UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ
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Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
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For the quarterly period ended June 30, 2010
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o
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Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
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For the transition period from
to
Commission File Number 000-32955
LSB Corporation
(Exact name of registrant as specified in its charter)
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Massachusetts
(State or other jurisdiction of
incorporation or organization)
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04-3557612
(I.R.S. Employer
Identification Number)
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30 Massachusetts Avenue, North Andover, MA
(Address of principal executive offices)
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01845
(Zip Code)
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(978) 725-7500
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such report), and (2) has been subject
to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes
o
No
o
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 definition 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
o
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Accelerated Filer
o
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Non-Accelerated Filer
o
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Smaller Reporting Company
þ
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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
o
No
þ
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 August 6, 2010
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Common Stock, par value $.10 per share
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4,506,686 shares
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LSB CORPORATION AND SUBSIDIARY
INDEX
2
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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June 30,
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December 31,
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2010
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2009
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(In thousands, except share data)
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ASSETS
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Assets:
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Cash and due from banks
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$
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7,536
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$
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8,615
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Federal funds sold
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10,222
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6,597
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Total cash and cash equivalents
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17,758
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15,212
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Investment securities available for sale, at fair value,
amortized cost of $193,945 in 2010 and $224,130 in 2009
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202,270
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230,533
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Federal Home Loan Bank stock, at cost
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11,825
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11,825
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Loans, net of allowance for loan losses
of $7,467 in 2010 and $7,168 in 2009
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535,046
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529,451
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Premises and equipment
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8,501
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7,209
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Accrued interest receivable
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2,593
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2,727
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Deferred income tax asset, net
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3,087
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4,315
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Bank-owned life insurance
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11,350
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11,120
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Prepaid FDIC insurance
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2,674
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3,069
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Other assets
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1,813
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1,137
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Total assets
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$
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796,917
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$
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816,598
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LIABILITIES AND STOCKHOLDERS EQUITY
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Liabilities:
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Core deposits
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$
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273,805
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$
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252,389
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Term deposits
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218,742
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240,405
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Total deposits
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492,547
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492,794
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Long-term borrowed funds
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221,889
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245,971
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Short-term borrowed funds
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8,209
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7,111
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Subordinated debt
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6,000
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6,000
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Mortgagors escrow accounts
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741
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776
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Other liabilities
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3,444
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3,426
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Total liabilities
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732,830
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756,078
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Stockholders equity:
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Preferred stock, Series A, $.10 par value per
share:
5,000,000 shares authorized, none issued
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Common stock, $.10 par value per share;
20,000,000 shares authorized;
4,506,686 shares issued and outstanding at
June 30, 2010 and December 31, 2009, respectively
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451
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451
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Additional paid-in capital
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60,004
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60,004
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Accumulated deficit
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(1,378
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)
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(3,802
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)
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Accumulated other comprehensive income, net of tax
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5,010
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3,867
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Total stockholders equity
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64,087
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60,520
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Total liabilities and stockholders equity
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$
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796,917
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$
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816,598
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The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
3
LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
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Three months ended
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Six months ended
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June 30,
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June 30,
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2010
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2009
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2010
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2009
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(In thousands, except share data)
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Interest and dividend income:
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Loans
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$
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7,862
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$
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7,077
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$
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15,568
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$
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13,754
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Investment securities available for sale
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2,112
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3,003
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4,490
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6,367
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Short term investments
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5
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7
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14
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11
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Total interest and dividend income
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9,979
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10,087
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20,072
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20,132
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Interest expense:
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Deposits
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1,959
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2,585
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4,191
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5,245
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Long-term borrowed funds
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2,280
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2,770
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4,773
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5,544
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Short-term borrowed funds
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3
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4
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7
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43
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Subordinated debt
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132
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261
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Total interest expense
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4,374
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5,359
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9,232
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10,832
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Net interest income
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5,605
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|
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4,728
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10,840
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9,300
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Provision for loan losses
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700
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460
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1,400
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700
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Net interest income after provision for loan losses
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4,905
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4,268
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9,440
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8,600
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Non-interest income:
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|
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Deposit account fees
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236
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234
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|
460
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|
457
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Loan servicing fees, net
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69
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|
|
65
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|
151
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|
116
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Gains on sales of investments
|
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679
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232
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1,376
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|
458
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Income on bank-owned life insurance
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115
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124
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230
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249
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Prepayment penalty on FHLB advances
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(149
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)
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Other income
|
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|
139
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|
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|
119
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|
|
261
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|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total non-interest income
|
|
|
1,238
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|
|
|
774
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|
|
|
2,329
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|
|
|
1,505
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|
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Non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Salaries and employee benefits
|
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1,929
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|
|
1,627
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|
|
|
3,745
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|
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3,370
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|
Occupancy and equipment
|
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|
467
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|
346
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942
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|
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|
720
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Data processing
|
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|
295
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|
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|
233
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|
|
|
535
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|
473
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|
Professional
|
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|
129
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|
|
|
152
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|
|
|
241
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|
|
337
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|
Marketing
|
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|
96
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|
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|
117
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|
241
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|
|
259
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|
Other real estate owned
|
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|
10
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|
15
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|
|
2
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|
FDIC deposit insurance
|
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|
200
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|
|
|
369
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|
|
|
411
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|
|
|
760
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Other
|
|
|
472
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|
|
|
613
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|
|
|
948
|
|
|
|
1,158
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|
|
|
|
|
|
|
|
|
|
|
|
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Total non-interest expense
|
|
|
3,598
|
|
|
|
3,457
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|
|
|
7,078
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|
|
|
7,079
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|
|
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|
|
|
|
|
|
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Income before income tax expense
|
|
|
2,545
|
|
|
|
1,585
|
|
|
|
4,691
|
|
|
|
3,026
|
|
Income tax expense
|
|
|
946
|
|
|
|
524
|
|
|
|
1,546
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|
|
|
1,001
|
|
|
|
|
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|
|
|
|
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Net income before preferred stock
dividends and accretion
|
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|
1,599
|
|
|
|
1,061
|
|
|
|
3,145
|
|
|
|
2,025
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|
Preferred stock dividends and accretion
|
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|
|
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|
(215
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)
|
|
|
|
|
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|
(374
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)
|
|
|
|
|
|
|
|
|
|
|
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Net income available to common shareholders
|
|
$
|
1,599
|
|
|
$
|
846
|
|
|
$
|
3,145
|
|
|
$
|
1,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
Average basic common shares outstanding
|
|
|
4,506,686
|
|
|
|
4,471,382
|
|
|
|
4,506,686
|
|
|
|
4,471,163
|
|
Common stock equivalents
|
|
|
3,538
|
|
|
|
1,683
|
|
|
|
2,935
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|
|
|
882
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|
|
|
|
|
|
|
|
|
|
|
|
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|
Average diluted common shares outstanding
|
|
|
4,510,224
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|
|
|
4,473,065
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|
|
|
4,509,621
|
|
|
|
4,472,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.35
|
|
|
$
|
0.19
|
|
|
$
|
0.70
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.35
|
|
|
$
|
0.19
|
|
|
$
|
0.70
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited Consolidated Financial
Statements.
4
LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2009 AND THE
SIX MONTHS ENDED JUNE 30, 2010
(UNAUDITED)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Equity
|
|
|
|
(In thousands, except share data)
|
|
Balance at December 31, 2008
|
|
$
|
14,455
|
|
|
$
|
447
|
|
|
$
|
60,179
|
|
|
$
|
(6,250
|
)
|
|
$
|
3,311
|
|
|
$
|
72,142
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,037
|
|
|
|
|
|
|
|
5,037
|
|
Other comprehensive income -
Unrealized gain on securities
available for sale
(tax effect $343)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
556
|
|
|
|
556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
121
|
|
Exercise of stock options
and tax benefits (28,995 shares)
|
|
|
|
|
|
|
4
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
268
|
|
Common dividends declared and
paid ($0.30 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,344
|
)
|
|
|
|
|
|
|
(1,344
|
)
|
Preferred dividends declared
and paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(700
|
)
|
|
|
|
|
|
|
(700
|
)
|
Accretion of discount on
preferred stock
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
(545
|
)
|
|
|
|
|
|
|
|
|
Redemption of preferred stock
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,000
|
)
|
Repurchase of warrants issued
with preferred stock
|
|
|
|
|
|
|
|
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
|
|
|
|
451
|
|
|
|
60,004
|
|
|
|
(3,802
|
)
|
|
|
3,867
|
|
|
|
60,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,145
|
|
|
|
|
|
|
|
3,145
|
|
Other comprehensive income -
Unrealized gain on securities
available for sale
(tax effect $780)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,143
|
|
|
|
1,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared and paid
($0.16 per common share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(721
|
)
|
|
|
|
|
|
|
(721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
$
|
|
|
|
$
|
451
|
|
|
$
|
60,004
|
|
|
$
|
(1,378
|
)
|
|
$
|
5,010
|
|
|
$
|
64,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
5
LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,145
|
|
|
$
|
1,651
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
1,400
|
|
|
|
700
|
|
Gains on sales of securities
|
|
|
(1,376
|
)
|
|
|
(458
|
)
|
Net accretion of investment securities
|
|
|
(110
|
)
|
|
|
(393
|
)
|
Depreciation and amortization of premises and equipment
|
|
|
388
|
|
|
|
290
|
|
Decrease in accrued interest receivable
|
|
|
134
|
|
|
|
34
|
|
Deferred income tax benefit
|
|
|
(137
|
)
|
|
|
(115
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
14
|
|
Income on bank-owned life insurance
|
|
|
(230
|
)
|
|
|
(249
|
)
|
Decrease (increase) in other assets and prepaid FDIC Insurance
|
|
|
304
|
|
|
|
(52
|
)
|
Increase in other liabilities
|
|
|
18
|
|
|
|
717
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
3,536
|
|
|
|
2,139
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from maturities of investment securities available for sale
|
|
|
16,779
|
|
|
|
7,987
|
|
Proceeds from sales of investment securities available for sale
|
|
|
25,598
|
|
|
|
8,291
|
|
Purchases of investment securities available for sale
|
|
|
(39,929
|
)
|
|
|
(24,288
|
)
|
Principal payments of investment securities available for sale
|
|
|
29,224
|
|
|
|
45,816
|
|
Loan originations, net of principal payments
|
|
|
(7,248
|
)
|
|
|
(42,474
|
)
|
Loans purchased
|
|
|
|
|
|
|
(6,837
|
)
|
Proceeds from sales of other real estate owned
|
|
|
253
|
|
|
|
|
|
Purchases of premises and equipment
|
|
|
(1,680
|
)
|
|
|
(1,093
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
22,997
|
|
|
|
(12,598
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits
|
|
|
(247
|
)
|
|
|
40,068
|
|
Additions to long-term borrowed funds
|
|
|
9,000
|
|
|
|
|
|
Payments on long-term borrowed funds
|
|
|
(33,082
|
)
|
|
|
(5,078
|
)
|
Net increase (decrease) in short-term borrowed funds
|
|
|
1,098
|
|
|
|
(10,218
|
)
|
(Decrease) increase in mortgagors escrow accounts
|
|
|
(35
|
)
|
|
|
13
|
|
Dividends paid to preferred shareholders
|
|
|
|
|
|
|
(319
|
)
|
Dividends paid to common shareholders
|
|
|
(721
|
)
|
|
|
(894
|
)
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(23,987
|
)
|
|
|
23,602
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
2,546
|
|
|
|
13,143
|
|
Cash and cash equivalents, beginning of period
|
|
|
15,212
|
|
|
|
13,328
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
17,758
|
|
|
$
|
26,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
$
|
4,201
|
|
|
$
|
5,257
|
|
Interest on borrowed funds
|
|
|
5,158
|
|
|
|
5,654
|
|
Income taxes paid
|
|
|
1,592
|
|
|
|
1,235
|
|
|
|
|
|
|
|
|
|
|
Supplemental non cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Transfers to other real estate owned
|
|
|
253
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
6
LSB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(UNAUDITED)
1. 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 organized in 1868. 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
it is also subject to the jurisdiction of the Massachusetts Division of Banks, while the Bank is
subject to the regulations of, and periodic examination by, the Federal Deposit Insurance
Corporation (FDIC) and the Massachusetts Division of Banks. The Banks deposits are currently
insured by the Deposit Insurance Fund of the FDIC up to $250,000 per depositor, as defined by the
FDIC. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed
into law which made permanent the current standard maximum deposit insurance amount of $250,000.
The FDIC coverage limit applies per depositor, per insured depository institution, for each account
ownership category. The Depositors Insurance Fund (DIF) of Massachusetts, a private
industry-sponsored insurer, insures the Banks customer deposit amounts in excess of FDIC insurance
limits. The Consolidated Financial Statements include the accounts of LSB Corporation and its
wholly-owned consolidated subsidiary, River Bank, and the Banks 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. In the opinion of management, the accompanying Consolidated
Financial Statements reflect all necessary adjustments consisting of normal recurring adjustments
for fair presentation. Certain amounts in prior periods may be re-classified to conform to the
current presentation.
The Corporations Consolidated Financial Statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. Accordingly, management
is required to make estimates and assumptions that affect amounts reported in the balance sheets
and statements of income. Actual results could differ significantly from those estimates and
judgments. Material estimates that are particularly susceptible to change relate to the allowance
for loan losses, income taxes and impairment of investment securities.
The interim results of consolidated income are not necessarily indicative of the results for any
future interim period or for the entire year. These interim Consolidated Financial Statements do
not include all disclosures associated with annual financial statements and, accordingly, should be
read in conjunction with the annual Consolidated Financial Statements and accompanying notes
included in the Companys Annual Report on Form 10-K as of and for the year ended December 31, 2009
filed with the Securities and Exchange Commission.
7
2. INVESTMENTS
The following table reflects the components and carrying values of the investment securities
portfolio at June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/10
|
|
|
12/31/09
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In thousands)
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations
|
|
$
|
5,548
|
|
|
$
|
342
|
|
|
$
|
|
|
|
$
|
5,890
|
|
|
$
|
5,557
|
|
|
$
|
237
|
|
|
$
|
|
|
|
$
|
5,794
|
|
Government-sponsored
enterprise obligations (1)
|
|
|
39,844
|
|
|
|
360
|
|
|
|
|
|
|
|
40,204
|
|
|
|
33,379
|
|
|
|
188
|
|
|
|
(49
|
)
|
|
|
33,518
|
|
Residential mortgage-backed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government guaranteed
|
|
|
13,102
|
|
|
|
718
|
|
|
|
|
|
|
|
13,820
|
|
|
|
16,037
|
|
|
|
483
|
|
|
|
|
|
|
|
16,520
|
|
Government-sponsored
enterprises
|
|
|
92,021
|
|
|
|
5,993
|
|
|
|
(7
|
)
|
|
|
98,007
|
|
|
|
118,537
|
|
|
|
5,543
|
|
|
|
(71
|
)
|
|
|
124,009
|
|
Residential collateralized
mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government guaranteed
|
|
|
25,435
|
|
|
|
727
|
|
|
|
|
|
|
|
26,162
|
|
|
|
21,965
|
|
|
|
94
|
|
|
|
(80
|
)
|
|
|
21,979
|
|
Government-sponsored
enterprises
|
|
|
14,537
|
|
|
|
302
|
|
|
|
|
|
|
|
14,839
|
|
|
|
21,283
|
|
|
|
389
|
|
|
|
|
|
|
|
21,672
|
|
Private-label
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,415
|
|
|
|
93
|
|
|
|
|
|
|
|
1,508
|
|
Corporate obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,489
|
|
|
|
|
|
|
|
(111
|
)
|
|
|
2,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
190,487
|
|
|
|
8,442
|
|
|
|
(7
|
)
|
|
|
198,922
|
|
|
|
220,662
|
|
|
|
7,027
|
|
|
|
(311
|
)
|
|
|
227,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
1,000
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
992
|
|
|
|
1,000
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
966
|
|
Equity securities
|
|
|
2,458
|
|
|
|
|
|
|
|
(102
|
)
|
|
|
2,356
|
|
|
|
2,468
|
|
|
|
|
|
|
|
(279
|
)
|
|
|
2,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
3,458
|
|
|
|
|
|
|
|
(110
|
)
|
|
|
3,348
|
|
|
|
3,468
|
|
|
|
|
|
|
|
(313
|
)
|
|
|
3,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
193,945
|
|
|
$
|
8,442
|
|
|
$
|
(117
|
)
|
|
$
|
202,270
|
|
|
$
|
224,130
|
|
|
$
|
7,027
|
|
|
$
|
(624
|
)
|
|
$
|
230,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
The net unrealized gains on securities available for sale at June 30, 2010 totaled $8.3 million, or
$5.0 million net of taxes. One preferred equity security is on the Banks securities watch list
due to its current credit rating by external, independent rating agencies. Management believes
that the Company will collect all amounts due on this investment in accordance with its contractual
terms. The cost of this investment totaled $2.0 million at June 30, 2010, with an unrealized loss
of $102,000, or 5.0% of cost. This watch list security recovered a significant portion of the
unrealized losses during the fourth quarter of 2009 and the first quarter of 2010 due to the
improved outlook of the issuer. If a decline in value is determined to be other-than-temporary, a
charge to earnings would be recognized at that time. Management is monitoring this security on a
regular basis, does not intend to sell the security, and it is not more likely than not that the
Company will be required to sell the security before recovery of its cost. Therefore, management
does not consider this investment to be other-than-temporarily impaired at June 30, 2010. The
remainder of the gross unrealized losses resulted from changes in interest rates and is not
material as of June 30, 2010.
8
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 June 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-
backed securities
|
|
$
|
1,500
|
|
|
$
|
(7
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,500
|
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
1,500
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
1,500
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
|
|
|
|
|
|
|
|
992
|
|
|
|
(8
|
)
|
|
|
992
|
|
|
|
(8
|
)
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
1,938
|
|
|
|
(102
|
)
|
|
|
1,938
|
|
|
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
|
|
|
|
|
|
|
|
2,930
|
|
|
|
(110
|
)
|
|
|
2,930
|
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities
|
|
$
|
1,500
|
|
|
$
|
(7
|
)
|
|
$
|
2,930
|
|
|
$
|
(110
|
)
|
|
$
|
4,430
|
|
|
$
|
(117
|
)
|
|
The Company realized gross gains of $1.4 million and gross losses of $5,000 on the sale of
$25.6 million of investments available for sale in the first six months of 2010.
The following table is a summary of the contractual maturities of debt securities available for
sale at June 30, 2010. Mortgage-backed securities and collateralized mortgage obligations are
shown at their final contractual maturity date but are expected to have shorter average lives.
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
505
|
|
|
$
|
506
|
|
After 1 year through 5 years
|
|
|
51,303
|
|
|
|
52,127
|
|
After 5 years through 10 years
|
|
|
19,409
|
|
|
|
19,992
|
|
After 10 years
|
|
|
119,270
|
|
|
|
126,297
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
$
|
190,487
|
|
|
$
|
198,922
|
|
|
Investment securities pledged as collateral for customer repurchase and wholesale repurchase
agreements at June 30, 2010 totaled $6.6 million and $47.5 million, respectively.
3. CONTINGENCIES
The Company is involved in various legal proceedings incidental to its business. During the six
months ended June 30, 2010, no new legal proceeding was filed and no material development in any
pending legal proceeding occurred that the Company expects will have a material adverse effect on
its financial condition or operating results.
9
4. FAIR VALUES 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. 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.
The estimated fair values of the Companys financial instruments at June 30, 2010 and December 31,
2009, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
(In thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
7,536
|
|
|
$
|
7,536
|
|
|
$
|
8,615
|
|
|
$
|
8,615
|
|
Federal Funds sold
|
|
|
10,222
|
|
|
|
10,222
|
|
|
|
6,597
|
|
|
|
6,597
|
|
Investment securities available for sale
|
|
|
202,270
|
|
|
|
202,270
|
|
|
|
230,533
|
|
|
|
230,533
|
|
Federal Home Loan Bank stock
|
|
|
11,825
|
|
|
|
11,825
|
|
|
|
11,825
|
|
|
|
11,825
|
|
Accrued interest receivable
|
|
|
2,593
|
|
|
|
2,593
|
|
|
|
2,727
|
|
|
|
2,727
|
|
Loans, net
|
|
|
535,046
|
|
|
|
538,818
|
|
|
|
529,451
|
|
|
|
526,087
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposits
|
|
|
273,805
|
|
|
|
273,805
|
|
|
|
252,389
|
|
|
|
252,389
|
|
Certificates of deposit
|
|
|
218,742
|
|
|
|
223,250
|
|
|
|
240,405
|
|
|
|
244,002
|
|
Borrowed funds
|
|
|
236,098
|
|
|
|
257,510
|
|
|
|
259,082
|
|
|
|
272,320
|
|
Mortgagors escrow accounts
|
|
|
741
|
|
|
|
741
|
|
|
|
776
|
|
|
|
776
|
|
Accrued interest payable
|
|
|
858
|
|
|
|
858
|
|
|
|
987
|
|
|
|
987
|
|
The fair values for cash and short-term investments approximate their carrying amounts because
of the short-term nature of the assets. 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 from an independent pricing service that consider standard input factors such as
observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit
spreads and new issue data. The Company did not make any changes to the input factors used by the
external pricing service. 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. The fair value of stock in
the Federal Home Loan Bank of Boston is based upon the redemption value of the stock which equates
to its carrying value. 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 because 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 estimated using 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 the liabilities. 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.
Assets measured at fair value on a recurring basis at June 30, 2010 and December 31, 2009, are
summarized below. There are no liabilities measured at fair value on a recurring basis. The
Company had no transfers into or out of Levels 1, 2 or 3 during the six months ended June 30, 2010.
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations
|
|
$
|
5,890
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,890
|
|
All other debt securities
|
|
|
|
|
|
|
193,032
|
|
|
|
|
|
|
|
193,032
|
|
Equity securities
|
|
|
1,937
|
|
|
|
995
|
|
|
|
416
|
|
|
|
3,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recurring assets
|
|
$
|
7,827
|
|
|
$
|
194,027
|
|
|
$
|
416
|
|
|
$
|
202,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations
|
|
$
|
5,794
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,794
|
|
All other debt securities
|
|
|
|
|
|
|
221,584
|
|
|
|
|
|
|
|
221,584
|
|
Equity securities
|
|
|
1,760
|
|
|
|
970
|
|
|
|
425
|
|
|
|
3,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recurring assets
|
|
$
|
7,554
|
|
|
$
|
222,554
|
|
|
$
|
425
|
|
|
$
|
230,533
|
|
|
There was a minimal change in Level 3 assets measured at fair value on a recurring basis for the
six months ended June 30, 2010 and the year ended December 31, 2009. 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 Company may also be required, from time to time, to measure certain other assets or liabilities
on a non-recurring basis in accordance with generally accepted accounting principles. Asset
adjustments to fair value usually result from application of lower-of-cost-or-market accounting or
write-downs of individual assets. There are no liabilities measured at fair value on a
non-recurring basis at June 30, 2010 or December 31, 2009. The following table summarizes the fair
value hierarchy used to determine each adjustment and the carrying value of the assets measured at
fair value on a non-recurring basis as of June 30, 2010 and December 31, 2009. The losses
represent the amount of losses recorded during 2010 on the assets held at June 30, 2010 and during
2009 on the assets held at December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
June 30, 2010
|
|
2010
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Losses
|
|
|
Total Losses
|
|
|
|
(In thousands)
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,616
|
|
|
$
|
773
|
|
|
$
|
1,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
2009
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
Total Losses
|
|
|
|
(In thousands)
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,781
|
|
|
|
|
|
|
$
|
415
|
|
|
Losses applicable to impaired loans that are collateral dependent are based on the appraised value
of the underlying collateral, discounted as necessary due to managements estimates of changes in
market conditions. The factors used to determine the fair value of such collateral include selling
prices of similar properties, expected future cash flows of the subject property and other economic
factors. These losses are recorded as a component in determining the overall adequacy of the
allowance for loan losses. Adjustments to the estimated fair value of impaired loans may result in
increases or decreases to the provision for loan losses.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the Financial Accounting Standards Board (FASB) amended its guidance surrounding the
accounting for transfers and servicing of financial assets and extinguishments of liabilities and
will now require more information about transfers of financial assets, including securitization
transactions, where entities have continuing exposure to the risks related to transferred financial
assets. This guidance eliminates the concept of a qualifying special-purpose entity, changes the
requirements for derecognizing financial assets, and requires additional
disclosures. The Company adopted this new guidance on January 1, 2010, as required, and it did not
have a material impact on the Companys Consolidated Financial Statements.
In June 2009, the FASB amended its guidance on the consolidation of variable interest entities and
changed how a reporting entity determines when an entity that is insufficiently capitalized or is
not controlled through voting (or
11
similar rights) should be consolidated. The determination of
whether a reporting entity is required to consolidate another entity is based on, among other
things, the other entitys purpose and design and the reporting entitys ability to direct the
activities of the other entity that most significantly impact the other entitys economic
performance. The Company adopted this new guidance on January 1, 2010, as required, and it did not
have a material impact on the Companys Consolidated Financial Statements.
In September 2009, the FASB amended its guidance on fair value measurements and disclosures
relating to investments in certain entities that calculate net asset value per share (or its
equivalent). This guidance permits a reporting entity to measure the fair value of certain
investments on the basis of the net asset value per share of the investment (or its equivalent).
This guidance also requires new disclosures, by major category of investments, about the attributes
of investments within the scope of this guidance. The Company adopted this new guidance on January
1, 2010, as required, and it did not have a material impact on the Companys Consolidated Financial
Statements.
In January 2010, the FASB amended its guidance on fair value measurements and disclosures. These
changes increase the disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements.
In July 2010, the FASB issued an Accounting Standards Update,
Disclosures about the Credit Quality
of Financing Receivables and the Allowance for Credit Losses.
The objective of this Update is for
an entity to provide disclosures that facilitate financial statement users evaluation of (1) the
nature of credit risk inherent in the entitys portfolio of financing receivables (2) how that risk
is analyzed and assessed in arriving at the allowance for credit losses (3) the changes and reasons
for those changes in the allowance for credit losses. For public entities, the disclosures as of
the end of a reporting period are effective for interim and annual reporting periods ending on or
after December 15, 2010 and the disclosures about activity that occurs during a reporting period
are effective for interim and annual reporting periods beginning on or after December 15, 2010.
This update will significantly expand the Companys relevant disclosures in the Companys
Consolidated Financial Statements.
6. SUBSEQUENT EVENT
On July 15, 2010, the Company entered into an Agreement and Plan of Merger with Peoples United
Financial, Inc. to acquire the Company in an all-cash transaction valued at $21.00 per share or
approximately $96 million.
The completion of the merger is subject to customary conditions, including the approval of the
shareholders of LSB Corporation and the receipt of regulatory approvals. Assuming satisfaction of
all of the conditions to closing, completion of the merger is expected to occur in the fourth
quarter of 2010.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In this report, the Company has made forward-looking statements (within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 as
amended) that are subject to risks and uncertainties. Such forward-looking statements are
expressions of managements expectations as of the date of this report regarding future events or
trends and which do not relate to historical matters. Such expectations may or may not be
realized, depending on a number of variable factors, including, but not limited to, changes in
interest rates, general economic conditions, including real estate conditions in the Banks lending
areas, regulatory considerations, competition and consummation of the merger with Peoples United
Financial, Inc. For more information about these factors, please see our 2009 Annual Report on
Form 10-K on file with the SEC, including the sections entitled Risk Factors and Managements
Discussion and Analysis of Financial Condition and Results of Operations. As a result of such
risk factors and uncertainties, among others, the Companys actual results may differ materially
from such forward-looking statements. The Company does not undertake and specifically
disclaims any obligation to publicly release updates or revisions to any such forward-looking
statements as a result of new information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company has not changed its significant accounting and reporting policies from those disclosed
in its 2009 Annual Report on Form 10-K. In applying these accounting policies, management is
required to exercise judgment
12
in determining many of the methodologies, assumptions and estimates
to be utilized. As discussed in the Companys 2009 Annual Report on Form 10-K, the three most
significant areas in which management applies critical assumptions and estimates that are
particularly susceptible to change relate to the determination of the allowance for loan losses,
income taxes and impairment of the investment portfolio. Managements estimates and assumptions
affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and
expenses for the period. Actual results could differ from the amount derived from managements
estimates and assumptions under different conditions.
EXECUTIVE LEVEL OVERVIEW
The Company recorded second quarter 2010 net income available to common shareholders of $1.6
million, or $0.35 per diluted common share, compared to $846,000, or $0.19 per diluted common
share, for the second quarter of 2009. The largest factors affecting the quarterly results were
gains on sales of investments totaling $679,000 and $232,000 in the second quarter of 2010 and
2009, respectively, offset in part by FDIC deposit insurance premiums amounting to $200,000 and
$369,000 in the same periods, respectively, as well as the preferred stock dividend and accretion
of $215,000 in the second quarter of 2009. Another positive factor in the second quarter of 2010
was the $877,000 improvement in net interest income offset by the $240,000 increased loan loss
provision from the second quarter of 2009.
On July 15, 2010, the Company entered into an Agreement and Plan of Merger with Peoples United
Financial, Inc. to acquire the Company in an all-cash transaction valued at $21.00 per share or
approximately $96 million.
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 Companys most significant source of revenue and is
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. Managements efforts
in this area are to increase the corporate loan portfolio, which includes construction, commercial
real estate and commercial loans, and the residential loan portfolio. Managements efforts for
funding are to increase core deposit accounts, which are lower interest-bearing accounts and
include savings and money market accounts, and demand deposit accounts. Deposits and borrowings
typically have short durations and the costs of these funds do not necessarily rise and fall
concurrent with earnings from 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 its internal credit and underwriting function and reviews at meetings
of the Asset and Liability Management Committee (ALCO) on a regular basis. The credit review
process reviews loans for underwriting and grading of loan quality while ALCO reviews the
liquidity, interest rate risk, duration risk and allocation of capital resources. Loan quality has
a direct impact on the amount of provisions for loan losses the Company reports.
Non-interest income includes gains and losses on sales of investment securities, various fees and
increases in the cash surrender value of the Companys investment in Bank-Owned Life Insurance
(BOLI). 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 customer
transactions, which could change in response to changes in interest rates, pricing and competition
as well as securities gains or losses.
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 controlled by a budget process.
Income tax expense is 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 also affect the amount of income tax expense reported
and the overall effective income tax rate recorded.
The Company believes that the most significant challenge in the current interest rate environment
is to increase net interest income while also maintaining competitive deposit rates. The Companys
net interest income for the six
13
months ended June 30, 2010 was $10.8 million, a 16.6% increase from
$9.3 million for the comparable period in 2009, primarily due to sustained loan growth. The
results from the Companys continued emphasis on increasing loan originations instead of purchasing
lower-yielding investment securities, which favorably affected net interest income during the six
months ended June 30, 2010.
FINANCIAL CONDITION
SUMMARY
The Company maintains its commitment to servicing the banking needs of the local community in the
Merrimack Valley area of northeastern Massachusetts and southern New Hampshire. The Company had
total assets of $796.9 million at June 30, 2010, compared to $816.6 million at December 31, 2009.
The decrease in asset size at June 30, 2010 from December 31, 2009 reflected a measured effort to
reduce wholesale funding. The Company experienced local loan growth of $5.9 million or 1.1% from
December 31, 2009.
Investments:
The investment securities portfolio totaled $202.3 million, or 25.4% of total assets, at June 30,
2010, a decrease of $28.3 million, compared to $230.5 million, or 28.2% of total assets at December
31, 2009.
During the first six months of 2010, the Bank experienced cash inflows of $29.2 million of
investments from principal payments and prepayments, $16.8 million in calls and maturities, as well
as $25.6 million in proceeds from sales of investments. The funds were reinvested in investment
securities purchases totaling $39.9 million, funded new loan originations and paid down maturing
FHLBB advances. These purchases were primarily for use as collateral for wholesale repurchase
agreements, FHLBB short-term and long-term advances and customer repurchase agreements. The
Company intends to utilize future principal paydowns and maturities from the investment portfolio
to fund future loan growth.
Loans:
Total loans increased $5.9 million to $542.5 million and represented 68.1% of total assets at June
30, 2010, versus $536.6 million and 65.7% of total assets, respectively, at December 31, 2009.
Retail loans, comprised primarily of residential mortgage loans, increased $4.8 million while
corporate loans, comprised mainly of construction and commercial real estate loans, increased $1.1
million during the same period. The increase is due to loan growth experienced in the commercial
real estate and residential loan categories and reflects the continued strategic preference toward
loan originations rather than investment security purchases. There has been continued demand from
the Banks existing borrowers which is reflected in the commercial business loans. During the
first six months of 2010, construction loans decreased $9.4 million due to improved sales of the
underlying collateral in the portfolio.
The following table reflects the loan portfolio at June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
6/30/10
|
|
|
12/31/09
|
|
|
|
(In thousands)
|
|
Residential real estate
|
|
$
|
134,573
|
|
|
$
|
131,441
|
|
Home equity lines and second mortgages
|
|
|
28,593
|
|
|
|
27,003
|
|
Consumer
|
|
|
699
|
|
|
|
657
|
|
|
|
|
|
|
|
|
Retail loans
|
|
|
163,865
|
|
|
|
159,101
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
53,407
|
|
|
|
62,772
|
|
Commercial real estate
|
|
|
284,242
|
|
|
|
282,716
|
|
Commercial business
|
|
|
40,999
|
|
|
|
32030
|
|
|
|
|
|
|
|
|
Corporate loans
|
|
|
378,648
|
|
|
|
377,518
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
542,513
|
|
|
|
536,619
|
|
Allowance for loan losses
|
|
|
(7,467
|
)
|
|
|
(7,168
|
)
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
535,046
|
|
|
$
|
529,451
|
|
|
|
|
|
|
|
|
14
Allowance For Loan Losses:
The following table summarizes changes in the allowance for loan losses for the three and six
months ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
6/30/10
|
|
|
6/30/09
|
|
|
6/30/10
|
|
|
6/30/09
|
|
|
|
(Dollars in thousands)
|
|
Beginning balance
|
|
$
|
7,277
|
|
|
$
|
6,089
|
|
|
$
|
7,168
|
|
|
$
|
5,885
|
|
Provision for loan losses
|
|
|
700
|
|
|
|
460
|
|
|
|
1,400
|
|
|
|
700
|
|
Recoveries on loans previously charged-off
|
|
|
4
|
|
|
|
1
|
|
|
|
5
|
|
|
|
2
|
|
Loans charged-off
|
|
|
(514
|
)
|
|
|
(151
|
)
|
|
|
(1,106
|
)
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
7,467
|
|
|
$
|
6,399
|
|
|
$
|
7,467
|
|
|
$
|
6,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized net charge-offs to average
loans outstanding
|
|
|
0.37
|
%
|
|
|
0.12
|
%
|
|
|
0.41
|
%
|
|
|
0.08
|
%
|
Allowance for loan losses to total
loans at end of period
|
|
|
1.38
|
%
|
|
|
1.28
|
%
|
|
|
1.38
|
%
|
|
|
1.28
|
%
|
The allowance for loan losses increased to $7.5 million at June 30, 2010 compared to $7.2 million
and $6.4 million, respectively, at December 31, 2009 and June 30, 2009. The coverage of the
allowance for loan losses increased slightly to 1.38% at June 30, 2010 from 1.34% at December 31,
2009 and 1.28% at June 30, 2009. The Company recorded charge-offs of $750,000 in the first six
months of 2010 on one commercial construction loan that was foreclosed in July 2010 and the
remaining balance of $1.2 million was transferred into other real estate owned at that time. The
Company believes that asset quality remains high, as evidenced by the relatively low levels of
non-performing and delinquent loans as a percentage of total loans and OREO or total assets as
defined below. See Risk Assets below. The level of loan charge-offs combined with the low
levels of delinquent loans and sustained asset quality of the loan portfolio contributed to the
assessment of the allowance for loan losses and resulted in the increase in the allowance for loan
loss coverage as a percentage of total loans from December 31, 2009 to June 30, 2010. The Company
has not engaged in any subprime lending, which it views as one-to-four-family residential loans to
a borrower with a credit score below 620 on a scale that ranges from 300 to 850.
The Company considers the current level of the allowance for loan losses to be appropriate and
adequate. The amount of the allowance for loan losses reflects managements assessment of
estimated credit quality 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 values 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 allowance levels.
Management believes the allowance level is adequate to absorb the estimated credit losses inherent
in the loan portfolio.
Risk Assets:
Risk assets consist of non-performing loans and other real estate owned (OREO). Non-performing
loans consist of both loans that are 90 days or more past due and loans that are placed on
non-accrual because full collection of the principal balance and interest is in doubt. OREO is
comprised of foreclosed properties where the Company has formally received title or has possession
of the collateral and is carried at the lower of the carrying amount of the loan plus capital
improvements or the estimated fair value of the property, less selling costs.
Total risk assets were $6.1 million at June 30, 2010, compared to $6.0 million at December 31, 2009
and $4.3 million as of June 30, 2009. As evidenced by the table below, the economy has had an
impact on the level of non-performing loans and on residential and commercial real estate
non-performing loans in particular. The Bank expects the commercial business non-performing loans
totaling $646,000 will be partially protected by a guaranty by the SBA in the amount of $415,000.
15
Impaired loans are commercial and commercial real estate loans and individually significant
residential mortgage loans for which management believes 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 totaled $10.6 million and $7.3 million at June 30, 2010 and December 31, 2009,
respectively, with specific reserves of $449,000 and $415,000, respectively. Of the $10.6 million
in impaired loans, $1.7 million represent modifications on residential, owner-occupied properties
at June 30, 2010. Additionally, one construction loan for residential condominiums with a balance
of $2.3 million and five commercial rentals from the same project with a balance of $1.7 million
were modified at a lower interest rate as the project experienced a slow down in sales activity
during the winter months. This construction loan and related rental units totaled $4.1 million at
June 30, 2010, down from a combined balance of $4.9 million in January in the fourth quarter of
2010 and are included in the accruing loan portfolio. In July 2010, another $640,000 was received
to reduce the construction loan balance from a unit sale. The Company does not have collateral
concerns and the loans remained current on their respective payment status. The remaining impaired
loans are reported as nonaccrual loans in the table below in their respective loan category. All
of the impaired loans at June 30, 2010, have been measured using either the fair value of the
collateral method or the estimated cash flow method. The Company had impaired loans totaling $1.5
million at June 30, 2009.
The following table summarizes the Companys risk assets at June 30, 2010, December 31, 2009 and
June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/10
|
|
|
12/31/09
|
|
|
6/30/09
|
|
|
|
(Dollars in thousands)
|
|
Non-performing loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
1,311
|
|
|
$
|
1,211
|
|
|
$
|
442
|
|
Construction and land development
|
|
|
1,713
|
|
|
|
2,527
|
|
|
|
349
|
|
Commercial real estate
|
|
|
2,344
|
|
|
|
1,528
|
|
|
|
3,282
|
|
Commercial business
|
|
|
646
|
|
|
|
683
|
|
|
|
|
|
Equity
|
|
|
39
|
|
|
|
54
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
6,053
|
|
|
|
6,003
|
|
|
|
4,139
|
|
Other real estate owned
|
|
|
|
|
|
|
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
Total risk assets
|
|
$
|
6,053
|
|
|
$
|
6,003
|
|
|
$
|
4,259
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured loans accruing
|
|
$
|
5,779
|
|
|
$
|
2,634
|
|
|
$
|
1,540
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk assets as a percent of total loans and OREO
|
|
|
1.12
|
%
|
|
|
1.12
|
%
|
|
|
0.85
|
%
|
|
|
|
|
|
|
|
|
|
|
Risk assets as a percent of total assets
|
|
|
0.76
|
%
|
|
|
0.74
|
%
|
|
|
0.54
|
%
|
|
|
|
|
|
|
|
|
|
|
Deposits:
Deposits decreased slightly by $247,000 during the first six months of 2010 to $492.5 million at
June 30, 2010, from $492.8 million at December 31, 2009. Core deposits, consisting of NOW
accounts, demand deposit accounts, savings accounts and money market accounts, increased $21.4
million, or 8.5%, amounting to $273.8 million at June 30, 2010, compared to $252.4 million at
December 31, 2009. Savings accounts experienced an increase of $10.6 million from December 31,
2009, to $101.3 million at June 30, 2010, primarily due to higher-rate promotional accounts. NOW
and money market accounts increased $3.0 million and $4.4 million, respectively, from December 31,
2009, to $23.7 million and $111.1 million, respectively, at June 30, 2010. Demand deposit accounts
increased $3.3 million to $37.7 million at June 30, 2010. Term deposits, comprised of brokered
certificates of deposit and certificates of deposit, decreased $21.7 million, or 9.0%, totaling
$218.7 million at June 30, 2010, versus $240.4 million at December 31, 2009. Certificates of
deposit decreased $12.7 million to $198.3 million at June 30, 2010,
while brokered certificates of deposit decreased $8.9 million to $20.4 million at June 30, 2010.
The decrease in brokered deposits reflects a maturity of $8.9 million.
Due to the recent turmoil in the financial markets, the Bank has seen an inflow of core deposits as
evidenced by the 8.5% growth in core deposits during the first six months of 2010. However, the
Company continues to face strong competition for deposits which will impact the rate of growth of
deposits for the foreseeable future.
16
The following table reflects the components of the deposit portfolio at June 30, 2010 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
6/30/10
|
|
|
12/31/09
|
|
|
|
(In thousands)
|
|
NOW accounts
|
|
$
|
23,749
|
|
|
$
|
20,739
|
|
Demand deposit accounts
|
|
|
37,717
|
|
|
|
34,368
|
|
Savings accounts
|
|
|
101,284
|
|
|
|
90,642
|
|
Money market accounts
|
|
|
111,055
|
|
|
|
106,640
|
|
|
|
|
|
|
|
|
Core deposits
|
|
|
273,805
|
|
|
|
252,389
|
|
|
|
|
|
|
|
|
Brokered certificates of deposit
|
|
|
20,411
|
|
|
|
29,344
|
|
Certificates of deposit
|
|
|
198,331
|
|
|
|
211,061
|
|
|
|
|
|
|
|
|
Term deposits
|
|
|
218,742
|
|
|
|
240,405
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
492,547
|
|
|
$
|
492,794
|
|
|
|
|
|
|
|
|
Borrowed Funds:
Borrowed funds consist of long-term and short-term Federal Home Loan Bank of Boston (FHLBB)
advances, securities sold under agreements to repurchase and subordinated debt. Total borrowed
funds amounted to $236.1 million at June 30, 2010, compared to $259.1 million at December 31, 2009,
a decrease of $23.0 million or 8.9%. Short-term FHLBB borrowings increased $3.0 million from
December 31, 2009, while long-term FHLBB borrowed funds decreased $24.1 million due to maturing
advances totaling $28.0 million and $5.0 million in prepayments. Wholesale repurchase agreements
remained stable at $40.0 million at both June 30, 2010 and December 31, 2009. In October 2009, the
Bank entered into a subordinated debt agreement for $6.0 million on an unsecured basis with a final
maturity in October 2016. The subordinated agreement calls for a fixed interest rate of 8.5% and
equal annual principal payments of $1.2 million commencing on the third anniversary of the
agreement. The entire amount of the subordinated debt was included as part of the Banks Tier 2
capital for regulatory purposes at both June 30, 2010 and December 31, 2009. The Company reduced
its borrowing position with a view toward lessening the Companys exposure to rate fluctuations
that may occur in the coming year.
The following table reflects the components of borrowings at June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
6/30/10
|
|
|
12/31/09
|
|
|
|
(In thousands)
|
|
Long-term borrowed funds:
|
|
|
|
|
|
|
|
|
FHLBB long-term advances
|
|
$
|
181,889
|
|
|
$
|
205,971
|
|
Subordinated debt
|
|
|
6,000
|
|
|
|
6,000
|
|
Wholesale repurchase agreements
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
227,889
|
|
|
|
251,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowed funds:
|
|
|
|
|
|
|
|
|
FHLBB short-term borrowings
|
|
|
3,000
|
|
|
|
|
|
Customer repurchase agreements
|
|
|
5,209
|
|
|
|
7,111
|
|
|
|
|
|
|
|
|
|
|
|
8,209
|
|
|
|
7,111
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
$
|
236,098
|
|
|
$
|
259,082
|
|
|
|
|
|
|
|
|
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2010 and 2009
SUMMARY
The Company reported net income available to common shareholders of $1.6 million, or $0.35 per
diluted common share, as compared to $846,000, or $0.19 per diluted common share, for the three
months ended June 30, 2010 and 2009, respectively. The largest factors affecting net income were
an improvement of $877,000 in the net interest income and an increase in the gains on sales of
investments amounting to $447,000 in the second quarter of 2010 as
17
compared to the second quarter of 2009. Offsetting the impact of these gains were an increased
loan loss provision from the second quarter of 2009 of $240,000, FDIC deposit insurance premiums
totaling $200,000 and $369,000 for the second quarter of 2010 and 2009, respectively, as well as
the preferred stock dividend and accretion of $215,000 in the second quarter of 2009.
Net Interest Income:
Net interest income for the three months ended June 30, 2010 increased by $877,000, or 18.5%, to
$5.6 million from $4.7 million for the same period of 2009. The net interest rate spread increased
to 2.67% for the three months ended June 30, 2010 versus 2.17% for the same period of 2009.
Interest and dividend income for the three months ended June 30, 2010 decreased $108,000, or 1.1%,
primarily due to a decline in investment security rates and average balances compared to the same
period of 2009. Interest expense decreased $985,000 or 18.4% to $4.4 million from $5.4 million
during the three months ended June 30, 2010, versus 2009, respectively, primarily due to a decrease
in average deposit rates. Net interest margin increased to 2.90% versus 2.52% for the quarters
ended June 30, 2010 and 2009, respectively.
Interest and Dividend Income:
Interest and dividend income decreased $108,000, or 1.1%, during the second quarter of 2010 versus
the same quarter in 2009, primarily due to a decline in investment security rates and average
balances coupled with a decline in loan rates partially offset by a rise in average loan balances.
Interest income on loans for the three months ended June 30, 2010, increased $785,000, or 11.1%,
from the same period of 2009. Average loan interest rates decreased 2 basis points from 5.82% to
5.80% during the second quarter of 2010 as compared to the same quarter of 2009, resulting in a
decrease of $57,000 to interest income. Average loan balances rose $56.5 million, or 11.6%, from
$487.5 million in 2009 to $544.0 million in 2010, contributing $842,000 to interest income.
Interest income on investment securities for the three months ended June 30, 2010, decreased
$893,000 or 29.7%, from the same period in 2009. Average investment security interest rates
decreased 87 basis points during the second quarter of 2010, from 4.54% in 2009 to 3.67% in 2010,
resulting in a decrease of $456,000 to interest income. Average investment security balances
declined $34.3 million or 12.9%, from $265.9 million in 2009 to $231.6 million in 2010, resulting
in a decrease of $437,000 to interest income.
Interest Expense:
Interest expense decreased $985,000 during the second quarter of 2010, from $5.4 million in the
second quarter of 2009 to $4.4 million in the second quarter of 2010, primarily due to the decline
in average deposit rates coupled with a decrease in average borrowed funds balances.
Interest expense on deposits for the three months ended June 30, 2010, decreased $626,000, or
24.2%, from the same period in 2009. Average deposit interest rates decreased 86 basis points,
from 2.54% to 1.68% in the second quarter of 2010 as compared to the same quarter of 2009,
decreasing interest expense by $659,000. Average interest-bearing deposit balances increased by
$58.0 million or 14.2%, from $408.8 million in 2009 to $466.9 million in 2010, accompanied by a
change in the mix resulting in a preference for higher rate promotional savings accounts which
increased interest expense by $33,000.
Interest expense on borrowed funds for the three months ended June 30, 2010, decreased $359,000, or
12.9%, from the same period in 2009. Average interest rates on borrowed funds declined 16 basis
points from 4.24% in the second quarter of 2009 to 4.08% in the same quarter of 2010 reducing
interest expense by $98,000. Average borrowed funds balances decreased $25.3 million, or 9.6%,
from $262.6 million in 2009 to $237.3 million in 2010. This decrease resulted in a decline in
interest expense of $261,000 due primarily to maturities and prepayments of longer term borrowed
funds.
18
Provision for Loan Losses:
The provision for loan losses totaled $700,000 and $460,000 for the three months ended June 30,
2010 and 2009, respectively. The provisions in 2010 and 2009 reflect managements analysis of loan
growth and changes in risk during the second quarters of 2010 and 2009 with the highest levels of
growth coming from the commercial business and residential loan portfolios in 2010 and from the
commercial real estate and residential loan portfolios in 2009. The increase in the provision for
loan losses was due to the increase in loan charge-offs in the second quarter of 2010. See Risk
Assets for additional information. The balance of the allowance for loan losses grew to $7.5
million at June 30, 2010, from $7.2 million at December 31, 2009, and $6.4 million at June 30,
2009.
Non-Interest Income:
Non-interest income increased $464,000 or 59.9% for the three months ended June 30, 2010, compared
to the same period in 2009, to $1.2 million in 2010 compared to income of $774,000 in 2009. The
largest factor in the increase in 2010 was the increase in gains on sales of securities which
increased $447,000 to $679,000 from $232,000 in the second quarter of 2010 versus 2009,
respectively. Deposit account fees remained stable at $236,000 and $234,000 for the three months
ended June 30, 2010 and 2009, respectively. Loan servicing fees increased by $4,000 to $69,000
from $65,000 for the three months ended June 30, 2010 and 2009, respectively, due to the increase
in late and prepayment fees on loans and the absence of amortization of service loan fees. Income
on bank-owned life insurance decreased $9,000 to $115,000 for the three months ended June 30, 2010
from $124,000 for the same period in 2009 based on lower investment income earned by the underlying
insurance company. Other income increased $20,000 or 16.8% to $139,000 from $119,000 for the three
months ended June 30, 2010 and 2009, respectively, due to an increase in ATM and debit card fees.
Non-Interest Expense:
Non-interest expenses increased $141,000, or 4.1%, during the second quarter of 2010 to $3.6
million versus $3.5 million for the same period of 2009 primarily resulting from an increase in
salaries and benefits of $302,000 or 18.6% to $1.9 million and $1.6 million in the second quarter
of 2010 and 2009, respectively, due primarily to increases in bonuses, medical and dental insurance
coupled with a reduction in deferred salaries resulting from fewer loan closings in 2010, partially
offset by a decrease of $169,000 in FDIC deposit insurance premiums due to the absence of a special
assessment in 2010. Occupancy and equipment expense increased $121,000, or 35.0%, to $467,000 in
the second quarter of 2010 from $346,000 in the same period of 2009 due mainly to an increase in
depreciation due to the opening of the newly relocated Lawrence, Massachusetts branch coupled with
depreciation of obsolete equipment amounting to $60,000, equipment purchases of $35,000 and an
increase in rent expense of $26,000. Data processing expense increased $62,000 or 26.6% to
$295,000 from $233,000 in the second quarters of 2010 and 2009, respectively, due primarily to an
increase of $43,000 in computer software and license fees. Professional fees decreased $23,000, or
15.1%, to $129,000 in the second quarter of 2010 from $152,000 in the second quarter of 2009 due
primarily to a decrease in legal fees. Marketing expense decreased $21,000 or 17.9% to $96,000 and
$117,000 in 2010 and 2009, respectively, due primarily to a reduction in public relations expenses.
OREO expense totaled $10,000 in the three months ended June 30, 2010 compared to zero in the same
period of 2009. Other expenses decreased $141,000, or 23.0%, to $472,000 in the second quarter of
2010 from $613,000 in the same period of 2009 due primarily to a decrease in loan workout expenses
associated with one nonaccrual loan coupled with a decrease in expenses associated with a third
party debit card fraud incurred in 2009.
Income Taxes:
The Company reported an income tax expense of $946,000 for the three months ended June 30, 2010 for
an effective income tax rate of 37.2%. This compares to an income tax expense of $524,000 for the
three months ended June 30, 2009 for an effective income tax rate of 33.1%. The increase in the
effective tax rate in the second quarter of 2010 was due primarily to the reversal of a previously
recorded state tax valuation reserve on the Fannie Mae and Freddie Mac preferred stock holdings.
Subsidiaries within the consolidated group pay various state income tax rates, the mix of taxable
earnings within the group can change and, beginning in 2010, the taxable losses of one subsidiary
can be used to offset taxable income in another subsidiary in the consolidated group.
19
The following table presents the Companys average balance sheet, net interest income and average
interest rates for the three months ended June 30, 2010 and 2009. Average loans include
non-performing loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Three months ended
|
|
|
|
6/30/10
|
|
|
6/30/09
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
|
Interest
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
9,267
|
|
|
$
|
5
|
|
|
|
0.22
|
%
|
|
$
|
17,269
|
|
|
$
|
7
|
|
|
|
0.16
|
%
|
U. S. Treasury and government-
sponsored enterprise obligations
|
|
|
45,859
|
|
|
|
238
|
|
|
|
2.08
|
|
|
|
21,138
|
|
|
|
179
|
|
|
|
3.40
|
|
Other bonds and equity securities
|
|
|
15,203
|
|
|
|
49
|
|
|
|
1.29
|
|
|
|
19,357
|
|
|
|
125
|
|
|
|
2.59
|
|
Collateralized mortgage
obligations and mortgage-
backed securities
|
|
|
161,269
|
|
|
|
1,825
|
|
|
|
4.54
|
|
|
|
208,114
|
|
|
|
2,699
|
|
|
|
5.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
231,598
|
|
|
|
2,117
|
|
|
|
3.67
|
|
|
|
265,878
|
|
|
|
3,010
|
|
|
|
4.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
133,633
|
|
|
|
1,769
|
|
|
|
5.31
|
|
|
|
122,415
|
|
|
|
1,680
|
|
|
|
5.50
|
|
Home equity
|
|
|
28,049
|
|
|
|
268
|
|
|
|
3.83
|
|
|
|
24,558
|
|
|
|
248
|
|
|
|
4.05
|
|
Consumer
|
|
|
662
|
|
|
|
7
|
|
|
|
4.24
|
|
|
|
634
|
|
|
|
11
|
|
|
|
6.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retail loans
|
|
|
162,344
|
|
|
|
2,044
|
|
|
|
5.05
|
|
|
|
147,607
|
|
|
|
1,939
|
|
|
|
5.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land
|
|
|
57,966
|
|
|
|
828
|
|
|
|
5.73
|
|
|
|
75,308
|
|
|
|
1,014
|
|
|
|
5.40
|
|
Commercial real estate
|
|
|
283,763
|
|
|
|
4,456
|
|
|
|
6.30
|
|
|
|
234,589
|
|
|
|
3,752
|
|
|
|
6.42
|
|
Commercial
|
|
|
39,934
|
|
|
|
534
|
|
|
|
5.36
|
|
|
|
30,044
|
|
|
|
372
|
|
|
|
4.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate loans
|
|
|
381,663
|
|
|
|
5,818
|
|
|
|
6.11
|
|
|
|
339,941
|
|
|
|
5,138
|
|
|
|
6.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
544,007
|
|
|
|
7,862
|
|
|
|
5.80
|
|
|
|
487,548
|
|
|
|
7,077
|
|
|
|
5.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
775,605
|
|
|
|
9,979
|
|
|
|
5.16
|
%
|
|
|
753,426
|
|
|
|
10,087
|
|
|
|
5.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(7,432
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,232
|
)
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
36,397
|
|
|
|
|
|
|
|
|
|
|
|
30,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
804,570
|
|
|
|
|
|
|
|
|
|
|
$
|
778,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
23,967
|
|
|
$
|
23
|
|
|
|
0.38
|
%
|
|
$
|
18,590
|
|
|
$
|
9
|
|
|
|
0.19
|
%
|
Regular savings accounts
|
|
|
102,802
|
|
|
|
227
|
|
|
|
0.89
|
|
|
|
67,559
|
|
|
|
221
|
|
|
|
1.31
|
|
Money market accounts
|
|
|
118,029
|
|
|
|
323
|
|
|
|
1.10
|
|
|
|
76,803
|
|
|
|
281
|
|
|
|
1.47
|
|
Certificates of deposit
and escrow
|
|
|
222,068
|
|
|
|
1,386
|
|
|
|
2.50
|
|
|
|
245,892
|
|
|
|
2,074
|
|
|
|
3.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
466,866
|
|
|
|
1,959
|
|
|
|
1.68
|
|
|
|
408,844
|
|
|
|
2,585
|
|
|
|
2.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowed funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowed funds
|
|
|
231,584
|
|
|
|
2,412
|
|
|
|
4.18
|
|
|
|
256,405
|
|
|
|
2,770
|
|
|
|
4.33
|
|
Short-term borrowed funds
|
|
|
5,700
|
|
|
|
3
|
|
|
|
0.21
|
|
|
|
6,161
|
|
|
|
4
|
|
|
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
|
237,284
|
|
|
|
2,415
|
|
|
|
4.08
|
|
|
|
262,566
|
|
|
|
2,774
|
|
|
|
4.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
704,150
|
|
|
|
4,374
|
|
|
|
2.49
|
%
|
|
|
671,410
|
|
|
|
5,359
|
|
|
|
3.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
|
|
35,206
|
|
|
|
|
|
|
|
|
|
|
|
30,515
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
2,701
|
|
|
|
|
|
|
|
|
|
|
|
3,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
742,057
|
|
|
|
|
|
|
|
|
|
|
|
704,938
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
62,513
|
|
|
|
|
|
|
|
|
|
|
|
73,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
804,570
|
|
|
|
|
|
|
|
|
|
|
$
|
778,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread
|
|
|
|
|
|
|
|
|
|
|
2.67
|
%
|
|
|
|
|
|
|
|
|
|
|
2.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
5,605
|
|
|
|
|
|
|
|
|
|
|
$
|
4,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin on average
earning assets
|
|
|
|
|
|
|
|
|
|
|
2.90
|
%
|
|
|
|
|
|
|
|
|
|
|
2.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
SIX MONTHS ENDED JUNE 30, 2010 AND 2009
SUMMARY
The Company reported net income available to common shareholders of $3.1 million, or $0.70 per
diluted common share, as compared to a net income of $1.7 million, or $0.36 per diluted common
share, for the six months ended June 30, 2010 and 2009, respectively. The largest factors in
2010s year-to-date results were the increase in net interest income of $1.5 million, the increase
in the gains on sales of investments totaling $918,000, a decrease of $349,000 in FDIC deposit
insurance due to the special deposit assessment of $370,000 incurred in the first six months of
2009, partially offset by an increase in the provision for loan losses of $700,000 compared to the
six months ended 2009.
Net Interest Income:
Net interest income for the six months ended June 30, 2010 increased by $1.5 million, or 16.6%, to
$10.8 million from $9.3 million for the same period of 2009. The net interest rate spread
increased to 2.55% for the six months ended June 30, 2010 versus 2.15% for the same period of 2009.
Interest income for the six months ended June 30, 2009 decreased $60,000 primarily due to a
decline in investment security average volumes compared to the same period of 2009. Interest
expense decreased by $1.6 million, or 14.8%, to $9.2 million in 2010 from $10.8 million in 2009,
primarily due to a decrease in average deposit rates. Net interest margin increased to 2.79%
versus 2.50% for the six months ended June 30, 2010 and 2009, respectively.
Interest and Dividend Income:
Interest and dividend income decreased $60,000, or 0.3%, during the first six months of 2010 versus
the same period in 2009, primarily due to a decline in average investment security volumes and
interest rates.
Average loan interest rates decreased 2 basis points from 5.82% to 5.80% during the first six
months of 2010 as compared to the same period of 2009, resulting in a decrease of $161,000 to
interest income. Average loan balances rose $65.5 million, or 13.8%, from $476.2 million in 2009
to $541.7 million in 2010, contributing $2.0 million to interest income.
Average investment security interest rates decreased 93 basis points during the first six months of
2010, from 4.70% in 2009 to 3.77% in 2010, resulting in a decrease of $924,000 to interest income.
Average investment security balances declined $32.6 million, from $273.8 million in 2009 to $241.1
million in 2010, resulting in a decrease of $950,000 to interest income.
Interest Expense:
Interest expense decreased $1.6 million, or 14.8%, during the first six months of 2010, from $10.8
million in 2009 to $9.2 million in the same period of 2010, primarily due to the decline in deposit
interest rates coupled with a decrease in average borrowed funds volumes.
Average deposit interest rates decreased 83 basis points, from 2.64% to 1.81% in the first six
months of 2010 as compared to the same period of 2009, decreasing interest expense by $1.3 million.
Average interest-bearing deposit balances increased by $65.9 million or 16.4%, from $401.3 million
in 2009 to $467.2 million in 2010, accompanied by a change in the mix resulting in a preference for
higher high rate promotional savings accounts, which increased interest expense by $243,000.
Average borrowed funds interest rates decreased 5 basis points from 4.20% in the first six months
of 2009 to 4.15% in the same period of 2010, resulting in a decrease of $144,000 to interest
expense. Average borrowed funds balances declined $23.4 million, or 8.7%, from $268.4 million in
2009 to $245.0 million in 2010. This decrease resulted in a decline in interest expense of
$402,000 due primarily to a decrease in longer term borrowed funds.
21
Provision for Loan Losses:
The provision for loan losses totaled $1.4 million and $700,000 for the six months ended June 30,
2010 and 2009, respectively. The provisions in 2010 and 2009 reflect managements analysis of loan
growth and changes in risk during the first six months of 2010 and 2009 with the highest levels of
growth coming from the commercial real estate and residential loan portfolio. The increase in the
provision for loan losses was due to an increase in the level of loan charge-offs in the first six
months of 2010, including one commercial construction loan relationship with total charge-offs of
$750,000. The balance of the allowance for loan losses grew to $7.5 million at June 30, 2010, from
$6.4 million at June 30, 2009.
Non-Interest Income:
Non-interest income increased $824,000, or 54.8%, for the six months ended June 30, 2010 to $2.3
million in 2010 versus $1.5 million in 2009. The largest factor in 2010 was the increase in the
gains on sales of investments of $918,000 or 200.4% to $1.4 million in the six months ended June
30, 2010 compared to $458,000 in 2009. Deposit account fees remained stable at $460,000 compared
to $457,000 for the six months ended June 30, 2010 and 2009, respectively. Loan servicing fees
increased by $35,000, or 30.2%, to $151,000 from $116,000 for the six months ended June 30, 2010
and 2009, respectively, due to increased commercial loan prepayments received. Income on
bank-owned life insurance decreased $19,000 to $230,000 for the six months ended June 30, 2010 from
$249,000 for the same period in 2009. Other income increased to $36,000 or 16.0% to $261,000 from
$225,000 for the six months ended June 30, 2010 and 2009, respectively, primarily due to an
increase in ATM and debit card fees.
Non-Interest Expense:
Non-interest expenses remained stable at $7.1 million, during the first six months of 2010 versus
the same period of 2009. Salary and employee benefits increased $375,000, or 11.1%, to $3.7
million for the six months ended June 30, 2010, due to an increase in head count and accrued
bonuses, increased medical and dental insurance costs, and a reduction in deferred salaries due to
fewer loan closings in 2010. Occupancy and equipment expense increased $222,000, or 30.8%, to
$942,000 in the first six months of 2010 from $720,000 in the same period of 2009 due to an
increase in depreciation resulting from the opening of the relocated branch in Lawrence,
Massachusetts, coupled with depreciation on obsolete equipment, an increase in rent expense,
equipment purchases and repairs and maintenance. Data processing expense increased $62,000 or
13.1% to $535,000 in the first six months of 2010, primarily due to an increase in software license
fees. Professional fees decreased $96,000, or 28.5%, to $241,000 in the first six months of 2010
from $337,000 in the first six months of 2009 due primarily to a decrease in legal fees. Marketing
expenses decreased $18,000, or 6.9%, to $241,000 in the first six months of 2010 from $259,000 for
the comparable period of 2009 primarily due to decreased marketing campaigns in 2010 versus 2009
which included the opening of the Derry, New Hampshire branch in 2009. OREO expense totaled
$15,000 in the six months ended June 30, 2010 compared to $2,000 in 2009. Other expenses decreased
$210,000, or 18.1%, to $948,000 in the first six months of 2010 from $1.2 million in the same
period of 2009 due primarily to a decrease in loan workout expenses associated with one nonaccrual
loan and a decrease in expenses associated with a third party debit card fraud incurred in 2009.
Income Taxes:
The Company reported an income tax expense of $1.5 million for the six months ended June 30, 2010
for an effective income tax rate of 33.0%. This compares to an income tax expense of $1.0 million
for the six months ended June 30, 2009 for an effective income tax rate of 33.1%. The modest
decrease in the effective tax rate in the first six months of 2010 resulted primarily due to the
reversal of a previously recorded state tax valuation reserve on the Fannie Mae and Freddie Mac
preferred stock holdings. Notwithstanding the recognition of this tax benefit, the effective tax
rate would have been 37.0%.
22
The following table presents the Companys average balance sheet, net interest income and average
interest rates for the six months ended June 30, 2010 and 2009. Average loans include
non-performing loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
Six months ended
|
|
|
|
6/30/10
|
|
|
6/30/09
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
|
Interest
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
11,387
|
|
|
$
|
14
|
|
|
|
0.25
|
%
|
|
$
|
13,017
|
|
|
$
|
11
|
|
|
|
0.17
|
%
|
U. S. Treasury and government-
sponsored enterprise obligations
|
|
|
42,808
|
|
|
|
456
|
|
|
|
2.15
|
|
|
|
21,381
|
|
|
|
371
|
|
|
|
3.50
|
|
Corporate and other
investment securities
|
|
|
16,147
|
|
|
|
127
|
|
|
|
1.59
|
|
|
|
19,697
|
|
|
|
253
|
|
|
|
2.59
|
|
Collateralized mortgage
obligations and mortgage-
backed securities
|
|
|
170,794
|
|
|
|
3,907
|
|
|
|
4.61
|
|
|
|
219,687
|
|
|
|
5,743
|
|
|
|
5.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
241,136
|
|
|
|
4,504
|
|
|
|
3.77
|
|
|
|
273,782
|
|
|
|
6,378
|
|
|
|
4.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
133,297
|
|
|
|
3,539
|
|
|
|
5.35
|
|
|
|
119,304
|
|
|
|
3,294
|
|
|
|
5.57
|
|
Home equity
|
|
|
27,653
|
|
|
|
528
|
|
|
|
3.85
|
|
|
|
24,179
|
|
|
|
497
|
|
|
|
4.15
|
|
Consumer
|
|
|
667
|
|
|
|
18
|
|
|
|
5.44
|
|
|
|
706
|
|
|
|
24
|
|
|
|
6.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retail loans
|
|
|
161,617
|
|
|
|
4,085
|
|
|
|
5.10
|
|
|
|
144,189
|
|
|
|
3,815
|
|
|
|
5.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land
|
|
|
60,511
|
|
|
|
1,668
|
|
|
|
5.56
|
|
|
|
74,966
|
|
|
|
1,983
|
|
|
|
5.33
|
|
Commercial real estate
|
|
|
283,001
|
|
|
|
8,875
|
|
|
|
6.32
|
|
|
|
226,052
|
|
|
|
7,214
|
|
|
|
6.44
|
|
Commercial
|
|
|
36,558
|
|
|
|
940
|
|
|
|
5.19
|
|
|
|
30,976
|
|
|
|
742
|
|
|
|
4.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate loans
|
|
|
380,070
|
|
|
|
11,483
|
|
|
|
6.09
|
|
|
|
331,994
|
|
|
|
9,939
|
|
|
|
6.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
541,687
|
|
|
|
15,568
|
|
|
|
5.80
|
|
|
|
476,183
|
|
|
|
13,754
|
|
|
|
5.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
782,823
|
|
|
|
20,072
|
|
|
|
5.17
|
%
|
|
|
749,965
|
|
|
|
20,132
|
|
|
|
5.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(7,409
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,100
|
)
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
36,839
|
|
|
|
|
|
|
|
|
|
|
|
30,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
812,253
|
|
|
|
|
|
|
|
|
|
|
$
|
774,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and super NOW accounts
|
|
$
|
22,599
|
|
|
$
|
42
|
|
|
|
0.37
|
%
|
|
$
|
18,388
|
|
|
$
|
18
|
|
|
|
0.20
|
%
|
Regular savings accounts
|
|
|
98,926
|
|
|
|
474
|
|
|
|
0.97
|
|
|
|
63,644
|
|
|
|
441
|
|
|
|
1.40
|
|
Money market accounts
|
|
|
116,889
|
|
|
|
663
|
|
|
|
1.15
|
|
|
|
77,276
|
|
|
|
635
|
|
|
|
1.66
|
|
Certificates of deposit
and escrow
|
|
|
228,786
|
|
|
|
3,012
|
|
|
|
2.65
|
|
|
|
242,013
|
|
|
|
4,151
|
|
|
|
3.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
467,200
|
|
|
|
4,191
|
|
|
|
1.81
|
|
|
|
401,321
|
|
|
|
5,245
|
|
|
|
2.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowed funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowed funds
|
|
|
239,410
|
|
|
|
5,034
|
|
|
|
4.24
|
|
|
|
257,697
|
|
|
|
5,544
|
|
|
|
4.34
|
|
Short-term borrowed funds
|
|
|
5,622
|
|
|
|
7
|
|
|
|
0.25
|
|
|
|
10,717
|
|
|
|
43
|
|
|
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
|
245,032
|
|
|
|
5,041
|
|
|
|
4.15
|
|
|
|
268,414
|
|
|
|
5,587
|
|
|
|
4.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
liabilities
|
|
|
712,232
|
|
|
|
9,232
|
|
|
|
2.62
|
%
|
|
|
669,735
|
|
|
|
10,832
|
|
|
|
3.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
|
|
35,198
|
|
|
|
|
|
|
|
|
|
|
|
29,397
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
2,820
|
|
|
|
|
|
|
|
|
|
|
|
2,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
750,250
|
|
|
|
|
|
|
|
|
|
|
|
702,107
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
62,003
|
|
|
|
|
|
|
|
|
|
|
|
72,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
812,253
|
|
|
|
|
|
|
|
|
|
|
$
|
774,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread
|
|
|
|
|
|
|
|
|
|
|
2.55
|
%
|
|
|
|
|
|
|
|
|
|
|
2.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
10,840
|
|
|
|
|
|
|
|
|
|
|
$
|
9,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin on
average earning assets
|
|
|
|
|
|
|
|
|
|
|
2.79
|
%
|
|
|
|
|
|
|
|
|
|
|
2.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
LIQUIDITY AND CAPITAL RESOURCES:
The Companys primary source of funds is cash dividends from its wholly-owned subsidiary, River
Bank. The Bank paid $750,000 in dividends to the Company in the first six months of 2010 compared
to none in the same period of 2009.
The Banks primary sources of funds include collections of principal payments and repayments on
outstanding loans, investment security maturities and amortization, increases in deposits, advances
from the FHLBB and securities sold under agreements to repurchase.
Based on its monitoring of deposit trends and its current pricing strategy for deposits, management
believes the Company will retain a large portion of its existing deposit base. Continued deposit
growth during the remainder of 2010 will depend on several factors, including the interest rate
environment and competitor pricing. The Company also considers the use of brokered certificates of
deposit as an additional source of deposits and evaluates them in conjunction with its own retail
certificates of deposit.
The Bank has a collateralized line of credit of $3.0 million with the FHLBB. At June 30, 2010, the
entire $3.0 million was available. In addition, the Bank established a collateralized line of
credit with the Federal Reserve Bank discount window for $8.5 million which was available in its
entirety at June 30, 2010.
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. The Banks borrowing capacity at the
FHLBB at June 30, 2010 was $245.6 million, of which $184.9 million had been borrowed.
At June 30, 2010, the Companys stockholders equity totaled $64.1 million, an increase of $3.6
million when compared to $60.5 million at December 31, 2009. The increase was primarily
attributable to net income of $3.1 million coupled with an increase in the net unrealized gain on
investment securities available for sale of $1.1 million, net of tax, partially offset by cash
dividends to common shareholders of $721,000.
Each of the Company and the Bank was well-capitalized for bank regulatory purposes at June 30,
2010.
The following table presents the Companys and the Banks capital ratios at June 30, 2010, December
31, 2009, and June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Threshold
|
|
|
|
|
|
|
|
|
|
|
|
|
for Well Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
|
06/30/10
|
|
|
12/31/09
|
|
|
06/30/09
|
|
LSB Corporation Tier 1 risk-based
|
|
|
6.0
|
%
|
|
|
10.31
|
%
|
|
|
9.74
|
%
|
|
|
12.72
|
%
|
River Bank Tier 1 leverage ratio
|
|
|
5.0
|
%
|
|
|
7.25
|
%
|
|
|
6.85
|
%
|
|
|
8.14
|
%
|
River Bank Tier 1 risk-based
|
|
|
6.0
|
%
|
|
|
10.14
|
%
|
|
|
9.57
|
%
|
|
|
11.55
|
%
|
River Bank total risk-based
|
|
|
10.0
|
%
|
|
|
12.44
|
%
|
|
|
11.84
|
%
|
|
|
12.73
|
%
|
The increase in the Companys and the Banks regulatory capital ratios was primarily attributable
to the decrease in total assets as well as the increase in total stockholders equity since
December 31, 2009.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Management believes there have been no material changes to the discussion under the caption
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK of the Companys 2009 Annual Report on
Form 10-K which is incorporated by reference.
24
ITEM 4: CONTROLS AND PROCEDURES
The Companys chief executive officer and chief financial officer, after evaluating the
effectiveness of the Companys disclosure controls and procedures (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
quarterly report (the Evaluation Date), have concluded that as of the Evaluation Date the
Companys disclosure controls and procedures were effective and designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms.
During the period covered by this quarterly report, there were no changes in the Companys internal
controls that have materially affected, or are reasonably likely to materially affect, the
Companys internal controls over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings incidental to its business. During the three
months ended June 30, 2010, no new legal proceeding was filed or terminated and no material
development in any pending legal proceeding occurred that the Company expects will have a material
adverse effect on its financial condition or operating results.
On July 27, 2010, George Assad, Jr., an alleged stockholder of the Company, filed a putative class
action allegedly on behalf of all Company stockholders in the Massachusetts Superior Court, Essex
County, against the Company, River Bank, the Companys board of Directors, Peoples United
Financial, Inc. (Peoples United), Peoples United Bank, a wholly-owned subsidiary of Peoples
United, and Bridgeport Merger Corporation, a wholly-owned subsidiary of Peoples United. The case
is captioned George Assad, Jr. v. LSB Corporation et al., Civ. Act. No. 2010-1616. The complaint
generally alleges that the Companys board of directors breached its fiduciary duties by approving
the agreement and plan of merger, dated as of July 15, 2010, by and among the Company, River Bank,
Peoples United, Peoples United Bank and Bridgeport Merger Corporation, because, plaintiff
alleges, the proposed merger would deny Company stockholders the right to share proportionately in
the value of the Companys ongoing business and future growth, the merger consideration of $21.00
per share is inadequate, the merger agreements termination fee and no solicitation provisions
discourage bids from other sources and the transaction unfairly benefits the Companys board of
directors and chief executive officer to the disadvantage of its stockholders. The complaint also
alleges that Peoples United Bank and Bridgeport Merger Corporation aided and abetted our boards
breach of fiduciary duties. The complaint seeks an order preliminarily and permanently enjoining
the defendants from consummating, or closing the merger; in the event that the merger is
consummated, an order rescinding it and setting it aside or awarding rescissory damages; an
accounting; and attorneys fees and costs. The Company believes that the allegations in the
complaint are without merit and intends to vigorously defend this action.
ITEM 1A. RISK FACTORS
Other than the risk factors discussed below, management believes that there have been no material
changes in the Companys risk factors as reported in the Annual Report on Form 10-K for the year
ended December 31, 2009.
Proposed Merger with Peoples United Financial, Inc.
On July 15, 2010, the Company entered into an Agreement and Plan of Merger with Peoples United
Financial, Inc. to acquire the Company in an all-cash transaction. Completion of the merger is
subject to various customary closing conditions including, but not limited to, certain regulatory
approvals and the affirmative vote of the holders of not less than two-thirds of the shares of the
Companys common stock outstanding and entitled to vote. The Company currently expects that the
merger will be completed in the fourth quarter of 2010. It is possible, however, that factors
outside of the Companys control could require the parties to complete the merger at a later time,
or not to
25
complete the merger at all. Delay or failure to consummate the merger could have a negative impact
on the price of the Companys common stock.
Financial Regulatory Reform Legislation
On July 21, 2010, the President signed the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 (the Act) into law. The Act comprehensively reforms the regulation of financial
institutions, products and services. Among other things, the Act provides for new capital
standards that eliminate the treatment of trust preferred securities as Tier 1 capital. Existing
trust preferred securities are grandfathered for banking entities with less than $15 billion of
assets, such as the Company. The Act permanently raises deposit insurance levels to $250,000,
retroactive to January 1, 2008, and extends for two years the Transaction Account Guarantee
Program, which will become mandatory for all insured depository institutions. Pursuant to
modifications under the Act, deposit insurance assessments will be calculated based on an insured
depository institutions assets rather than its insured deposits and the minimum reserve ratio will
be raised to 1.35%. In addition, the Act authorizes the FRB to regulate interchange fees for debit
card transactions and establishes new minimum mortgage underwriting standards for residential
mortgages. The Act also establishes the Bureau of Consumer Financial Protection (CFPB) as an
independent bureau of the FRB. The CFPB has the exclusive authority to prescribe rules governing
the provision of consumer financial products and services.
The Act grants the SEC express authority to adopt rules granting proxy access for shareholder
nominees, and grants shareholders a non-binding vote on executive compensation and golden
parachute payments. Pursuant to modifications of the proxy rules under the Act, the Company will
be required to disclose the relationship between executive pay and financial performance, the ratio
of the median pay of all employees to the pay of the chief executive officer, and employee and
director hedging activities. The Act also requires that stock exchanges amend their listing rules
(i) to require, among other things, that each listed companys compensation committee be granted
the authority and funding to retain independent advisors and (ii) to prohibit the listing of any
security of an issuer that does not adopt policies governing the claw back of excess executive
compensation based on inaccurate financial statements.
It is difficult to predict at this time what specific impact the Act and the yet to be written
implementing rules and regulations will have on community banks. However, it is expected that at a
minimum these emerging regulations will increase the Companys operating and compliance costs.
ITEM 6. EXHIBITS
|
|
|
Number
|
|
Description
|
2.1
|
|
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)
|
|
|
|
2.2
|
|
Agreement and Plan of Merger, dated as of July 15, 2010, by and among LSB Corporation, River
Bank, Peoples United Financial, Inc., Peoples United Bank, and Bridgeport Merger Corporation
(filed as Exhibit 2.1 to the Companys Current Report on Form 8-K filed July 16, 2010, 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 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)
|
26
|
|
|
Number
|
|
Description
|
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)
|
|
|
|
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
|
|
Amendment to Renewed Rights Agreement, dated as of July 15, 2010, by and between LSB
Corporation and Computershare Trust Company (filed as Exhibit 4.1 to the Companys Current
Report on Form 8-K filed July 16, 2010, and incorporated herein by reference).
|
|
|
|
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.
|
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
LSB CORPORATION
|
|
August 13, 2010
|
/s/ Gerald T. Mulligan
|
|
|
Gerald T. Mulligan
|
|
|
President and
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
August 13, 2010
|
/s/ Diane L. Walker
|
|
|
Diane L. Walker
|
|
|
Executive Vice President, Treasurer and
Chief Financial Officer
|
|
28
LSB CORPORATION AND SUBSIDIARY
Quarterly Report on Form 10-Q for the six months ended June 30, 2010
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
31.1
|
|
Certification of Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
30
|
|
|
|
|
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
31
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
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
|
|
|
33
|
|
29
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