferred the Senior Preferred to a third party, the consent of the Treasury will be required
for the Company to (i) declare or pay any dividend or make any distribution on common stock (other
than the regular quarterly cash dividend or not more than $0.15 per share) or (ii) redeem, purchase
or acquire any shares of the Companys common stock, other than in connection with benefit plans
consistent with past practice and certain other circumstances specified in the CPP.
Stock Repurchase Plan
In 2007, the Company announced a common stock repurchase program to repurchase up to 230,000
shares. During 2008 and 2007, 64,620 and 90,356 shares were repurchased under this program,
respectively. As a result of the other-than-temporary impairment charges recorded during 2008,
the Company suspended its stock repurchase program and is not permitted to reinstate the repurchase
program without the Treasurys consent prior to December 12, 2011, unless the Company has redeemed the
Senior Preferred or the Treasury has transferred the Senior Preferred to a third party.
49
Restrictions on Dividends, Loans and Advances
The Company functions only as a holding company for River Bank, a wholly-owned subsidiary of the
Company. The Company engages in no business activities directly and is entirely dependent on the
receipt of dividends from the Bank to meet the Companys separate expenses, repay any indebtedness
and pay dividends. Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company. Without regulatory approval, the total
amount of dividends declared in any calendar year cannot exceed the Banks net income for the
current year, plus the Banks net income retained for the two previous years. As such, the Bank is
required to seek regulatory approval for the payment of dividends to the Company as of December 31,
2008. In addition, loans or advances by the Bank to the Company are limited to 10 percent of the
Banks capital stock and surplus on a secured basis. At December 31, 2008, funds available for
loans or advances by the Bank to the Company amounted to $6.4 million.
The Company and the Bank may not declare or pay dividends if the effect thereof would cause
stockholders equity to be reduced below applicable minimum regulatory capital requirements.
Stockholders Rights Plan
In 1996, the Board of Directors adopted a stockholder rights plan declaring a dividend of one
preferred stock purchase right for each share of outstanding common stock. The rights will remain
attached to the common stock and are not exercisable except under limited circumstances relating to
(i) acquisition of beneficial ownership of more than 10% of the outstanding shares of common stock,
or (ii) a tender offer or exchange offer that would result in a person or group beneficially owning
more than 10% of the outstanding shares of common stock. The rights are not exercisable until those
aforementioned circumstances occur. The rights under the plan as adopted in 1996 would have expired
in 2006. In November 2005, however, the Board of Directors approved a renewed rights plan to
become effective upon the expiration of the plan in 2006. The terms of the renewed rights plan are
substantially similar to those of the previous plan. The renewed rights plan expires in 2016.
Until a right is exercised, the holder has no rights to vote or to receive dividends. The rights
are not taxable to stockholders until exercisable.
(10) EMPLOYEE BENEFITS
Pension Plan
Effective December 31, 2006, the Company terminated the Savings Bank Employees Retirement
Association Pension Plan (the Plan). The Plan was a multiple-employer, non-contributory, defined
benefit plan. In connection with the termination of the Plan, the Company froze future pension
benefits effective December 31, 2006. As a result of that cessation of future pension benefits,
the Company recognized a pre-tax curtailment gain of $602,000 due to the reversal of the accrued
pension liability recorded on the financial statements in the fourth quarter of 2006.
During the year ended December 31, 2007, the Company distributed the Plan assets and recorded
settlement gains in proportion to the distributions and recorded pre-tax settlement gains of
$762,000 in conjunction with the distribution of $6.4 million in Plan assets.
4
01(k)
Savings Plan
The Company provides an employee savings plan (the Savings Plan) through the Savings Banks
Employees Retirement Association. The Savings Plan qualifies as a deferred salary arrangement
under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, employees may defer a
portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit.
Employees are eligible to participate in the Savings Plan immediately upon employment with the
Company provided they have attained 21 years of age. Company employees become eligible for
matching contributions after completing one year of service with 1,000 hours or more. On an annual
basis, the Company determines whether or not to contribute to the Savings Plan. Effective January
1, 2007, the Company adopted safe harbor contributions of 3% of total compensation on all
employees, regardless of their participation in the voluntary savings plan. The Company recognized
expenses of $186,000 and $182,000 on behalf of the employees who were in the Savings Plan for the
years ended December 31, 2008 and 2007, respectively.
Post-Retirement Plan Other Than Pensions
Prior to curtailing the pension plan in 2006, the Company sponsored a defined benefit
post-retirement plan that offered limited post-retirement medical benefits to certain full-time
employees who retired before age 65 and life insurance benefits to full-time employees who retired
after age 62 and after completing 10 years of service. The plan is non-contributory and unfunded.
The amounts of accrued post-retirement benefit cost reported on the Companys consolidated balance
sheets were $258,000 as of December 31, 2008 and 2007, respectively. There were no post-retirement
expenses for the year ended December 31, 2008 and totaled $16,000 for the year ended December 31,
2007.
Employee Stock Ownership Plan
Effective January 1, 2007, the Company established an Employee Stock Ownership Plan (the ESOP)
that covers all employees who meet specified age and length of service requirements. The Company
makes voluntary contributions to the ESOP which will in turn, use the cash contributions to
purchase Company stock on the open market. The Companys contributions are discretionary and are
50
included in the salary and employee benefits expense and totaled $162,000 and $150,000 for the
years ended December 31, 2008 and 2007, respectively. The ESOP purchased 9,000 shares of Company
stock at an average cost of $13.69 per share in 2008 and 8,600 shares at an average cost of $16.35
per share in 2007.
Incentive Compensation Plan
The Incentive Compensation Plan provides for the payment of bonuses to officers under certain
circumstances based upon the Companys pre-tax earnings adjusted for gains or losses from sales of
assets, targeted returns on assets and the individuals achievement of established goals and
objectives as well as increases in total loans and core deposits. Amounts are allocated to
participants as determined by the Companys Compensation Committee taking into account the
recommendation of the President and subject to approval by its Board of Directors. During the
years ended December 31, 2008 and 2007, respectively, payments of $234,000 and $333,000,
respectively, were made to all employees under this Plan.
Section 111(b) of EESA, as amended by the ARRA, will require the Treasury to adopt compensation and
governance standards that, among other things, would prohibit the Company from paying or accruing
any bonus, retention award, or incentive compensation to the Companys most highly-compensated
employee (currently Gerald T. Mulligan). The ARRA amendments to Section 111(b) expressly except
from the bonus limitation, however, a long-term restricted stock award, provided that such
restricted stock does not fully vest while the Treasury holds any of the Senior Preferred, has a
value not greater than one-third of the total amount of annual compensation of the Companys most
highly-compensated employee, and is subject to such other terms and conditions as the Treasury may
determine is in the public interest.
Employment Termination or Change-in-Control Agreements
The Company has entered into special termination agreements with its President and Chief Executive
Officer and certain other executives. The agreements provide generally that if there is a
change-in-control of the Company and if, within two years after such event, the officers
employment is terminated for any reason (other than death, disability or cause, as defined in the
agreements), then the officer would be entitled to receive a lump-sum severance payment in an
amount equal to approximately three times his or her average annual compensation over the five
previous years of his or her employment with the Company (or such shorter period in which the
officer was employed) and the continuation of his of her life, medical and disability benefits at
the same level of coverage and at the same out-of-pocket cost to the officer, immediately prior to
the change-in-control, or at the officers election, the earlier commencement of the proposed
business combination (as defined in the agreement) that results in such change-in-control.
As a result of the Companys participation in the CPP of the Treasury, when combined with the ARRA
of 2009, enacted on February 17, 2009, prohibits the Company from making any severance payment to
the Named Executive Officers, any other senior executive officer and certain other officers of the
Company, including severance payments made under existing change-in-control agreements so long as
the Senior Preferred Stock is outstanding.
Supplemental Executive Retirement Plan
The Company has two supplemental executive retirement plans with a former president and chief
executive officer. These plans require that the Company begin payments to the former president
commencing January 1, 2007 and was derived from the three years of gross compensation prior to his
retirement. These plans are unfunded. As of December 31, 2008 and 2007, the accrued liability
recorded on the consolidated balance sheet was $1.2 million and $1.3 million, respectively.
Expenses associated with the plans totaled $76,000 for both of the years ended December 31, 2008
and 2007, respectively.
Limitation on Compensation Deduction for Senior Executive Officers
Section 111(b) of EESA, as amended by ARRA, provides that, so long as the Senior Preferred remains
outstanding, the Company may not deduct any compensation to a senior executive officer that
exceeds $500,000, regardless of whether it qualifies as performance-based compensation.
(11) STOCK COMPENSATION AWARDS
The Board grants options on its common stock to Directors and Officers to purchase unissued common
stock of the Company at a price equal to the fair market value of the Companys common stock on the
date of grant. The Company issues shares for option exercises and restricted stock issuances from
its pool of authorized but unissued shares. The following table presents the amount of cumulatively
granted options and restricted stock awards, net of cancellations, through December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Option
|
|
|
|
Authorized
|
|
|
Cumulative
|
|
|
Awards, Net of
|
|
|
|
Awards
|
|
|
Stock Awards
|
|
|
Expiration
|
|
|
1986 Plan
|
|
|
720,500
|
|
|
|
N/A
|
|
|
|
430,250
|
|
1997 Plan
|
|
|
449,500
|
|
|
|
N/A
|
|
|
|
427,850
|
|
2006 Plan
|
|
|
400,000
|
|
|
|
23,500
|
|
|
|
68,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,570,000
|
|
|
|
23,500
|
|
|
|
926,675
|
|
|
At December 31, 2008, there were 307,925 shares available for issuance under the Companys 2006
Stock Option and Incentive Plan and none remaining for issuance under any other Plan.
51
All options granted prior to December 31, 2005 vested over three years from the date of grant and
have ten-year contractual terms and expire between 2009 and 2015. The vesting schedule for all
options granted provides for 50% of options granted to vest after the first year and an additional
25% to vest each year thereafter.
All incentive stock options granted after January 1, 2006 vest over two years from the date of
grant, have seven-year contractual terms and expire between 2013 and 2014. The vesting schedule
for these grants typically provides for 50% of the options granted to vest immediately and an
additional 25% to vest each year thereafter. Options are fully vested two years after the grant
date with the exception of the non-qualifying stock option grants made to the Directors during 2007
and 2008, which vested immediately at the time of the grant.
The 9,500 stock awards granted during 2008 represent shares of stock granted with a transfer
restriction of one year. These stock awards were fully vested upon grant. There were no stock
awards granted in 2007.
The total compensation expense related to all equity awards recognized in earnings by the Company
in the years ended December 31, 2008 and 2007 was $156,000 and $121,000 and the related tax benefit
was $4,000 and $22,000, respectively. The expense for the year ended December 31, 2008,
represented expense related to stock options of $80,000 and expense related to restricted stock of
$76,000. The expense for the year ended December 31, 2007, represented expense related to stock
options of $121,000. There was no expense for the year ended December 31, 2007 related to
restricted stock awards.
A summary of option activity as of December 31, 2008 and 2007 and changes during the years then
ended follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding at beginning of year
|
|
|
251,600
|
|
|
$
|
14.51
|
|
|
|
244,900
|
|
|
$
|
14.07
|
|
Granted
|
|
|
9,000
|
|
|
|
8.00
|
|
|
|
38,500
|
|
|
|
16.39
|
|
Exercised
|
|
|
(9,500
|
)
|
|
|
12.39
|
|
|
|
(13,300
|
)
|
|
|
8.76
|
|
Forfeited
|
|
|
(3,000
|
)
|
|
|
16.77
|
|
|
|
(8,500
|
)
|
|
|
16.69
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
16.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
248,100
|
|
|
|
14.33
|
|
|
|
251,600
|
|
|
|
14.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable end of year
|
|
|
240,725
|
|
|
|
14.27
|
|
|
|
225,850
|
|
|
|
14.29
|
|
Weighted average fair value of
options granted during the year
|
|
|
|
|
|
$
|
2.01
|
|
|
|
|
|
|
$
|
3.50
|
|
|
The intrinsic value is based on the average of the high price and low price at which the Companys
common stock traded on December 31, 2008 of $7.38 as compared to the weighted average exercise
price for all outstanding stock options, as well as all exercisable stock options on that date. At
December 31, 2008, the aggregate intrinsic value for both outstanding options and exercisable
options was zero.
For the years ended December 31, 2008 and 2007, the total intrinsic value of options exercised was
$46,000 and $112,000, respectively. At December 31, 2008, the total compensation cost not yet
recognized related to non-vested options was $26,000 and the weighted average period over which it
is expected to be recognized was one year. The weighted average remaining life of outstanding
options and exercisable options at December 31, 2008 was 3.8 years and 3.7 years, respectively.
The fair value of each option grant is estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Expected volatility
|
|
|
53.00
|
%
|
|
|
25.00
|
%
|
Risk-free interest rate
|
|
|
2.03
|
%
|
|
|
3.88
|
%
|
Expected dividend yield
|
|
|
7.50
|
%
|
|
|
3.42
|
%
|
Expected life in years
|
|
7 years
|
|
7 years
|
|
The expected volatility is based on historical volatility. The risk-free interest rates for
periods within the contractual life of the awards are based on the U.S. Treasury yield curve in
effect at the time of the grant. The expected life is based on historical exercise experience.
The dividend yield assumption is based on the Companys history and expectation of dividend
payouts.
52
(12) CONTINGENCIES
The Bank and the Company are, from time to time, involved as either a plaintiff or defendant in
various legal actions incident to its business. Other than discussed above, none of these actions
are believed to be material, either individually or collectively, to the results of operations and
financial condition of the Company.
(13) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk. These instruments, in
the form of commitments to extend credit and financial and standby letters of credit, are offered
in the normal course of business to meet the financing needs of customers. The Company is exposed
to varying degrees of credit and interest rate risk in excess of amounts recognized in the
consolidated financial statements as a result of such transactions. Commitments to extend credit
are agreements to lend to a customer as long as there is compliance with conditions established in
the agreement. These extensions of credit are based upon traditional underwriting standards and
generally have a fixed expiration date of less than five years. Included in the unused commitments
are commitments to purchase residential, fixed rate loans subject to the same underwriting
standards as any other residential origination.
Letters of credit are documents issued by the Company on behalf of its customers in favor of third
parties, who can present requests for drafts from the Company within specified terms and
conditions. Letters of credit are secured by cash deposits. Standby letters of credit are
conditional commitments issued by the Company to guarantee payment to a third party. Outstanding
letters of credit generally expire within one year. The credit risk involved with these
instruments is similar to the risk of extending loans and, accordingly, the underwriting standards
are also similar. It is expected that most letters of credit will not require cash disbursements.
The components of financial instruments with off-balance sheet risk at December 31, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
|
2008
|
|
Rate
|
|
|
Rate
|
|
|
Total
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments with contract amounts represent credit risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unused commitments to extend credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
$
|
8,324
|
|
|
$
|
160
|
|
|
$
|
8,484
|
|
Home equity lines of credit
|
|
|
1,034
|
|
|
|
11,905
|
|
|
|
12,939
|
|
Personal lines of credit
|
|
|
295
|
|
|
|
|
|
|
|
295
|
|
Commercial real estate mortgage
|
|
|
13
|
|
|
|
22,364
|
|
|
|
22,377
|
|
Construction
|
|
|
|
|
|
|
28,497
|
|
|
|
28,497
|
|
Commercial loans
|
|
|
103
|
|
|
|
28,817
|
|
|
|
28,920
|
|
|
|
|
|
|
|
|
|
|
|
Total unused commitments
|
|
$
|
9,769
|
|
|
$
|
91,743
|
|
|
$
|
101,512
|
|
|
Letters of credit and standby letters of credit
|
|
$
|
|
|
|
$
|
1,610
|
|
|
$
|
1,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
|
2007
|
|
Rate
|
|
|
Rate
|
|
|
Total
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments with contract amounts represent credit risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unused commitments to extend credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
$
|
1,540
|
|
|
$
|
1,620
|
|
|
$
|
3,160
|
|
Home equity lines of credit
|
|
|
1,372
|
|
|
|
12,855
|
|
|
|
14,227
|
|
Personal lines of credit
|
|
|
142
|
|
|
|
|
|
|
|
142
|
|
Commercial real estate mortgage
|
|
|
283
|
|
|
|
29,846
|
|
|
|
30,129
|
|
Construction
|
|
|
|
|
|
|
36,128
|
|
|
|
36,128
|
|
Commercial loans
|
|
|
156
|
|
|
|
26,460
|
|
|
|
26,616
|
|
|
|
|
|
|
|
|
|
|
|
Total unused commitments
|
|
$
|
3,493
|
|
|
$
|
106,909
|
|
|
$
|
110,402
|
|
|
Letters of credit and standby letters of credit
|
|
$
|
|
|
|
$
|
1,770
|
|
|
$
|
1,770
|
|
|
(14) FAIR VALUE OF ASSETS AND LIABILITIES
The Company uses fair value measurements to record fair value adjustments to certain assets and
liabilities and to determine fair value disclosures. In accordance with FASB Statement No. 157, the
fair value of a financial instrument is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement
date. Fair value is best determined based upon quoted market prices. However, in many instances,
there are no quoted market prices for the Companys various financial instruments. In cases where
quoted market prices are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instrument.
In accordance with SFAS 157, the Company groups its financial assets and financial liabilities
measured at fair value in three levels, based on the markets in which the assets and liabilities
are traded and the reliability of the assumptions used to determine fair value.
Level 1 Quoted prices in active markets for identical assets or liabilities. Level 1 assets and
liabilities include debt and equity securities that are traded in an active exchange market.
Valuations are obtained from readily available pricing sources for market transactions involving
identical assets or liabilities.
53
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data for substantially the full term of the assets or
liabilities.
Level 3 Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include
financial instruments whose value is determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as instruments for which the determination of fair
value requires significant management judgment or estimation. This category generally includes
certain private equity investments, certain impaired loans, and other real estate owned.
Assets measured at fair value on a recurring and non-recurring basis at December 31, 2008 are
summarized below. There are no liabilities measured at fair value. There are no assets measured
at fair value on a non-recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
$
|
7,504
|
|
|
$
|
256,632
|
|
|
$
|
425
|
|
|
$
|
264,561
|
|
|
The table below presents the changes in Level 3 assets measured at fair value on a recurring basis:
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
|
|
Investments
|
|
|
(In thousands)
|
|
|
Balance as of January 1, 2008
|
|
$
|
425
|
|
Total realized/unrealized gains (losses)
included in net income
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
425
|
|
|
|
|
|
Change in unrealized gains/(losses) relating to
instruments still held at the reporting date
|
|
$
|
|
|
|
The investments carried under Level 3 assumptions are carried at par value since all redemptions
have been made at par value and represent non-marketable securities.
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value.
The fair values for cash and short-term investments approximate their carrying amounts because of
the short maturity of these instruments. The fair values for investment securities available for
sale are based on quoted bid prices received from securities dealers or third-party pricing
services. The fair value of stock in the Federal Home Loan Bank of Boston equals its carrying
amount as reported in the balance sheet because this stock is redeemable only at par by the FHLBB.
The securities measured at fair value in Level 1 are based on quoted market prices in an active
exchange market. These securities include marketable equity securities and U.S. Treasury
obligations. Securities measured at fair value in Level 2 are based on pricing models that
consider standard input factors such as observable market data, benchmark yields, interest rate
volatilities, broker/dealer quotes, credit spreads and net issue data. These securities include
government-sponsored enterprise obligations, mortgage-backed securities, collateralized mortgage
obligations and corporate obligations. Securities measured at fair value in Level 3 include
non-marketable equity securities that are carried at par value based on the redemptive provisions
of the issuers. Loans are estimated by discounting contractual cash flows adjusted for prepayment
estimates and using discount rates approximately equal to current market rates on loans with
similar characteristics and maturities. The incremental credit risk for non-performing loans has
been considered in the determination of the fair value of the loans. The fair values of demand
deposit accounts, NOW accounts, savings accounts and money market accounts are equal to their
respective carrying amounts since they are equal to the amounts payable on demand at the reporting
date. Certificates of deposit, Federal Home Loan Bank advances, and wholesale
repurchase agreements are based on the discounted value of contractual cash flows. The discount
rates used are representative of approximate market rates currently offered on instruments with
similar remaining maturities. The fair values of short-term borrowed funds, accrued interest
receivable, mortgagors escrow accounts and accrued interest payable approximate their carrying
amounts because of the short-term nature of these financial instruments. The majority of the
Companys commitments for unused lines and outstanding standby letters of credit and unadvanced
portions of loans are at floating rates and, therefore, there is no fair value adjustment.
54
The estimated fair values of the Banks financial instruments at December 31, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Value
|
|
Value
|
|
Value
|
|
Value
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
6,859
|
|
|
$
|
6,859
|
|
|
$
|
7,494
|
|
|
$
|
7,494
|
|
Short-term investments
|
|
|
6,469
|
|
|
|
6,469
|
|
|
|
56
|
|
|
|
56
|
|
Investment securities available for sale
|
|
|
264,561
|
|
|
|
264,561
|
|
|
|
230,596
|
|
|
|
230,596
|
|
Federal Home Loan Bank stock
|
|
|
11,825
|
|
|
|
11,825
|
|
|
|
10,185
|
|
|
|
10,185
|
|
Accrued interest receivable
|
|
|
2,720
|
|
|
|
2,720
|
|
|
|
2,453
|
|
|
|
2,453
|
|
Loans, net
|
|
|
446,736
|
|
|
|
446,609
|
|
|
|
353,303
|
|
|
|
352,493
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
408,663
|
|
|
|
414,082
|
|
|
|
322,083
|
|
|
|
322,920
|
|
Borrowed funds
|
|
|
276,490
|
|
|
|
297,385
|
|
|
|
235,351
|
|
|
|
243,141
|
|
Mortgagors escrow accounts
|
|
|
619
|
|
|
|
619
|
|
|
|
647
|
|
|
|
647
|
|
Accrued interest payable
|
|
|
1,106
|
|
|
|
1,106
|
|
|
|
1,013
|
|
|
|
1,013
|
|
(16) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS.
The condensed financial statements for LSB Corporation, referred to as the Parent Company for
purposes of this Note only at and for the year ended December 31, follow:
|
|
|
|
|
|
|
|
|
Balance Sheets
|
|
2008
|
|
|
2007
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash deposits in subsidiaries
|
|
$
|
7,749
|
|
|
$
|
1,320
|
|
Investment in subsidiary, at equity
|
|
|
64,172
|
|
|
|
58,642
|
|
Other assets
|
|
|
423
|
|
|
|
458
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
72,344
|
|
|
$
|
60,420
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity:
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accrued income taxes
|
|
$
|
24
|
|
|
$
|
24
|
|
Accrued expenses
|
|
|
178
|
|
|
|
98
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
202
|
|
|
|
122
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
72,142
|
|
|
|
60,298
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
72,344
|
|
|
$
|
60,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Operations
|
|
2008
|
|
|
2007
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
Dividends from bank subsidiary
|
|
$
|
2,800
|
|
|
$
|
3,200
|
|
Interest income
|
|
|
31
|
|
|
|
64
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
2,831
|
|
|
|
3,264
|
|
Non-interest expenses
|
|
|
228
|
|
|
|
241
|
|
|
|
|
|
|
|
|
Income before income taxes and undistributed earnings
|
|
|
2,603
|
|
|
|
3,023
|
|
Income tax benefit
|
|
|
(56
|
)
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
Income before undistributed earnings of subsidiary
|
|
|
2,659
|
|
|
|
3,084
|
|
Equity in undistributed earnings (loss) of subsidiary
|
|
|
(5,382
|
)
|
|
|
634
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,723
|
)
|
|
$
|
3,718
|
|
|
|
|
|
|
|
|
55
The Parent Companys statements of changes in stockholders equity are identical to the
consolidated statements of changes in stockholders equity and therefore are not presented here.
|
|
|
|
|
|
|
|
|
Statements of Cash Flows
|
|
2008
|
|
|
2007
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,723
|
)
|
|
$
|
3,718
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Net distributed (earnings) loss of subsidiaries
|
|
|
5,382
|
|
|
|
(634
|
)
|
Decrease in other assets
|
|
|
36
|
|
|
|
55
|
|
Increase in liabilities
|
|
|
80
|
|
|
|
49
|
|
Stock-based compensation
|
|
|
156
|
|
|
|
121
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
2,931
|
|
|
|
3,309
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Investment in subsidiary
|
|
|
(8,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(8,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options and tax benefits
|
|
|
121
|
|
|
|
139
|
|
Repurchases of common stock
|
|
|
(1,034
|
)
|
|
|
(1,463
|
)
|
Proceeds from issuance of preferred stock and warrants
|
|
|
15,000
|
|
|
|
|
|
Dividends paid to common stockholders
|
|
|
(2,589
|
)
|
|
|
(2,562
|
)
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities
|
|
|
11,498
|
|
|
|
(3,886
|
)
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
6,429
|
|
|
|
(577
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
1,320
|
|
|
|
1,897
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
7,749
|
|
|
$
|
1,320
|
|
|
|
|
|
|
|
|
56
(17) Quarterly Results of Operations (Unaudited)
The sum of the four rounded quarters might not necessarily equal the rounded year-to-date figures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 2008
|
|
|
|
March
|
|
|
June
|
|
|
September
|
|
|
December
|
|
|
|
31
|
|
|
30
|
|
|
30
|
|
|
31
|
|
|
(In Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
$
|
9,282
|
|
|
$
|
9,560
|
|
|
$
|
9,925
|
|
|
$
|
9,988
|
|
Interest expense
|
|
|
5,393
|
|
|
|
5,335
|
|
|
|
5,482
|
|
|
|
5,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
3,889
|
|
|
|
4,225
|
|
|
|
4,443
|
|
|
|
4,320
|
|
Provision for loan losses
|
|
|
105
|
|
|
|
400
|
|
|
|
330
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
3,784
|
|
|
|
3,825
|
|
|
|
4,113
|
|
|
|
3,870
|
|
Impairment write-downs on securities
|
|
|
|
|
|
|
|
|
|
|
(9,383
|
)
|
|
|
(722
|
)
|
Non-interest income
|
|
|
494
|
|
|
|
510
|
|
|
|
535
|
|
|
|
577
|
|
Non-interest expense
|
|
|
2,822
|
|
|
|
2,982
|
|
|
|
2,985
|
|
|
|
3,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes expense
|
|
|
1,456
|
|
|
|
1,353
|
|
|
|
(7,720
|
)
|
|
|
636
|
|
Income tax expense (benefit)
1
|
|
|
540
|
|
|
|
410
|
|
|
|
530
|
|
|
|
(3,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
916
|
|
|
$
|
943
|
|
|
$
|
(8,250
|
)
|
|
$
|
3,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.20
|
|
|
$
|
0.21
|
|
|
$
|
(1.85
|
)
|
|
$
|
0.82
|
|
Diluted earnings (loss) per share
|
|
$
|
0.20
|
|
|
$
|
0.21
|
|
|
$
|
(1.85
|
)
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 2007
|
|
|
|
March
|
|
|
June
|
|
|
September
|
|
|
December
|
|
|
|
31
|
|
|
30
|
|
|
30
|
|
|
31
|
|
|
(In Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
$
|
8,093
|
|
|
$
|
8,511
|
|
|
$
|
9,100
|
|
|
$
|
9,304
|
|
Interest expense
|
|
|
4,319
|
|
|
|
4,667
|
|
|
|
5,262
|
|
|
|
5,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
3,774
|
|
|
|
3,844
|
|
|
|
3,838
|
|
|
|
3,872
|
|
Provision for loan losses
|
|
|
60
|
|
|
|
155
|
|
|
|
250
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
3,714
|
|
|
|
3,689
|
|
|
|
3,588
|
|
|
|
3,692
|
|
Settlement gains on pension plan termination
|
|
|
|
|
|
|
|
|
|
|
357
|
|
|
|
405
|
|
Non-interest income
|
|
|
354
|
|
|
|
434
|
|
|
|
568
|
|
|
|
566
|
|
Non-interest expense
|
|
|
2,858
|
|
|
|
2,874
|
|
|
|
2,904
|
|
|
|
2,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes expense
|
|
|
1,210
|
|
|
|
1,249
|
|
|
|
1,609
|
|
|
|
1,741
|
|
Income tax expense
|
|
|
446
|
|
|
|
417
|
|
|
|
577
|
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
764
|
|
|
$
|
832
|
|
|
$
|
1,032
|
|
|
$
|
1,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.17
|
|
|
$
|
0.18
|
|
|
$
|
0.22
|
|
|
$
|
0.24
|
|
Diluted earnings per share
|
|
$
|
0.17
|
|
|
$
|
0.18
|
|
|
$
|
0.22
|
|
|
$
|
0.24
|
|
|
|
|
|
1
|
|
The tax benefit relating to the impairment write-down of FNMA and FHLMC preferred stock was
recognized in the fourth quarter of 2008 when a change in tax law re-characterized these losses
from capital losses to ordinary losses.
|
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
There were no disagreements or other reportable events of the type for which disclosure would be
required under Item 304(b) of Regulation
S-K
.
ITEM 9A (T). CONTROLS AND PROCEDURES
(a) Disclosure of Controls and Procedures
The Companys management, including the Companys Chief Executive Officer and Chief Financial
Officer, have evaluated the effectiveness of the Companys disclosure controls and procedures, as
such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended, (the Exchange Act). Based upon their evaluation, the principal executive officer and
principal financial officer concluded that, as of the end of the period covered by this report, the
Companys disclosure controls and procedures were effective for the purpose of ensuring that the
information required to be disclosed in the reports that the Company files or submits under the
Exchange Act with the Securities and Exchange Commission (the SEC) (1) is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms, and (2) is
accumulated and communicated to the Companys management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding required
disclosure.
(b) Internal Controls Over Financial Reporting
Managements Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. The Companys internal control system was designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of the
Companys financial statements in accordance with accounting principles generally accepted in the
United States of America to the Companys management and Board of Directors regarding the
preparation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Management assessed the effectiveness of the Companys internal control over financial reporting as
of December 31, 2008, using the framework set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in
Internal Control-Integrated Framework
. Based on our assessment,
we believe that, as of December 31, 2008, the Companys internal control over financial reporting
is effective.
This report does not include an attestation report of the Companys registered public accounting
firm regarding internal control over financial reporting. Managements report was not subject to
attestation by the Companys registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only managements report in
this annual report.
(c) Changes to Internal Control Over Financial Reporting
There were no changes in the Companys internal control over financial reporting during the three
months ended December 31, 2008, that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by Item 10 of this Form is incorporated by reference herein from those
sections in the Companys definitive Proxy Statement relating to the 2009 Annual Meeting of
Stockholders of the Company to be held May 5, 2009 (the Proxy Statement) entitled Information
Regarding Directors, Executive Officers, Section 16(a) Beneficial Ownership Reporting
Compliance and Code of Professional Conduct.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 of this Form is incorporated by reference herein from the section
in the Companys Proxy Statement entitled Executive Compensation.
58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Information required by Item 12 of this Form is incorporated by reference herein from the sections
in the Companys Proxy Statement entitled Equity Compensation Plan Information and Security
Ownership of Certain Beneficial Owners and Management.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information required by Item 13 of this Form is incorporated by reference herein from the section
in the Companys Proxy Statement entitled Indebtedness of Directors and Management and Certain
Transactions with Management and Others.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by Item 14 of this Form is incorporated by reference herein from the sections
in the Companys Proxy Statement entitled Ratification of Independent Registered Public Accounting
Firm and The Board of Directors and its Committees Audit Committee..
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
|
|
The following documents are filed as part of this report:
|
|
(1)
|
|
Financial Statements: The following Consolidated Financial
Statements of LSB Corporation and Subsidiary for the year ended December 31, 2008 are included in Item 8 of Part II to this
report:
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
|
Consolidated Balance Sheets at December 31, 2008 and 2007
|
|
|
|
|
Consolidated Statements of Operations for the years ended December 31, 2008 and 2007
|
|
|
|
|
Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2008 and 2007
|
|
|
|
|
Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
(2)
|
|
Financial Statement Schedules: None.
|
|
|
(3)
|
|
List of Exhibits: The following is a list of exhibits which are either filed or
incorporated by reference as part of this Annual Report on Form 10-K. Upon request to
Investors Relations, LSB Corporation, 30 Massachusetts Avenue, North Andover, MA 01845,
copies of the individual exhibits will be furnished upon payment of a reasonable
reproduction fee.
|
Exhibits:
|
|
|
Number
|
|
Description of Exhibit
|
|
(2)
|
|
Plan of Reorganization and Acquisition, dated as of March 12, 2001 between LSB Corporation
and Lawrence Savings Bank (Filed as Exhibit 2.1 to the Companys Current Report on Form 8-K
filed July 2, 2001, (File Number 000-32955) and incorporated herein by reference)
|
|
|
|
(3)(i).1
|
|
Articles of Organization of LSB Corporation (Filed as Exhibit 3.1 to the Companys
Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and incorporated herein
by reference)
|
|
|
|
(3)(i).2
|
|
Articles of Amendment of the Articles of Organization of LSB Corporation, as submitted
for filing in the Office of the Secretary of the Commonwealth of Massachusetts on December 30,
2005, (Filed as Exhibit 3(i).1 to the Companys Current Report on Form 8-K filed January 6,
2006, and incorporated herein by reference)
|
|
|
|
(3)(i).3
|
|
Articles of Amendment to the Articles of Organization of LSB Corporation, establishing
the fixed rate cumulative perpetual preferred stock, Series B (Filed as Exhibit 3.1 to the
Companys Current Report of Form 8-K filed December 17, 2008, and incorporated herein by
reference)
|
59
|
|
|
Number
|
|
Description of Exhibit
|
|
(3)(ii)
|
|
Amended and Restated By-Laws of LSB Corporation (Filed as Exhibit 3.1 to the Companys
Current Report on Form 8-K filed October 31, 2007, and incorporated herein by reference)
|
|
|
|
(3)(iii)
|
|
Lawrence Savings Bank Certificate of Vote of Directors Establishing a Series of a Class
of Stock (Filed as Exhibit 3(iii) to the Companys 2005 Annual Report on Form 10-K and
incorporated herein by reference)
|
|
|
|
(4.1)
|
|
Specimen certificate of shares of common stock of the Company (Filed as Exhibit 4.1 to the
Companys Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and
incorporated herein by reference)
|
|
|
|
(4.2)
|
|
Renewed Rights Agreement dated as of November 17, 2005, between LSB Corporation and
Computershare Trust Company, N.A., as Rights Agent (Filed as Exhibit 4.1 to the Companys
Current Report on Form 8-K filed January 31, 2006, and incorporated herein by reference)
|
|
|
|
(4.3)
|
|
Warrant to purchase 209,497 shares of common stock of LSB Corporation dated December 12,
2008, (filed as Exhibit 4.1 to the Companys Current Report on Form 8-K filed December 17,
2008, and incorporated herein by reference)
|
|
|
|
(10.1)
|
|
Supplemental Retirement Agreement by and between the Bank and Paul A. Miller dated April 21,
1989, (Filed as Exhibit 10.8 to the Companys Current Report on Form 8-K filed July 2, 2001,
(File Number 000-32955) and incorporated herein by reference)*
|
|
|
|
(10.2)
|
|
Supplemental Retirement Agreement by and between the Bank and Paul A. Miller dated April 21,
1996, (Filed as Exhibit 10.9 to the Companys Current Report on Form 8-K filed July 2, 2001,
(File Number 000-32955) and incorporated herein by reference)*
|
|
|
|
(10.3)
|
|
Lawrence Savings Bank 1986 Stock Option Plan (Filed as Exhibit 10.14 to the Companys
Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and incorporated herein
by reference)*
|
|
|
|
(10.4)
|
|
Lawrence Savings Bank 1997 Stock Option Plan (Filed as Exhibit 10.15 to the Companys
Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and incorporated herein
by reference)*
|
|
|
|
(10.5)
|
|
LSB Corporation 2006 Stock Option and Incentive Plan (Filed as Exhibit 10.1 to the Companys
Form S-8 filed June 5, 2006)*
|
|
|
|
(10.6)
|
|
LSB Corporations Form of Restricted Stock Agreement (Filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K filed December 26, 2006, and incorporated herein by reference)*
|
|
|
|
(10.7)
|
|
LSB Corporations Form of Incentive Stock Option Agreement (Filed as Exhibit 10.2 to the
Companys Current Report on Form 8-K filed December 26, 2006, and incorporated herein by
reference)*
|
|
|
|
(10.8)
|
|
LSB Corporations Form of Non-Qualified Stock Option Agreement (Filed as Exhibit 10.3 to the
Companys Current Report on Form 8-K filed December 26, 2006, and incorporated herein by
reference)*
|
|
|
|
(10.9)
|
|
LSB Corporation and River Bank Employee Stock Ownership Plan (Filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K filed March 19, 2007, and incorporated herein by
reference)*
|
|
|
|
(10.10)
|
|
LSB Corporation and River Bank Special Separation Plan (Filed as Exhibit 99.1 to the
Companys Current Report on Form 8-K filed December 14, 2007, and incorporated herein by
reference)*
|
|
|
|
(10.11)
|
|
LSB Corporation and River Bank Special Termination Agreement with Gerald T. Mulligan (Filed
as Exhibit 10.2 to the Companys Current Form 10-Q filed August 14, 2006, and incorporated
herein by reference)*
|
|
|
|
(10.12)
|
|
LSB Corporation and River Bank Special Termination Agreement with Michael J. Ecker (Filed
as Exhibit 10.3 to the Companys Current Form 10-Q filed August 14, 2006, and incorporated
herein by reference)*
|
|
|
|
(10.13)
|
|
LSB Corporation and River Bank Special Termination Agreement with Stephen B. Jones (Filed
as Exhibit 10.4 to the Companys Current Form 10-Q filed August 14, 2006, and incorporated
herein by reference)*
|
|
|
|
(10.14)
|
|
LSB Corporation and River Bank Special Termination Agreement with Diane L. Walker (Filed as
Exhibit 10.5 to the Companys Current Form 10-Q filed August 14, 2006, and incorporated herein
by reference)*
|
|
|
|
(10.15)
|
|
LSB Corporation and River Bank Special Termination Agreement with Teresa K. Flynn (Filed as
Exhibit 10.1 to the Companys Current Form 10-Q filed May 11, 2007, and incorporated herein by
reference)*
|
60
|
|
|
Number
|
|
Description of Exhibit
|
|
(10.16)
|
|
Letter Agreement which incorporates the Securities Purchase Agreement Standard terms,
dated December 12, 2008, between LSB Corporation and the United States Department of the
Treasury (filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed December 17,
2008, and incorporated herein by reference)
|
|
|
|
(13)
|
|
2008 Annual Report to Stockholders of LSB Corporation enclosed herein (furnished solely for
the Commissions information)
|
|
|
|
(14)
|
|
LSB Corporation and River Bank Code of Professional Conduct (Filed as Exhibit 99.1 to the
Companys Current Report on Form 8-K filed November 20, 2006, and incorporated herein by
reference)
|
|
|
|
(21)
|
|
Subsidiary of LSB Corporation and subsidiaries of River Bank
|
|
|
|
(23.1)
|
|
Consent of Wolf & Company, P.C.
|
|
|
|
(24)
|
|
Power of Attorney (contained in signature page)
|
|
|
|
(31.1)
|
|
Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
(31.2)
|
|
Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
(32.1)
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as added by
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
(32.2)
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as added by
Section 906 of the Sarbanes-Oxley Act of 2002
|
Financial Statement excluded from Annual Report to Stockholders: None
|
|
|
*
|
|
Management contract or compensatory plan or arrangement
|
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
|
|
|
By:
|
/s/ Gerald T. Mulligan
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated. Each person whose signature appears below hereby makes, constitutes and appoints Gerald
T. Mulligan acting individually, his true and lawful attorney, with full power to sign for such
person and in such persons name and capacity indicated below any and all amendments to this Form
10-K, hereby ratifying and confirming such persons signature as it may be signed by said attorney
to any and all amendments.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Gerald T. Mulligan
Gerald T. Mulligan
|
|
President, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
March 26, 2009
|
|
|
|
|
|
/s/ Diane L. Walker
Diane L. Walker
|
|
Executive Vice President, Treasurer and Chief Financial Officer
(Principal Financial and Principal Accounting
Officer)
|
|
March 26, 2009
|
|
|
|
|
|
/s/ Thomas J. Burke
Thomas J. Burke
|
|
Chairman of the Board
Director
|
|
March 26, 2009
|
|
|
|
|
|
/s/ John P. Bachini, Jr.
John P. Bachini, Jr.
|
|
Director
|
|
March 26, 2009
|
|
|
|
|
|
/s/ Kathleen Boshar Reynolds
Kathleen Boshar Reynolds
|
|
Director
|
|
March 26, 2009
|
|
|
|
|
|
/s/ Malcolm W. Brawn
Malcolm W. Brawn
|
|
Director
|
|
March 26, 2009
|
|
|
|
|
|
/s/ Richard Hart Harrington
Richard Hart Harrington
|
|
Director
|
|
March 26, 2009
|
|
|
|
|
|
/s/ Robert F. Hatem
Robert F. Hatem
|
|
Director
|
|
March 26, 2009
|
|
|
|
|
|
/s/ Marsha A. McDonough
Marsha A. McDonough
|
|
Director
|
|
March 26, 2009
|
|
|
|
|
|
/s/ Fred P. Shaheen
Fred P. Shaheen
|
|
Director
|
|
March 26, 2009
|
62
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