-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JLqFV3mDuWaT3Q4t7aEHee/hbQK/a1SYqyNwqlCxhP7VG/s9NqbHTxNQnoTPnhhZ hn+yUsZLIptD3mgiPD59gQ== 0000950135-02-001771.txt : 20020415 0000950135-02-001771.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950135-02-001771 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LSB CORP CENTRAL INDEX KEY: 0001143848 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 043557612 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-32955 FILM NUMBER: 02593513 BUSINESS ADDRESS: STREET 1: C/O LSB CORP. STREET 2: 30 MASSACHUSETTS AVE. CITY: NORTH ANDOVER STATE: MA ZIP: 01845 BUSINESS PHONE: 9789757500 10-K 1 b42246lse10-k.txt FORM 10-K DATED 12/31/01 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 000-32955 LSB CORPORATION (Exact name of registrant as specified in its charter) Massachusetts 04-3557612 - ----------------------------------------------------------------------- ---------------------------------------------------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number) 30 Massachusetts Avenue, North Andover, MA 01845 - ----------------------------------------------------------------------- ---------------------------------------------------- (Address of principal executive offices) (Zip Code)
(978) 725-7500 (Registrant's telephone number, including area code) ------------------------- Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share -------------------------------------- (Title of Class) Preferred Stock Purchased Rights -------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ] State the aggregate market value of the voting stock held by non-affiliates* of the registrant based on the closing sale price of $12.75 per share as of March 21, 2002 Approximately $54,565,461 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
Class Outstanding as of March 21, 2002 - ----- -------------------------------- Common Stock, par value $.10 per share 4,382,243 shares
Documents Incorporated by Reference. Portions of the LSB Corporation (the "Company") Annual Report to Stockholders for the fiscal year ended December 31, 2001 (the "Annual Report"), attached hereto as Exhibit (13) and the Company's Proxy Statement for the 2002 Annual Meeting (the "Proxy Statement"), attached hereto as Exhibit (20), are incorporated by reference into Parts I, II, and III of this Form 10-K. An index to the exhibits attached to this Form 10-K can be found on page 9 of this Form 10-K. * For purposes of this calculation only, the common stock of LSB Corporation held by directors and executive officers of LSB Corporation has been treated as owned by affiliates. PART I Item 1. Business The response is incorporated herein by reference from the discussion respectively under the captions entitled "FINANCIAL HIGHLIGHTS" on page 4, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" on pages 5 through 15 and Financial Statements and Notes to Consolidated Financial Statements on pages 18 through 36 of the Annual Report. The following table is to supplement for information not contained in the Annual Report. Short term borrowings include securities sold under agreements to repurchase, Federal Home Loan Bank (FHLB) advances and Federal Reserve Bank (FRB) borrowings for which the original maturity is less than 3 months. At December 31, 2001 repurchase agreements were to corporate customers only. Short-term borrowings are summarized as follows:
2001 2000 1999 ------------------------ ----------------------- ----------------------- Repurchase FHLB/FRB Repurchase FHLB/FRB Repurchase FHLB Agreements Advances Agreements Advances Agreements Advances - ---------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Outstanding at December 31 $ 4,220 $ - $ - $ - $ - $32,500 Weighted average rate at December 31 0.31% - - - - 5.00% Average balance outstanding during the year 2,468 21 24,539 24,364 19,899 22,152 Weighted average rate during the year 2.35% 4.42% 6.29% 6.14% 5.13% 5.27% Maximum outstanding at any month end $ 5,836 $ - $ 42,544 $ 71,000 $ 37,639 54,000 =================================================================================================================
Item 2 - Properties Rent expense for 2001 totaled $144,000. The following table sets forth the locations of the offices of the Lawrence Savings Bank (the "Bank"), the wholly owned bank subsidiary of the Company, as well as certain information relating to these offices as of December 31, 2001
Lease -------------------- Year Current Acquired Square Owned/ Term Renewal Or Leased Feet Leased Expires Options - ---------------------------------------------------------------------------------------------------------------- CORPORATE OFFICES North Andover 1992 45,315 Owned -- -- 30 Massachusetts Ave. No. Andover, MA 01845 BRANCH OFFICES Essex Street 1998 3,432 Leased 2003 One (5) yr. 300 Essex Street Renewal Option Lawrence, MA 01840 Jackson Street 1998 2,369 Leased 2003 One (5) yr. 20 Jackson Street Renewal Option Methuen, MA 01844 West Methuen 1979 5,234 Owned -- -- 148 Lowell Street Methuen, MA 01844 Andover 1995 2,449 Leased 2010 Two (5) yr. 342 North Main Street Options Andover, MA 01810
2 Item 3. Legal Proceedings The Bank is involved in various legal proceedings incidental to its business. After review with legal counsel, management does not believe resolution of such litigation will have a material adverse effect on the financial condition and operating results of the Bank. In one litigation matter, the Bank was awarded a $4.2 million judgment in 1997. The Bank expects to collect this judgment, at least in substantial part, which would have a material favorable impact on the Bank's financial statements. Post judgment interest accrues from the date of this judgment and approximates $1.9 million at December 31, 2001. However, collectibility of post judgment interest in addition to the $4.2 million award has not yet been determined. In another litigation matter, the Bank was awarded $1.1 million by a jury verdict, during the fourth quarter 1999, in a legal case where the Bank sought to recover damages from loans previously charged off. In 2000, the court entered final judgment for approximately $1.8 million, which includes post judgment accrued interest. This award has been appealed by defendants and collectibility of this award is subject to this appeal and other contingencies. It is management's opinion that the timing and final amounts to be collected cannot be determined at this time. Accordingly, no recognition of these judgments has been recorded in the financial statements. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for the Registrant's Common Stock Equity and Related Stockholder Matters The response is incorporated herein by reference from the discussion under the caption "STOCKHOLDER INFORMATION" on page 37, the discussion under the subcaption "Capital Adequacy" of the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" on page 15 of the Annual Report, and from the table titled "Financial Highlights" on page 4 of the Annual Report. Item 6. Selected Financial Data The response is incorporated herein by reference from the table titled "FINANCIAL HIGHLIGHTS" on page 4 of the Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The response is incorporated herein by reference from the discussion under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" on pages 5 through 15 of the Annual Report. Item 7A. Quantitative and Qualitative Disclosures about Market Risk The response is incorporated herein by reference from the discussion under the subcaption "Interest Rate Sensitivity" of the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" on pages 13 and 15 of the Annual Report. 3 Item 8. Financial Statements and Supplementary Data The response is incorporated herein by reference from the LSB Corporation and Subsidiary Consolidated Financial Statements and Notes thereto on pages 18 through 36 of the Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None. PART III Item 10. Directors and Executive Officers of the Registrant The response is incorporated herein by reference from the discussion under the caption "INFORMATION REGARDING DIRECTORS" on pages 5 through 6, the discussion under the caption "EXECUTIVE OFFICERS" on page 9 and the discussion under the caption "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" on page 19 of the Proxy Statement. Item 11. Executive Compensation The response is incorporated herein by reference from the section entitled "EXECUTIVE COMPENSATION" on pages 10 through 15 of the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management The response is incorporated herein by reference from the discussion under the caption entitled "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" on pages 17 through 19 of the Proxy Statement. Item 13. Certain Relationships and Related Transactions The response is incorporated herein by reference from the discussion under the caption entitled "INDEBTEDNESS OF DIRECTORS AND MANAGEMENT AND CERTAIN TRANSACTIONS WITH MANAGEMENT AND OTHERS" on page 16 and 17 of the Proxy Statement. 4 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form F-3 or Form 8-K (a) (1) Financial Statements: The following LSB Corporation and Subsidiary Consolidated Financial Statements are incorporated herein by reference from the Annual Report, listed below and attached as Exhibit (13).
Page number(s) in Annual Report ------------------------ Report of Management Responsibility 16 Independent Auditors' Report 17 Consolidated Balance Sheets as of 18 December 31, 2001 and 2000 Consolidated Statements of Operations 19 for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Changes 20 in Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows 21 for the years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements 22-36
(a) (2) Financial Statement Schedules: None. (b) Reports on Form 8-K: There were no reports filed on Form 8-K during the last quarter of the period covered by this Form 10-K. 5 (c) List of Exhibits: Exhibits to the Form 10-K have been included (unless otherwise noted) only with the copies of the Form 10-K filed with the SEC. Upon request to Investors Relations, LSB Corporation, 30 Massachusetts Avenue, North Andover, MA 01845, copies of the individual exhibits will be furnished upon payment of a reasonable reproduction fee. Exhibits: (2) Plan of Reorganization * (3) (i) Articles of incorporation * (3) (ii) Corporate By-Laws, as amended * (3) (iii) Certificate of vote of directors establishing a series of a class of stock * (4.1) Specimen Certificate of shares of Common Stock of the Company * (4.2) Rights Agreement dated as of December 12, 1996 * (10.1) Employment Agreement by and between the Bank and Paul A. Miller dated April 21, 1989 * (10.2) Amendment dated December 23 1992 to Employment Agreement dated April 21, 1989 * (10.3) Amendment dated May 25, 2000 to Employment Agreement dated April 21, 1989 * (10.4) Employment Agreement by and between the Bank and Robert P. Perrault dated May 9, 1986 * (10.5) Amendment dated December 23, 1992 to Employment Agreement dated May 9, 1986 * (10.6) Special Termination Agreement by and between the Bank and Robert P. Perrault dated May 9, 1986 * (10.7) Amendment dated May 25, 2000 to Special Termination Agreement dated May 9, 1986 * (10.8) Supplemental Retirement Agreement by and between the Bank and Paul A. Miller dated April 21, 1989 * (10.9) Supplemental Retirement Agreement by and between the Bank and Paul A. Miller dated April 21, 1996 * (10.10) Employment Agreement by and between the Bank and Jeffrey W. Leeds dated February 24, 2000 * (10.11) Employment Agreement by and between the Bank and Timothy L. Felter dated February 24, 2000 * (10.12) Employment Agreement by and between the Bank and John E. Sharland dated February 24, 2000 * (10.13) Employment Agreement by and between the Bank and Richard J. D'Ambrosio dated February 24, 2000 * (10.14) Lawrence Savings Bank 1986 Stock Option Plan * (10.15) Lawrence Savings Bank 1997 Stock Option Plan * (13) 2001 Annual Report to Shareholders of LSB Corporation (20) 2002 Proxy Statement (21) Subsidiary of LSB Corporation and subsidiaries of Lawrence Savings Bank (23.1) Consent of KPMG LLP - ------------------ * Incorporated herein by reference from LSB Corporation Form 8-K filed July 2, 2001. (d) Financial Statements Schedules: None. 6 Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the LSB Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LSB Corporation By: /s/ Paul A. Miller --------------------------------- Paul A. Miller, President and Chief Executive Officer DATE: March 28, 2002 7 Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the LSB Corporation and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Paul A. Miller President, Chief Executive Officer and March 28, 2002 - -------------------------------- Director Paul A. Miller (Principal Executive Officer) /s/ John E. Sharland Senior Vice President, Chief Financial Officer March 28, 2002 - -------------------------------- (Principal Financial and Principal Accounting John E. Sharland Officer) /s/ Thomas J. Burke Chairman of the Board March 28, 2002 - -------------------------------- Director Thomas J. Burke /s/ Eugene A. Beliveau Director March 28, 2002 - -------------------------------- Eugene A. Beliveau /s/ Kathleen I. Boshar Director March 28, 2002 - -------------------------------- Kathleen I. Boshar /s/ Malcolm W. Brawn Director March 28, 2002 - -------------------------------- Malcolm W. Brawn /s/ Byron R. Cleveland, Jr. Director March 28, 2002 - -------------------------------- Byron R. Cleveland, Jr. /s/ Neil H. Cullen Director March 28, 2002 - -------------------------------- Neil H. Cullen /s/ Robert F. Hatem Director March 28, 2002 - -------------------------------- Robert F. Hatem /s/ Richard Hart Harrington Director March 28, 2002 - -------------------------------- Richard Hart Harrington /s/ Marsha A. McDonough Director March 28, 2002 - -------------------------------- Marsha A. McDonough
8 Index to Exhibits attached to Form 10-K Item Description - ---------------- (13) 2001 Annual Report to Shareholders of LSB Corporation (20) 2002 Proxy Statement (21) Subsidiary of the LSB Corporation and Lawrence Savings Bank (23.1) Consent of KPMG LLP EX-13 3 b42246lsex13.txt 2001 ANNUAL REPORT TO SHAREHOLDERS OF LSB CORP. EXHIBIT 13 LSB CORPORATION [COVER GRAPHIC] 2001 ANNUAL REPORT LETTER TO THE STOCKHOLDERS LSB Corporation reported net income for the year ended December 31, 2001 of $3,357,000 or $0.74 diluted earnings per share as compared to $4,323,000 or $0.97 diluted earnings per share for the prior year ended 2000. The decrease in net income and earnings per share was attributable to a favorable impact to earnings during the year 2000, including income taxes of $854,000 for the year 2000 compared to $1,953,000 for the year 2001. The favorable outcome of an income tax matter led to a lower effective income tax rate for the Company during 2000. Although the difference in income taxes had the greatest impact on earnings for the year, several other items are worth noting. During the year 2001 net interest income increased, when the banking industry was operating in a declining interest rate environment, by $502,000 or 4% from the year 2000; earnings before income taxes increased in 2001 from 2000 even after the recognition of expenses associated with the establishment of the holding company, and the Company has increased dividends paid to shareholders in each of the past three years to $0.40 per share for the year 2001, a 54% increase from $0.26 per share in 2000, which in turn was a 73% increase from $0.15 per share in 1999. Net interest income increased to $13,181,000 in 2001 from $12,679,000 in 2000. The Company's net interest margin on average earning assets decreased slightly to 3.21% in 2001 from 3.22% in 2000. Lower interest expense on FHLB advances and other borrowed funds and higher average loan balances helped net interest income increase despite declining yields on interest earning assets during 2001. The Company increased the average loan portfolio by $26,940,000 to $230,618,000 in 2001 from $203,678,000 in 2000, a 13% increase. The Company continued to maintain a low level of risk assets during the past several years. Non-performing loans were $951,000 at December 31, 2001 and $10,000 at December 31, 2000. Risk assets as a percentage of total assets has remained below 1.00% for the last six years and is currently at 0.22% and 0.01% for December 31, 2001 and 2000, respectively. Provisions for loan losses were $175,000 and $250,000 for the years ended December 31, 2001 and 2000, respectively. The Company continues to look for quality assets as it grows the loan portfolio with construction, commercial real estate and commercial business loan types. The Company has not acquired property through foreclosure in the past four years. Non-interest income increased to $1,426,000 for the year 2001 compared to $1,124,000 during 2000. This increase was primarily due to gains on sales of mortgage loans of $249,000 and $47,000 in 2001 and 2002, respectively. Increases in other accounts such as deposit account fees also contributed to the increase in non-interest income. Non-interest expense totaled $9,122,000 and $8,376,000 for the years ended December 31, 2001 and 2000, respectively. A major part of this increase was attributed to the reorganization of Lawrence Savings Bank into a holding company form effective on July 1, 2001. Professional expenses, which includes legal expenses, increased to $671,000 in 2001, up from $496,000 in 2000. Shareholder expense also increased due to the reorganization. Total assets increased to $438,267,000 at December 31, 2001 from $413,090,000 at December 31, 2000. The increase in asset size during 2001 is primarily attributed to both loan growth of $14,352,000 and a $22,935,000 increase in the investment securities portfolio funded by Federal Funds and borrowed funds. Gross loans at December 31, 2001 were $236,397,000 up 6% from $222,045,000 at December 31, 2000. The allowance for loan losses was $4,070,000 at December 31, 2001 and $3,685,000 at December 31, 2000. 1 LETTER TO THE STOCKHOLDERS (CONTINUED) Total deposits at December 31, 2001 were $268,450,000 down, from $270,548,000 at December 31, 2000. The decrease in deposits was primarily due to a decrease in certificates of deposit accounts partially offset by increases in both savings and money market accounts. The Company exceeds all regulatory minimum capital ratio requirements as defined by the FDIC. The leverage ratio was 11.46% and 11.71% at December 31, 2001 and December 31, 2000, respectively. The financial highlights show that over the past five years the Company has continued to grow the loan portfolio. The Company's loan balances show the most growth in commercial real estate, construction and commercial business loan types. Management continues to concentrate on asset quality and improving net interest margin to enhance the Company's earnings. The Company's 24 hour e-branch at LawrenceSavings.com continues to provide a convenient and useful delivery system of banking products to our customers. Customers can do their banking anytime, anywhere, using our website. During the coming year, our Board of Directors, management and staff will continue to work to further improve the earnings of the Company and shareholder value. /s/ Paul A. Miller - ----------------------------------------- Paul A. Miller President and Chief Executive Officer LSB Corporation 2 FINANCIAL TABLE OF CONTENTS 4 FINANCIAL HIGHLIGHTS 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16 REPORT OF MANAGEMENT RESPONSIBILITY 17 INDEPENDENT AUDITORS' REPORT 18 CONSOLIDATED BALANCE SHEETS 19 CONSOLIDATED STATEMENTS OF OPERATIONS 20 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 21 CONSOLIDATED STATEMENTS OF CASH FLOWS 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 37 STOCKHOLDER INFORMATION
3 FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------------------------------------------- December 31, 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands, Except Per Share Data) BALANCE SHEET DATA: Total assets $ 438,267 $ 413,090 $ 404,172 $ 340,041 $ 360,845 Loans, gross 236,397 222,045 198,098 197,110 164,500 Allowance for loan losses 4,070 3,685 3,381 3,272 3,144 Other real estate owned 22 32 519 556 809 Federal funds sold 5,705 15,427 -- 5,629 -- U.S. Treasury, Government agency and Corporate obligations 160,337 125,542 151,358 87,006 153,421 Municipal obligations 2,062 60 113 1,265 -- Other securities 11,369 25,231 26,301 25,216 23,685 Deposits 268,450 270,548 246,040 253,501 254,462 Borrowed funds 111,099 86,161 104,167 34,214 63,396 Equity 54,092 52,313 48,408 46,713 37,610
Year Ended December 31, 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- OPERATING DATA: Interest income $ 28,792 $ 29,037 $ 26,097 $ 25,060 $ 25,416 Interest expense 15,611 16,358 13,183 13,257 14,288 --------- --------- --------- --------- --------- Net interest income 13,181 $ 12,679 12,914 11,803 11,128 Provision (credit) for loan losses 175 250 75 450 (300) Non-interest income 1,426 1,124 844 1,380 1,451 Non-interest expense 9,122 8,376 9,347 8,725 7,767 --------- --------- --------- --------- --------- Income before income taxes 5,310 5,177 4,336 4,008 5,112 Income tax expense (benefit) 1,953 854 1,582 (4,800) (3,000) --------- --------- --------- --------- --------- Net income $ 3,357 $ 4,323 $ 2,754 $ 8,808 $ 8,112 ==================================================================================================================== Basic earnings per share $ .77 $ .99 $ .63 $ 2.04 $ 1.90 Diluted earnings per share $ .74 $ .97 $ .61 $ 1.95 $ 1.82 ==================================================================================================================== OTHER DATA: Interest rate spread 2.64% 2.66% 3.05% 2.97% 2.77% Net interest margin on average earning assets 3.21 3.22 3.55 3.54 3.26 Return on average assets (net income / average assets) 0.79 1.05 0.72 2.52 2.31 Return on average equity (net income / average stockholders' equity) 6.35 8.72 5.77 21.09 25.64 Dividend payout ratio (dividends declared per share divided by net income per share) 51.95 26.26 23.81 -- -- Cash dividends declared and paid per common share $ 0.40 $ 0.26 $ 0.15 $ -- $ -- Average stockholders' equity to average assets ratio 12.39% 12.06% 12.47% 11.96% 9.00% - -------------------------------------------------------------------------------------------------------------------- Book value per share at year end $ 12.35 $ 11.99 $ 11.11 $ 10.78 $ 8.77 - --------------------------------------------------------------------------------------------------------------------
4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS AND FACTORS WHICH MAY AFFECT FUTURE RESULTS This Annual Report contains forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 as amended) that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of operations of LSB Corporation (the "Corporation" or the "Company"). Also, when verbs in the present tense such as "believes," "expects," "anticipates," "continues," "attempts" or similar expressions are used, forward-looking statements are being made. Stockholders should note that many factors, some of which are discussed elsewhere in this document and in the documents which we incorporate by reference, could affect the future financial results of the Corporation and could cause results to differ materially from those expressed in or incorporated by reference in this document. Those factors include fluctuations in interest rates, inflation, government regulations and economic conditions and competition in the geographic and business areas in which the Corporation conducts its operations. As a result of such risks and uncertainties, the Corporation's actual results may differ materially from such forward-looking statements. The Corporation does not undertake, and specifically disclaims any obligation to publicly release revisions to any such forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. SUMMARY The Corporation is a one bank-holding company principally conducting business through Lawrence Savings Bank (the "Bank"). The Corporation became the holding company for the Bank on July 1, 2001 pursuant to a plan of reorganization in which each share of Bank common stock then outstanding (and accompanying preferred stock purchase rights) was converted into and exchanged for one share of the Corporation's common stock (and accompanying preferred stock purchase rights). The Corporation's common stock is currently traded on the Nasdaq Stock Market under the symbol "LSBX". Prices of the common stock are reported in the Wall Street Journal as "LSB Corp". The Bank was established as a Massachusetts savings bank in 1868; the Bank converted from mutual to stock form on May 9, 1986. Prior to July 1, 2001, the Bank's common stock traded on the Nasdaq Stock Market under the symbol "LSBX". Prices of the Bank's common stock were reported in the Wall Street Journal as "LawrenceSvg". The Corporation is subject to regulation and supervision by the Board of Governors of the Federal Reserve Bank ("FRB"), and Massachusetts Division of Banks. The Bank is subject to supervision and regulation of, and periodic examination by, the Federal Deposit Insurance Corporation ("FDIC") and the Massachusetts Division of Banks. The Bank has four wholly-owned subsidiaries at December 31, 2001. Shawsheen Security Corporation and Shawsheen Security Corporation II engage exclusively in buying, selling, dealing in and holding securities for their own accounts. Pemberton Corporation and Spruce Wood Realty Trust, respectively, hold foreclosed real estate and real estate used in the ordinary course of the Bank's business. The Bank offers various financial products to the general public. These products include loans for residential real estate, commercial real estate, construction, consumer and commercial businesses. The Bank offers various deposit accounts including savings, checking, money market, certificates of deposit and individual retirement accounts. The Bank invests a portion of its funds in federal funds and investment securities. The principal source of funds for the Corporation is dividends from its Bank subsidiary. The principal sources of funds for the Bank's lending and investment activities are deposits, loan payments and prepayments, investment securities payments and maturities, advances from the Federal Home Loan Bank, federal funds purchased and securities sold under agreements to repurchase. MARKET AREA The Bank's primary market area is the Merrimack Valley of Massachusetts and southern New Hampshire. The Bank has five banking offices in the communities of Andover, Lawrence, Methuen (2), and North Andover, Massachusetts. LENDING ACTIVITIES The Bank's loan portfolio consists of commercial real estate, commercial business, construction, residential mortgage, home equity and consumer loans. The Bank has been aggressive in seeking loans from creditworthy customers while competition on both pricing and underwriting terms have been strong in the Bank's market area. Gross loans at December 31, 2001 were $236.4 million, up from $222.0 million at December 31, 2000. COMMERCIAL REAL ESTATE. The Bank originates loans secured by real estate other than 1-4 family residential properties. These loans are generally secured by various types of commercial real estate including income properties, commercial facilities (including retail, manufacturing, office and office condominiums) and small businesses. The interest rates on these loans are fixed or variable. The interest rates are based on a margin over the Treasury note rate or another index (such as the Prime Rate as published in the Wall Street Journal ) for a similar term. The margin is determined by the Bank based on the creditworthiness of the borrower, relationship profitability and competitive factors. COMMERCIAL BUSINESS. The Bank originates loans secured by business assets which are not real estate. These loans are based on the creditworthiness, security offered and future cash flows of the borrower. The Bank has "Preferred Lender" status from the U.S. Small Business Administration ("SBA"). The interest rates on the loans are fixed or variable in nature. The rates are primarily based on a margin over the Prime Rate as published in the Wall Street Journal or the Base Rate determined by the Bank. The margin is determined based on the creditworthiness of the borrower, security offered and competitive factors. CONSTRUCTION. These loans are generally short-term in nature and are for land development, construction of residential homes built on speculation, construction of homes for homeowners with permanent financing, and for construction of commercial facilities (including retail, manufacturing and office space). These loans are generally priced to yield the Wall Street Journal Prime Rate plus a margin. Construction loans may involve additional risk due to uncertainty of estimated cost of completion of a project, or ultimate sale of the property to an end buyer. The Bank attempts to reduce these risks by lending to contractors with pre-arranged buyers or having financing commitments upon completion, or to businesses that are expanding and will occupy the completed project. RESIDENTIAL MORTGAGES. The Bank originates fixed and adjustable rate residential mortgage loans which are underwritten to be eligible for sale in the secondary market. These loans are secured primarily by owner occupied 1-4 family primary residential properties. Adjustable 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) rate mortgage loans are generally held by the Bank in the loan portfolio as a means to manage interest rate risk. Fixed rate mortgages are sold into the secondary market unless management believes they represent a good long-term asset based on various factors such as loan-to-value ratios, interest rates and management's expectations of a loan's duration. SECONDARY MORTGAGE MARKET. The Bank is an approved seller and servicer for the Federal Home Loan Mortgage Corporation ("FHLMC") and the Massachusetts Housing Finance Agency ("MHFA"). Sales of mortgage loans may be made at a premium or discount resulting in gains or losses on the transaction. Based on the structure of the sale, loans sold in the secondary market provide the Bank with service fee income over the life of the loan. HOME EQUITY. The Bank makes second mortgage and home equity loans. Home equity loans can be accessed by the borrower by an account established with the Bank. These loans carry interest rates that are either fixed or variable based on the Prime Rate published in the Wall Street Journal plus or minus a margin above or below this rate depending on the particular product selected by the borrower. CONSUMER. The Bank offers a variety of consumer loan products including overdraft lines of credit, collateral loans, and secured and unsecured personal loans. These loans are generally fixed rate in nature. The Bank adjusts these interest rates from time-to-time based on competitive factors in the marketplace. DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS. Deposits and borrowings are the primary source of funds for funding loans and purchasing investment securities. The mix of deposits and borrowings is dependent on many factors, such as loan demand, competition, the economy, interest rates, and capital resources. Deposits are obtained from the general public through the Bank's branch offices by additions to various deposit accounts, including checking, savings, money market, certificates of deposit and individual retirement accounts. The interest rates on these accounts generally are competitive with other local financial institutions. The Bank's core deposit products (savings, checking and money market accounts) allow customers more flexibility and access and generally earn lower interest rates than other types of accounts due to the Bank's operating costs to service these accounts. Certificates of deposit provide customers with higher interest rates, but less flexibility and access to deposits. Increasing and decreasing interest rates on certificates of deposit allows the Bank to adjust its sources of funds while providing a competitive interest rate. In addition to deposit accounts, other sources of funds include advances from the Federal Home Loan Bank of Boston ("FHLB"), federal funds purchased and securities sold under agreements to repurchase. The Bank is a member of the FHLB. As a member, the Bank is required to hold FHLB stock equal to at least 1% of residential mortgage loans or 5% of outstanding FHLB advances, whichever is higher. All FHLB advances are secured by a blanket lien on the Bank's qualifying collateral. These FHLB advances may be used to fund loans and investment securities or meet other cash needs of the Bank. The terms of FHLB advances can be short or long-term with interest rates based on U.S. Treasury obligations with similar maturities. COMPETITION. The Bank competes with local, regional and national financial service providers in its lending and deposit activities. The Bank competes in the local market against other local and branch offices of regional financial institutions such as banks, thrifts and credit unions. In addition, less regulated national companies such as mortgage companies, securities brokerage firms, insurance companies and mutual funds offer services competitive with those of the Bank. Bank mergers and recent legislation permitting interstate and cross-industry expansion may increase competition. The Bank competes on the basis of interest rates, deposit and loan terms, fees, office location, product and service arrays, customer convenience and technological advantages. Competition in the Bank's deposit taking and lending activities is affected by movements in interest rates, national and local market developments, economic trends and the Bank's ability to adjust to change. SUPERVISION AND REGULATION. The Corporation is subject to regulation and supervision by the FRB pursuant to the Bank Holding Company Act of 1956, as amended, and files with the FRB an annual report and such additional reports as the FRB may require. The Corporation is also subject to the jurisdiction of the Massachusetts Division of Banks. As a bank holding company, the Company's activities are limited to the business of banking and activities closely related or incidental to banking. The Corporation may not directly or indirectly acquire the ownership or control of more than five percent of any class of voting shares or substantially all of the assets of any company that is not engaged in activities closely related to banking and also generally must provide notice to or obtain approval of the FRB in connection with any such acquisition. The Bank is a state-chartered savings bank subject to the regulations and supervisory authority of, and periodic examinations by, both the FDIC and the Massachusetts Division of Banks. These examinations test the Bank's safety and soundness and compliance with various statutory and regulatory requirements. The Bank is subject to federal and state taxation authorities. The Bank is subject to certain reserve and reporting requirements as a non-member bank of the Federal Reserve System. Federal and state bank regulatory agencies have authority to issue cease and desist orders, assess civil money penalties, remove officers and directors, issue capital directives and impose prompt corrective action restrictions or requirements to address safety and soundness and compliance issues of the Bank. In addition, the Bank must obtain prior regulatory approvals to undertake certain banking transactions and initiatives, including establishment, relocation or termination of a banking office, and merger or acquisition transactions with other banks or non-banking entities. The supervision and regulation of the Bank are intended primarily for the protection of depositors and non-business borrowers. The results of examinations provide regulators with a means of measuring and assessing each institution and taking prompt corrective actions to address any safety and soundness or compliance issues. USA PATRIOT ACT. On October 26, 2001, President Bush signed into law the "Uniting and Strengthening America by providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001" (or USA Patriot Act). Title III of the USA Patriot Act, known as "The International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001" (the Act) is intended to make it more difficult for terrorists to launder money in the United States. In addition, the Act also makes it easier for law enforcement and regulatory officials to share information and identify illegal money laundering activity. Section 326 of the Act requires the Secretary of the Treasury to promulgate regulations effective no later than October 25, 2002 that would substantially increase the identification and verification requirements for customers of financial institutions. The regulations may require, at a minimum, financial institutions to develop procedures for verifying the identity of a person opening an account, maintaining records of such information, and, consulting lists of suspected 6 terrorists "to determine whether a person seeking to open an account appears on any such list." In addition, under Section 311 of the Act the Secretary of the Treasury may require, by regulation or by order, that financial institutions take certain "special measures" for all institutions, accounts or transactions that the Secretary deems to be a "primary money laundering concern." Most significant among these are requirements to maintain records and report information which identify the participants in a transaction involving a primary money laundering concern (also known as "know your customer"), and to maintain information relative to the beneficiary of such a transaction. Section 352 of the Act amends the Bank Secrecy Act to require all financial institutions to establish anti-money laundering programs. These must include, at a minimum: "(A) the development of internal policies, procedures, and controls; (B) the designation of a compliance officer; (C) an ongoing employee training program; and (D) an independent audit function to test programs." The Secretary of the Treasury may prescribe minimum standards for such programs effective April 24, 2002. Under Section 314 of the USA Patriot Act, the Secretary of the Treasury must promulgate regulations by February 23, 2002 to encourage cooperation among financial institutions, their regulators, and law enforcement officials. The purpose is to help provide financial institutions with information regarding suspected terrorist or money laundering activity. The regulations may require each financial institution to designate one or more individuals to receive such information and may establish procedures for the protection of such information. RESULTS OF OPERATIONS. The Company's net earnings amounted to $3.4 million during 2001, $4.3 million during 2000 and $2.8 million during 1999. The Company's earnings decreased by 22% or $966 thousand in 2001 impacted by an increase in income taxes coupled with a rise in non-interest expenses, offset by increases in net interest income, non-interest income and a reduction in the provision for loan losses. During 2000, net earnings increased by 57% or $1.6 million from 1999 due to several factors having a favorable impact on earnings including an increase in non-interest income and decreases in non-interest expense and provisions for income taxes. The Company's net interest income, which is the difference between interest earned on assets and interest paid on liabilities, totaled $13.2 million in 2001, $12.7 million in 2000 and $12.9 million in 1999. The increase in 2001 versus 2000 resulted from average earning assets growing faster than interest bearing liabilities. The slight decrease in net interest income in 2000 from 1999 is due to higher funding costs due to rising interest rates. The Company's net interest margin remained flat in 2001 and 2000 at 3.21% and 3.22%, respectively, versus an increase in 1999 to 3.55%. The decrease in 2001 resulted primarily from lower average rates earned on interest earning assets. The decrease in the net interest margin during 2000 was primarily due to higher average rates paid on interest bearing liabilities. The provision for loan losses was a charge of $175 thousand in 2001, $250 thousand in 2000 and $75 thousand in 1999. The provision for loan losses was made to maintain an appropriate allowance for loan losses. Non-interest income amounted to $1.4 million, $1.1 million and $894 thousand in 2001, 2000 and 1999, respectively. The increase in 2001 and 2000 was primarily due to gains on sales of mortgage loans of $249 thousand and $47 thousand, respectively, compared to losses on sales of mortgage loans of $205 thousand in 1999. Non-interest expense totaled $9.1 million in 2001, $8.4 million in 2000 and $9.3 million in 1999. Expenses attributable to the establishment of the holding company totaled $188 thousand in 2001 of which $107 thousand were professional fees. Professional expenses increased during 2001 to $671 thousand and decreased to $496 thousand in 2000 from $1.4 million in 1999. The Company recognized an income tax expense of $2.0 million in 2001, $854 thousand in 2000 and $1.6 million in 1999. The lower provision for taxes in 2000 as compared with 2001 resulted from a favorable outcome of an income tax matter that led to a lower effective income tax rate for the year 2000. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) AVERAGE BALANCES, NET INTEREST INCOME AND AVERAGE INTEREST RATES The table below presents the Company's average balance sheet, net interest income and average interest rates for the years ended December 31. Average real estate, commercial business, and consumer loans include non-performing loans.
2001 2000 -------------------------------------- -------------------------------------- AVERAGE Average AVERAGE INTEREST Average Interest BALANCE INTEREST RATE Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) ASSETS Loans: Residential $ 97,982 $ 7,123 7.27% $ 92,547 $ 6,875 7.43% Commercial 112,021 9,577 8.55 93,683 8,644 9.23 Commercial business 19,379 1,490 7.69 16,111 1,512 9.38 Consumer 1,236 105 8.50 1,337 108 8.08 ----------- ----------- ----------- ----------- Total loans 230,618 18,295 7.93 203,678 17,139 8.41 ----------- ----------- ----------- ----------- Investment securities: U.S. Treasury and Government Agency obligations 67,293 4,189 6.23 94,353 5,640 5.98 Other bonds and equity securities 76,789 4,237 5.52 61,421 4,039 6.58 Mortgage-backed securities 26,290 1,618 6.15 32,423 2,077 6.41 Short-term investments 10,236 453 4.43 2,334 142 6.08 ----------- ----------- ----------- ----------- Total investment securities 180,608 10,497 5.81 190,531 11,898 6.24 ----------- ----------- ----------- ----------- Total interest earning assets 411,226 28,792 7.00% 394,209 29,037 7.37% ----------- ----------- ----------- ----------- Allowance for loan losses (3,864) (3,491) Cash and due from banks 5,950 5,124 Other real estate owned 28 189 Other assets 13,432 15,338 ----------- ----------- Total assets $ 426,772 $ 411,369 =============================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Regular savings accounts $ 40,938 $ 720 1.76% $ 39,045 $ 770 1.97% NOW and Super NOW accounts 31,187 155 0.50 27,084 142 0.52 Money market accounts 54,266 1,664 3.07 48,199 1,935 4.01 Certificates of deposit 136,952 7,390 5.40 130,976 7,083 5.41 ----------- ----------- ----------- ----------- Total interest bearing deposits 263,343 9,929 3.77 245,304 9,930 4.05 Borrowed funds 95,089 5,682 5.98 101,913 6,428 6.31 ----------- ----------- ----------- ----------- Total interest bearing liabilities 358,432 15,611 4.36% 347,217 16,358 4.71% ----------- ----------- ----------- ----------- ----------- ----------- Non-interest bearing deposits 12,015 9,877 Other liabilities 3,469 4,672 ----------- ----------- Total liabilities 373,916 361,766 Stockholders' equity 52,856 49,603 ----------- ----------- Total liabilities and stockholders' equity $ 426,772 $ 411,369 =============================================================================================================================== Net interest rate spread 2.64% 2.66% =============================================================================================================================== Net interest income $ 13,181 $ 12,679 =============================================================================================================================== Net interest margin on average earning assets 3.21% 3.22% ===============================================================================================================================
1999 -------------------------------------- Average Average Interest Balance Interest Rate - -------------------------------------------------------------------------------------- (Dollars in Thousands) ASSETS Loans: Residential $ 98,777 $ 7,183 7.27% Commercial 84,592 7,597 8.98 Commercial business 11,995 1,071 8.93 Consumer 1,534 122 7.95 ----------- ----------- Total loans 196,898 15,973 8.11 ----------- ----------- Investment securities: U.S. Treasury and Government Agency obligations 82,972 4,997 6.02 Other bonds and equity securities 45,769 2,782 6.08 Mortgage-backed securities 36,021 2,249 6.24 Short-term investments 1,812 96 5.30 ----------- ----------- Total investment securities 166,574 10,124 6.08 ----------- ----------- Total interest earning assets 363,472 26,097 7.18% ----------- ----------- Allowance for loan losses (3,393) Cash and due from banks 4,923 Other real estate owned 537 Other assets 16,875 ----------- Total assets $ 382,414 ====================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Regular savings accounts $ 39,385 $ 772 1.96% NOW and Super NOW accounts 25,000 131 0.52 Money market accounts 43,838 1,424 3.25 Certificates of deposit 131,385 6,548 4.98 ----------- ----------- Total interest bearing deposits 239,608 8,875 3.70 Borrowed funds 79,379 4,308 5.43 ----------- ----------- Total interest bearing liabilities 318,987 13,183 4.13% ----------- ----------- ----------- Non-interest bearing deposits 10,719 Other liabilities 5,017 ----------- Total liabilities 334,723 Stockholders' equity 47,691 ----------- Total liabilities and stockholders' equity $ 382,414 ====================================================================================== Net interest rate spread 3.05% ====================================================================================== Net interest income $ 12,914 ====================================================================================== Net interest margin on average earning assets 3.55% ======================================================================================
8 RATE-VOLUME ANALYSIS The effect on net interest income of changes in interest rates and in the amounts of interest earning assets and interest bearing liabilities is shown in the following table. Information is provided on changes for the years indicated and is attributable to (i) changes in volume (change in average balance multiplied by prior year rate), (ii) changes in interest rate (change in rate multiplied by prior year average balance) and (iii) the combined effects of changes in interest rates and volume (change in rate multiplied by change in average balance).
2001 VS. 2000 -------------------------------------------- TOTAL RATE/ CHANGE VOLUME RATE VOLUME - ----------------------------------------------------------------------------------------------- (In Thousands) INTEREST INCOME: Loans: Residential $ 248 $ 404 $ (147) $ (9) Commercial 933 1,692 (635) (124) Commercial business (22) 307 (273) (56) Consumer (3) (8) 6 (1) ------- ------- ------- ------- Total loans 1,156 2,395 (1,049) (190) ------- ------- ------- ------- Investment securities: U.S. Treasury and Government Agency obligations (1,451) (1,618) 233 (66) Other bonds and equity securities 198 1,011 (650) (163) Mortgage-backed securities (459) (393) (82) 16 Short-term investments 311 481 (39) (131) ------- ------- ------- ------- Total investments (1,401) (519) (538) (344) ------- ------- ------- ------- Total interest income (245) 1,876 (1,587) (534) ------- ------- ------- ------- INTEREST EXPENSE: Deposits: Regular savings accounts (50) 37 (83) (4) NOW and Super NOW accounts 13 22 (7) (2) Money market accounts (271) 244 (457) (58) Certificates of deposit 307 323 (15) (1) ------- ------- ------- ------- Total interest bearing deposits (1) 626 (562) (65) Borrowed funds (746) (430) (338) 22 ------- ------- ------- ------- Total interest expense (747) 196 (900) (43) ------- ------- ------- ------- Net interest income $ 502 $ 1,680 $ (687) $ (491) ===============================================================================================
2000 vs. 1999 -------------------------------------------- Total Rate/ Change Volume Rate Volume - ----------------------------------------------------------------------------------------------- (In Thousands) INTEREST INCOME: Loans: Residential $ (308) $ (453) $ 155 $ (10) Commercial 1,047 816 208 23 Commercial business 441 368 55 18 Consumer (14) (16) 2 -- ------- ------- ------- ------- Total loans 1,166 715 420 31 ------- ------- ------- ------- Investment securities: U.S. Treasury and Government Agency obligations 643 685 (37) (5) Other bonds and equity securities 1,257 951 228 78 Mortgage-backed securities (172) (225) 58 (5) Short-term investments 46 28 14 4 ------- ------- ------- ------- Total investments 1,774 1,439 263 72 ------- ------- ------- ------- Total interest income 2,940 2,154 683 103 ------- ------- ------- ------- INTEREST EXPENSE: Deposits: Regular savings accounts (2) (7) 5 -- NOW and Super NOW accounts 11 11 -- -- Money market accounts 511 142 336 33 Certificates of deposit 535 (20) 557 (2) ------- ------- ------- ------- Total interest bearing deposits 1,055 126 898 31 Borrowed funds 2,120 1,223 699 198 ------- ------- ------- ------- Total interest expense 3,175 1,349 1,597 229 ------- ------- ------- ------- Net interest income $ (235) $ 805 $ (914) $ (126) ===============================================================================================
Net interest income [BAR CHART]
1997 1998 1999 2000 2001 $11.1M $11.8M $12.9M $12.7M $13.2M
NET INTEREST INCOME Net interest income is the difference between the interest income earned on earning assets and the interest expense paid on interest bearing liabilities. Interest income and interest expense are affected by changes in earning assets and interest bearing liabilities balances in addition to changes in interest rates. The Company's net interest income was $13.2 million in 2001, $12.7 million in 2000 and $12.9 million in 1999. Interest income from earning assets was $28.8 million, $29.0 million, and $26.1 million in 2001, 2000 and 1999, respectively. The increase in interest income during 2001 versus 2000 resulted from loan growth funded by an increase in deposits. The increase in interest income in 2000 from 1999 was due to loan growth and the purchase of investment securities funded by an increase in deposits and borrowed funds. Interest expense on interest bearing deposits was $9.9 million in both 2001 and 2000 compared to $8.9 million in 1999. Average deposit balances increased in both 2001 and 2000 from 1999 with the largest increase in the money market category in both years; however, interest expense on total deposits remained flat resulting from a decrease in the rate paid on that deposit category in 2001. Average rates paid on money market accounts decreased to 3.07% in 2001 from 4.01% in 2000 which resulted in $271 thousand decrease in interest expense. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Average rates paid on certificates of deposit remained stable at 5.40% in 2001 and 5.41% in 2000 from 4.98% in 1999; however, average balances of certificates of deposit increased $6.0 million causing interest expense to also rise $307 thousand. Interest expense on borrowed funds decreased to $5.7 million in 2001 compared to an increase to $6.4 million in 2000 from $4.3 million in 1999. The decrease of $746 thousand in 2001 resulted from a decrease in average balances coupled with a decrease in the rate paid. The increase of $2.1 million in interest expense in 2000 was due to higher average balances and to higher average rates paid on borrowings. Interest expense on total interest bearing liabilities totaled $15.6 million, $16.4 million and $13.2 million during 2001, 2000 and 1999, respectively. The average yield on earning assets in 2001 was down 37 basis points at 7.00% from 7.37% in 2000 which was an increase of 19 basis points from 7.18% in 1999. The average rate paid on interest bearing liabilities in 2001 was 4.36%, a decrease of 35 basis points from 4.71% in 2000 and was 4.13% in 1999. The net interest rate spread in 2001 was 2.64% down 2 basis points from 2.66% in 2000 which was a decrease of 39 basis points from 3.05% in 1999. The decrease in 2001 was due to interest rates on earning assets falling before interest rates on earning liabilities. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained through the provision for loan losses which is a charge to operations. The allowance balance reflects management's assessment of losses and is based on a review of the risk characteristics of the loan portfolio. The Company considers many factors in determining the adequacy of the allowance for loan losses. Collateral value on a loan-by-loan basis, trends of loan delinquencies on a portfolio segment level, risk classification identified in the Company's regular review of individual loans, and economic conditions are primary factors in establishing the allowance. The allowance for loan losses reflects all information available at the end of each year. The Company considers the year end 2001 level of the allowance for loan losses to be appropriate. The allowance as a percentage of total loans was 1.7% at December 31, 2001, 2000 and 1999. See Note 1 to the financial statements for further details on establishing the allowance for loan losses. "Impaired loans" are commercial, commercial real estate and individually significant residential mortgage and consumer loans for which it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are not the same as "non-accrual loans," although the two categories overlap. Non-accrual loans include impaired loans and are those on which the accrual of interest is discontinued when principal or interest has become contractually past due 90 days. The Company may choose to place a loan on non-accrual status due to payment delinquency or the uncertainty of collectibility, while not classifying the loan as impaired, if (i) it is probable that the Company will collect all amounts due in accordance with the contractual terms of the loan or (ii) the loan is not a commercial, commercial real estate or an individually significant residential mortgage or consumer loan. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment is determined by the difference between the present value of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or, as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is based on the fair value of the collateral. The provision for loan losses for the years 2001, 2000 and 1999 was a charge of $175 thousand, $250 thousand and $75 thousand, respectively. The Company had net recoveries of $210 thousand in 2001, $54 thousand in 2000, and $34 thousand in 1999. The following table summarizes changes in the allowance for loan losses for the years ended December 31:
2001 2000 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Balance at beginning of year $ 3,685 $ 3,381 $ 3,272 $ 3,144 $ 3,633 Charge-offs by loan type: Residential mortgage -- -- (17) (224) (150) Commercial (3) -- -- -- (1) Commercial real estate -- (27) -- (215) (483) Consumer -- (1) -- (16) (25) ------- ------- ------- ------- ------- Total charge-offs (3) (28) (17) (455) (659) ------- ------- ------- ------- ------- Recoveries by loan type: Residential mortgage 2 6 28 10 33 Commercial -- 5 3 60 59 Commercial real estate 201 62 13 49 370 Consumer 10 9 7 14 8 ------- ------- ------- ------- ------- Total recoveries 213 82 51 133 470 ------- ------- ------- ------- ------- Net recoveries (charge-offs) 210 54 34 (322) (189) Provision (credit) for loan losses 175 250 75 450 (300) ------- ------- ------- ------- ------- Ending balance $ 4,070 $ 3,685 $ 3,381 $ 3,272 $ 3,144 =================================================================================================================================== Ratio of net recoveries (charge-offs) to average loans outstanding during the period 0.09% 0.03% 0.02% (0.18)% (0.12)% ===================================================================================================================================
10 The following table sets forth the breakdown of the allowance for loan losses by loan category for the years ended December 31. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
2001 2000 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) PERCENT Percent Percent Percent Percent OF LOANS of loans of loans of loans of loans IN EACH in each in each in each in each CATEGORY category category category category TO TOTAL to Total to Total to Total to Total AMOUNT LOANS Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Construction, commercial and commercial real estate $3,251 58.9% $2,711 57.1% $1,933 52.3% $1,787 48.4% $1,715 48.5% Residential mortgage and home equity 397 40.7 436 42.3 526 46.8 634 50.8 830 50.3 Consumer 41 0.4 49 0.6 55 0.9 55 0.8 65 1.2 Unallocated 381 N/A 489 N/A 867 N/A 796 N/A 534 N/A ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ $4,070 100.0% $3,685 100.0% $3,381 100.0% $3,272 100.0% $3,144 100.0% =================================================================================================================================
In determining the adequacy of the allowance for loan losses, the Company aggregates the estimated credit loss on individual loans, pools of loans and other pools of risk having geographic, industry or other common exposures where inherent losses are identified or anticipated. All loans classified as "Substandard" or "Doubtful" are evaluated for collectibility and an allocation is made based on an assessment of the net realizable value of any collateral. The Company categorizes each commercial loan into different pools of risk. Each risk level allocation factor has been determined based upon the Company's review of common practices within the industry, its estimate of expected loss for loans with similar credit characteristics based upon historical experience and migration analysis, the losses experienced by the Company in the most recent 36 months, together with the Company's assessment of future economic trends, conditions and other relevant factors that may have an impact on or may affect repayment of loans in these pools. Residential mortgages, home equity loans, equity lines of credit, second mortgages and all other small consumer loans are considered in the aggregate and an allocation factor is assessed based upon the Company's most recent 24-month historical loss experience together with an assessment of future economic trends, conditions and other relevant factors that may have an impact on, or may affect repayment of, the loans in these pools. On a quarterly basis, the Company evaluates all allocation factors for appropriateness, considering (i) significant changes in the nature and volume of the loan portfolio, (ii) the Company's assessment of local and national economic business conditions, and (iii) any other relevant factor that it considers may have an impact on loan portfolio risk. Based upon these evaluations, changes to the reserve provision may be made to maintain the overall level of the reserve at a level that the Company deems appropriate to cover the estimated credit losses inherent in the Company's loan portfolio including unfunded binding commitments to lend. POTENTIAL PROBLEM LOANS The Company has a loan review and grading system. During the loan review process, deteriorating conditions of certain loans come to management's attention in which erosion of the borrower's ability to comply with the original terms of the loan agreement could potentially result in the classification of the loan as a risk asset. This may result from deteriorating conditions such as cash flows, collateral values or creditworthiness of the borrower. At December 31, 2001 and 2000, there were $941 thousand and $623 thousand, respectively, identified as potential problem loans. NON-INTEREST INCOME Non-interest income increased 26.9% and totaled $1.4 million versus $1.1 million for the years ended 2001 and 2000, respectively, compared to $844 thousand in 1999. The increase in 2001 was attributable to net gains of $249 thousand on the sale of mortgage loans compared to net gains of $47 thousand in 2000. Net gains on sales of investments available for sale amounted to $38 thousand in 2001 compared to net losses of $41 thousand in 2000. Increases in deposit account fees were offset by a reduction in loan servicing fees during 2001. The increase in 2000 is primarily due to a net gain on the sale of mortgage loans of $47 thousand in 2000 compared to a net loss on the sale of mortgage loans of $205 thousand in 1999. Increases in deposit account fees and official check income also contributed to the increase in non-interest income during 2000. NON-INTEREST EXPENSE Non-interest expense increased to $9.1 million in 2001 while decreasing to $8.4 million in 2000 from $9.3 million in 1999. The increase in 2001 is mainly attributable to an increase in professional fees associated with the formation of the holding company. The decrease in 2000 resulted from lower legal fees incurred during 2000 versus 1999. Professional fees, which include legal expenses, totaled $671 thousand in 2001, $496 thousand in 2000 compared to $1.4 million in 1999. Salaries and employee benefits expense was $5.3 million in 2001, $5.0 million in 2000 and $5.1 million in 1999. Full-time equivalent employees were 102 at December 31, 2001, 100 at December 31, 2000 and 97 at December 31, 1999. Increases in normal merit raises offset by reduced pension expense accounted for the increase between 2001, 2000 and 1999. The Company continually evaluates staffing levels in order to control salaries and employee benefits while managing business volumes. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Data processing expenses increased to $705 thousand during 2001 and remained level at $590 thousand and $550 thousand in 2000 and 1999, respectively. This includes the Company's service contract to provide on-line deposit accounting, loan accounting and item processing services. This contract is effective through November 12, 2003. Occupancy and equipment expenses increased to $872 thousand in 2001 from $763 thousand and $769 thousand in 2000 and 1999, respectively. Insurance expenses remained level at $146 thousand, $139 thousand and $117 thousand in 2001, 2000 and 1999, respectively, and other expenses remained level at $1.4 million in 2001, 2000 and 1999, respectively. INCOME TAXES The Company reported income tax expense of $2.0 million in 2001, $854 thousand in 2000 and $1.6 million in 1999. The increase in the provision for taxes was due to a favorable outcome of an income tax matter that led to a lower effective income tax rate for the year 2000. The effective income tax rate for the year 2001 was 36.8% compared to 16.5% in 2000 and 36.5% in 1999. There is a slight increase in the effective income tax rate in 2001 as compared to 1999 partially due to organization costs attributable to the establishment of the holding company, which are not tax effected. The Company's deferred tax asset was $5.7 million at December 31, 2001 compared to $7.5 million at December 31, 2000. The deferred tax asset was recognized in prior years due to the Company's sustained earnings for the past several years and management's expectations of future earnings. Factors supporting the recognition of the deferred tax asset include increased asset quality, higher capital levels, economic conditions and the low level of non-performing assets. For the past three years, the deferred tax asset has been declining as the Company recognizes deferred income tax expense. See Note 8 to the financial statements for further information regarding income taxes. FINANCIAL CONDITION AND EARNING ASSETS The Company manages its earning assets by utilizing available capital resources in a manner consistent with the Company's credit, investment and leverage policies. Loans, U.S. Treasury and Government Agency obligations, mortgage-backed securities, other investment securities, and short-term investments comprise the Company's earning assets. Total earning assets averaged $411.2 million in 2001, an increase of $17.0 million or 4% from 2000. Average earning assets in 2000 totaled $394.2 million which was a $30.7 million or 8.5% increase from $363.5 million in 1999. One of the Company's primary objectives continues to be the origination of loans that are soundly underwritten and collateralized. The Company's loan portfolios for commercial real estate and commercial loans increased in both 2001 and 2000. Loan growth in these portfolios caused the average balance of the loan portfolio to increase in 2001 and 2000 by $26.9 million and $6.8 million, respectively, to $230.6 million and $203.7 million, respectively, from $196.9 million in 1999. The components of the loan portfolio at December 31, follow:
2001 2000 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE PERCENT Balance Percent Balance Percent Balance Percent Balance Percent - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Residential real estate loans: Fixed rate $ 40,861 17.3% $ 44,350 20.0% $ 49,825 25.1% $ 47,887 24.3% $ 38,221 23.2% Adjustable rate 37,744 16.0 33,576 15.1 30,232 15.3 31,845 16.2 33,672 20.5 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- 78,605 33.3 77,926 35.1 80,057 40.4 79,732 40.5 71,893 43.7 -------- -------- -------- -------- -------- Home equity loans: Fixed rate 10,155 4.3 12,367 5.6 8,716 4.4 7,652 3.9 5,326 3.2 Adjustable rate 3,238 1.4 3,630 1.6 3,890 2.0 3,805 1.9 4,861 3.0 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- 13,393 5.7 15,997 7.2 12,606 6.4 11,457 5.8 10,187 6.2 -------- -------- -------- -------- -------- Commercial real estate loans: Fixed rate 16,447 7.0 10,247 4.6 10,898 5.5 9,206 4.7 8,861 5.4 Adjustable rate 83,663 35.3 76,882 34.6 69,995 35.3 62,052 31.4 52,196 31.7 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- 100,110 42.3 87,129 39.2 80,893 40.8 71,258 36.1 61,057 37.1 -------- -------- -------- -------- -------- Construction loans 20,593 8.7 17,148 7.7 9,666 4.9 11,550 5.9 5,781 3.5 Loans held for sale 4,156 1.8 -- 0.0 -- 0.0 8,950 4.5 682 0.4 Commercial loans 18,549 7.8 22,602 10.2 13,143 6.6 12,558 6.4 12,942 7.9 Consumer loans 991 0.4 1,243 0.6 1,733 0.9 1,605 0.8 1,958 1.2 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total loans 236,397 100.0% 222,045 100.0% 198,098 100.0% 197,110 100.0% 164,500 100.0% ===== ===== ===== ===== ===== Allowance for loan losses 4,070 3,685 3,381 3,272 3,144 -------- -------- -------- -------- -------- Loans, net $232,327 $218,360 $194,717 $193,838 $161,356 ===================================================================================================================================
12 The Company increases the investment portfolio through funds obtained from the FHLB, repurchase agreements and other borrowings when it is profitable to do so. The average balance of investment securities, including U.S. Treasury and Government Agency securities, mortgage-backed securities, other equity securities, and short-term investments amounted to $180.6 million in 2001 as compared to $190.5 million in 2000 and $166.6 million in 1999. These securities represent 42.3% of the Company's average assets at December 31, 2001 versus 46.3% and 43.6%, respectively, of average assets at December 31, 2000 and 1999. INTEREST BEARING LIABILITIES The Company's earning assets are primarily funded with deposits, securities sold under agreements to repurchase, FHLB advances and stockholders' equity. The Company manages its interest bearing liabilities to maintain a stable source of funds while providing competitively priced deposit accounts. Interest bearing deposits include regular savings accounts, NOW and Super NOW accounts, money market accounts, and certificates of deposit. In 2001 total average interest bearing liabilities were $358.4 million which was an $11.2 million or 3.2% increase from $347.2 million in 2000. Average total interest bearing deposits of $263.3 million comprised 73.5% of interest bearing liabilities in 2001 while in 2000 such deposits totaling $245.3 million comprised 70.6% of interest bearing liabilities. Changing interest rates can affect the mix and level of various deposit categories. The lower average interest rate paid on money market accounts had an impact on the overall interest rate paid on deposits and caused a decrease of 28 basis points in 2001. The average balance of certificates of deposit increased by $6.0 million to $137.0 million in 2001. The average balance of money market investment accounts increased by $6.1 million to $54.3 million in 2001 and the average balance of NOW and Super NOW accounts increased by $4.1 million to $31.2 million in 2001. Average borrowed funds in 2001, 2000 and 1999 were $95.1 million, $101.9 million and $79.4 million, respectively, including advances from the FHLB and other borrowed funds. The decrease in 2001 resulted from a shift in the mix of earning liabilities to take advantage of a lower cost of funds to fund loan growth. The increase in 2000 from 1999 is the result of the Company using borrowed funds to purchase investment securities and fund loan growth. RISK ASSETS Risk assets consist of non-performing loans, OREO, and restructured loans. The following paragraphs define each of these categories. The components of risk assets at December 31, for the years indicated are as follows:
2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Risk assets: Non-performing loans: Residential real estate $ 10 $ 10 $ -- $ 66 $ 428 Commercial real estate 730 -- -- -- 624 Commercial business 211 -- -- -- -- Consumer -- -- -- -- 1 ------- ------- ------- ------- ------- Total non-performing loans 951 10 -- 66 1,053 ------- ------- ------- ------- ------- Other real estate owned: One to four family residential properties -- -- -- -- 177 Condominiums -- -- -- -- 61 Land 67 77 87 89 104 Commercial real estate -- -- 477 512 512 OREO valuation allowance (45) (45) (45) (45) (45) ------- ------- ------- ------- ------- Total other real estate owned 22 32 519 556 809 ------- ------- ------- ------- ------- Total risk assets $ 973 $ 42 $ 519 $ 622 $ 1,862 ================================================================================================================ Risk assets as a percent of total loans and OREO 0.4% 0.0% 0.3% 0.3% 1.1% ================================================================================================================ Risk assets as a percent of total assets 0.2% 0.0% 0.1% 0.2% 0.5% ================================================================================================================
Non-performing loans consist of both (i) loans 90 days or more past due, and (ii) loans placed on a non-accrual status because full collection of the principal balance is in doubt. Non-performing loans at December 31, 2001 were $951 thousand, an increase from $10 thousand at December 31, 2000 and zero at December 31, 1999. The Company actively monitors risk assets. attempts to work with delinquent borrowers in order to bring loans current. If the borrower is not able to bring the loan current, the Company commences collection efforts. Valuation of property at foreclosure, and periodically thereafter, is based upon appraisals and management's best estimates of fair value less selling costs. The Company's policy is to sell such property as quickly as possible at fair value. ASSET/LIABILITY MANAGEMENT Managing interest rate risk is fundamental to banking. The Company has continued to manage its liquidity, capital, and GAP position so as to control its exposure to interest rate risk. As of December 31, 2001, the Company had interest rate sensitive assets which repriced or matured within one year of $179.0 million and interest rate sensitive liabilities which repriced or matured within one year of $174.1 million. As of December 31, 2000, the Company had interest rate sensitive assets which matured or repriced within one year of $178.4 million and interest rate sensitive liabilities which repriced or matured within one year of $182.2 million. INTEREST RATE SENSITIVITY The Company actively manages its interest rate sensitivity position. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve a stable and rising flow of net interest income. The Asset/Liability Committee ("ALCO") using policies approved by the Board of Directors, is responsible for managing the Bank's rate sensitivity position. The asset/liability management policy establishes guidelines for acceptable exposure to interest rate risk, liquidity, and capital. The objective of ALCO is to manage earning assets and liabilities to produce results which are consistent with the Company's policy for net interest income, liquidity and capital and identify acceptable levels of 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) growth, risk and profitability. ALCO establishes and monitors origination and pricing strategies consistent with ALCO policy. ALCO meets regularly to review the current economic environment, income simulation model and GAP analysis and implements appropriate changes in strategy that will manage the Company's exposure to interest rate risk, liquidity and capital. ALCO manages the Company's interest rate risk using both income simulation and GAP analysis. Income simulation is used to quantify interest rate risk inherent in the Company's consolidated balance sheet by showing the effect of a change in net interest income over a 24 month period. The income simulation model uses parallel interest rate shocks of up and down 200 basis points (bp) for earning assets and liabilities in the first year of the model. Interest rates are not shocked in the second year of the model. The composition of the Company's consolidated balance sheet at December 31, 2001 remains relatively well matched over the 24 month horizon with a slight bias towards asset sensitivity in the first year. The simulation takes into account the dates for repricing, maturing, prepaying and call options assumptions of various financial categories which may vary under different interest rate scenarios. Prepayment speeds are estimates for the loans and are adjusted according to the degree of rate changes. Call options and prepayment speeds for investment securities are estimates using industry standards for pricing and prepayment assumptions. The assumptions of financial instrument categories are reviewed before each simulation by ALCO in light of current economic trends. As of December 31, 2001, the income simulation model indicated some negative exposure of net interest income to declining interest rates to a degree that remains within tolerance levels established by the Company's policy. The interest rate scenario used does not necessarily reflect ALCO's view of the "most likely" change in interest rates over the model's period. Furthermore, the model assumes a static consolidated balance sheet. These results do not reflect the anticipated future net interest income of the Company for the same periods. The following table summarizes the net interest income for the 24 month period of the Company's consolidated balance sheet for earning assets and liabilities for the years ended December 31; Net Interest Income Simulation Model Results:
INTEREST RATE SHOCK --------------------------- DOWN UP 2001 FLAT RATES 200 BP 200 BP - --------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Year One $14,478 $14,274 $14,858 Year Two 14,648 13,103 15,862 ------- ------- ------- Total net interest income for 2 year period $29,126 $27,377 $30,720 =====================================================================================================================
Interest Rate Shock --------------------------- Down Up 2000 Flat Rates 200 bp 200 bp - --------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Year One $12,917 $12,770 $13,048 Year Two 13,130 13,111 12,580 ------- ------- ------- Total net interest income for 2 year period $26,047 $25,881 $25,628 =====================================================================================================================
The income simulation model reflects negative exposure to net interest income in a declining interest rate environment of 200 bp, which would result from shorter asset lives due to prepayment or refinancing of assets. Margins would narrow as deposits and borrowings are slower to reprice to lower interest rates. The Company's primary measure of interest rate risk is GAP analysis. GAP measurement attempts to analyze any mismatches in the timing of interest rate repricing between assets and liabilities. It identifies those balance sheet sensitivity areas which are vulnerable to unfavorable interest rate movements. As a tool of asset/liability management, the GAP position is compared with potential changes in interest rate levels in an attempt to measure the favorable and unfavorable effect such changes would have on net interest income. For example, when the GAP is positive, (i.e., assets reprice faster than liabilities) a rise in interest rates will increase net interest income; and, conversely, if the GAP is negative, a rise in interest rates will decrease net interest income. The accuracy of this measure is limited by unpredictable loan prepayments and the lags in the interest rate indices used for repricing variable rate loans or investment securities. 14 The Company's one-year cumulative GAP to total assets increased from (1)% at December, 2000, to 1% at December, 2001. The table below shows the interest rate sensitivity gap position as of December 31, 2001. The table excludes non-performing loans and assumes that all deposits except savings and NOWs will be withdrawn within the legal time period for withdrawal. This withdrawal of deposit assumption is not likely to occur. RATE SENSITIVITY GAP POSITION
- ------------------------------------------------------------------------------------------------------------------------------------ POSITION/VOLUME Time interval from December 31, 2001 0-3 MO. 4-6 MO. 7-12 MO. 13-36 MO. 37-60 MO. +60 MO. - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) EARNING ASSETS: Investment securities held to maturity $ 38,772 $ 8,562 $ 11,942 $ 52,252 $ 19,093 $ 4,381 Investments securities available for sale 3,118 2,711 4,863 27,533 26 347 Federal Home Loan Bank Stock and other earning assets 11,973 -- -- -- -- 168 Fixed rate mortgages loans 3,515 2,463 4,577 15,179 10,934 17,624 Adjustable rate mortgages loans 9,397 3,094 7,062 13,916 8,196 187 Consumer loans 552 176 194 69 -- -- Fixed rate commercial real estate loans 1,860 419 1,445 3,530 2,501 5,961 Adjustable rate commercial real estate loans 13,871 3,946 10,600 41,262 13,985 -- Construction loans 17,122 251 36 3,184 -- -- Fixed rate commercial loans 509 490 648 1,344 335 16 Adjustable rate commercial loans 11,186 40 3,567 203 -- -- --------- --------- --------- --------- --------- --------- Total earning assets 111,875 22,152 44,934 158,472 55,070 28,684 --------- --------- --------- --------- --------- --------- INTEREST BEARING LIABILITIES: Savings and escrow accounts -- -- -- -- -- 43,104 NOW and Super NOW accounts -- -- -- -- -- 30,080 Money market accounts 57,575 -- -- -- -- -- Certificates of deposit and retirement accounts 24,747 45,184 23,827 24,536 6,566 -- FHLB advances and other borrowed funds 7,343 125 15,256 32,195 10,591 45,589 --------- --------- --------- --------- --------- --------- Total interest bearing liabilities 89,665 45,309 39,083 56,731 17,157 118,773 --------- --------- --------- --------- --------- --------- INTEREST SENSITIVITY GAP $ 22,210 $ (23,157) $ 5,851 $ 101,741 $ 37,913 $ (90,089) ==================================================================================================================================== CUMULATIVE GAP $ 22,210 $ (947) $ 4,904 $ 106,645 $ 144,558 $ 54,469 ==================================================================================================================================== CUMULATIVE GAP AS A PERCENT OF TOTAL ASSETS 5% 0% 1% 24% 33% 12% ====================================================================================================================================
LIQUIDITY Managing liquidity involves planning to meet anticipated funding needs at a reasonable cost, as well as contingency plans to meet unanticipated funding needs or a loss of funding sources. The following factors are considered in managing liquidity; marketability of assets, the sources and stability of funding and the level of unfunded commitments. The Company's primary source of funds is dividends from its Bank subsidiary. The Bank's loans and investments are primarily funded by deposits, Federal Home Loan Bank advances, securities sold under agreements to repurchase and stockholders' equity. The investment portfolio is one of the primary sources of liquidity for the Bank. Maturities of securities provide a flow of funds which are available for cash needs such as loan originations and net deposit outflows. In addition, the investment portfolio includes high quality, and, therefore, readily marketable, U.S. Treasury and Government Agency obligations. At December 31, 2001, the Bank's investment securities and mortgage-backed securities available for sale totaled $38.8 million which is available to meet the Bank's liquidity needs. Loan maturities and amortization as well as deposit growth provide for a constant flow of funds. In addition, the Bank has two overnight lines of credit totaling $11.8 million to meet short-term liquidity needs. The Bank did not utilize these overnight lines at December 31, 2001 and had the full $11.8 million available. CAPITAL ADEQUACY The Company and the Bank are required to maintain a leverage capital ratio of 5% and risk-based capital ratios of at least 10% in order to be categorized as "well capitalized" in accordance with definitions in regulatory guidelines promulgated by the FDIC. At December 31, 2001 and 2000, the Company's and the Bank's leverage and risk-based capital ratios exceeded the required levels for the category of "well-capitalized" as defined by their regulatory agencies. The Company and the Bank may not declare or pay cash dividends on its shares of common stock if the effect thereof would cause its stockholders' equity to be reduced below applicable capital requirements or if such declaration and payments would otherwise violate regulatory requirements. See note 9 to the financial statements for further information regarding capital adequacy. IMPACT OF INFLATION AND CHANGING PRICES A Company's asset and liability structure is substantially different from that of an industrial company in that virtually all assets and liabilities of the Company are monetary in nature. Management believes the impact of inflation on financial results depends upon the Company's ability to react to changes in interest rates and by such reaction reduce the inflationary impact on performance. Interest rates do not necessarily move in the same direction, or at the same magnitude, as the prices of other goods and services. As discussed previously, management seeks to manage the relationship between interest-sensitive assets and liabilities in order to protect against wide net interest income fluctuations, including those resulting from inflation. Various information shown elsewhere in this Annual Report will assist in the understanding of how well the Company is positioned to react to changing interest rates and inflationary trends. In particular, the summary of net interest income, the maturity distributions, the compositions of the loan and security portfolios and the data on the interest rate sensitivity of loans and deposits should be considered. 15 REPORT OF MANAGEMENT RESPONSIBILITY The management of LSB Corporation (the "Corporation" or the "Company") is responsible for the preparation and integrity of the financial statements and other financial information contained in this annual report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices of the banking industry and, accordingly, include amounts based on management's best estimates and judgments. Management has established and is responsible for maintaining internal accounting controls designed to provide reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets, and the prevention and detection of irregularities. The concept of reasonable assurance recognizes that the cost of a system of internal accounting controls should not exceed the benefits derived. The internal accounting control system is augmented by written policies and guidelines, careful selection and training of qualified personnel, a written program of internal audits, appropriate review by management, and a written code of professional conduct for directors and officers. The Corporation's Board of Directors has an Audit Committee composed solely of independent directors. The Committee meets periodically with management, the internal auditors and KPMG LLP ("KPMG") to review the work of each and to inquire of each as to their assessment of the performance of the others in their work relating to the Company's financial statements. Both the independent and internal auditors have, at all times, the right of full access to the Audit Committee, without management present, to discuss any matter they believe should be brought to the attention of the Committee. Management recognizes that there are inherent limitations in the effectiveness of any internal control system. However, management believes that as of December 31, 2001 the Company's internal accounting controls provide reasonable assurance as to the integrity and reliability of the financial statements and related financial information. The independent auditors, KPMG, are recommended to the Board of Directors by the Audit Committee, appointed by the Board of Directors, and ratified by the stockholders. KPMG's audits include reviews and tests of the Company's internal controls to the extent they believe necessary to determine and conduct the audit procedures that support their report. Members of that firm also have the right of full access to each member of management in conducting their audits. The report of KPMG appears on the next page. /s/ Paul A. Miller - ----------------------------- Paul A. Miller President and Chief Executive Officer /s/ John E. Sharland - ----------------------------- John E. Sharland Senior Vice President and Chief Financial Officer December 31, 2001 16 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS LSB CORPORATION: We have audited the accompanying consolidated balance sheets of LSB Corporation and subsidiary as of December 31, 2001 and 2000 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LSB Corporation and its subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP ------------ KPMG LLP Boston, Massachusetts January 18, 2002 17 CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------- December 31, 2001 2000 - --------------------------------------------------------------------------------------------------- (In Thousands) ASSETS: Cash and due from banks $ 7,457 $ 7,086 Fed funds sold 5,705 15,427 --------- --------- Total cash and cash equivalents 13,162 22,513 Investment securities held to maturity market value of $137,886 in 2001 and $118,393 in 2000 (notes 2 and 7) 135,002 117,806 Investment securities available for sale amortized cost of $38,480 in 2001 and $32,840 in 2000 (notes 2 and 7) 38,766 33,027 Federal Home Loan Bank stock, at cost (note 3) 5,950 5,950 Loans, net of allowance for loan losses of $4,070 in 2001 and $3,685 in 2000 (notes 4 and 7) 232,327 218,360 Bank premises and equipment (note 5) 3,167 3,337 Accrued interest receivable 2,604 2,969 Other real estate owned 22 32 Deferred income tax asset (note 8) 5,737 7,511 Other assets 1,530 1,585 --------- --------- Total assets $ 438,267 $ 413,090 =================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY: Liabilities: Interest bearing deposits (note 6) $ 255,046 $ 259,325 Non-interest bearing deposits (note 6) 13,404 11,223 Federal Home Loan Bank advances (note 7) 102,992 82,283 Other borrowed funds (note 7) 8,107 3,878 Advance payments by borrowers for taxes and insurance 573 513 Other liabilities 4,053 3,555 --------- --------- Total liabilities 384,175 360,777 --------- --------- Commitments and contingencies (notes 5, 11 and 12): Stockholders' equity (notes 9 and 10): Preferred stock, $.10 par value; 5,000,000 shares authorized, none issued -- -- Common stock, $.10 par value; 20,000,000 shares authorized; 4,379,550 and 4,364,800 shares issued and outstanding at December 31, 2001 and 2000, respectively 438 436 Additional paid-in capital 57,813 57,711 Accumulated deficit (4,348) (5,956) Accumulated other comprehensive (loss) income 189 122 --------- --------- Total stockholders' equity 54,092 52,313 --------- --------- Total liabilities and stockholder's equity $ 438,267 $ 413,090 ===================================================================================================
The accompanying notes are an integral part of these financial statements. 18 CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------- Year Ended December 31, 2001 2000 1999 - ----------------------------------------------------------------------------------------------------- (In Thousands, Except Share Data) Interest and dividend income: Loans $ 18,295 $ 17,139 $ 15,973 Investment securities held to maturity 8,166 8,089 6,968 Investment securities available for sale 1,514 3,202 2,715 Federal Home Loan Bank stock 364 454 334 Other interest income 453 153 107 ----------- ----------- ----------- Total interest and dividend income 28,792 29,037 26,097 - ----------------------------------------------------------------------------------------------------- Interest expense: Deposits (note 6) 9,929 9,930 8,875 Borrowed funds 5,278 4,525 3,041 Securities sold under agreements to repurchase and other borrowed funds 404 1,903 1,267 ----------- ----------- ----------- Total interest expense 15,611 16,358 13,183 - ----------------------------------------------------------------------------------------------------- Net interest income 13,181 12,679 12,914 Provision for loan losses (note 4) 175 250 75 ----------- ----------- ----------- Net interest income after provision for loan losses 13,006 12,429 12,839 - ----------------------------------------------------------------------------------------------------- Non-interest income: Deposit account fees 594 500 490 Loan servicing fees 155 281 319 Gains (losses) on sales of mortgage loans, net 249 47 (205) Gains (losses) on sale of investment securities 38 (41) -- Other income 390 337 240 ----------- ----------- ----------- Total non-interest income 1,426 1,124 844 - ----------------------------------------------------------------------------------------------------- Non-interest expense: Salaries and employee benefits 5,264 5,033 5,116 Occupancy and equipment expenses 872 763 769 Data processing expenses 705 590 550 Professional expenses 671 496 1,401 Insurance expenses 146 139 117 Other expenses 1,464 1,355 1,394 ----------- ----------- ----------- Total non-interest expense 9,122 8,376 9,347 - ----------------------------------------------------------------------------------------------------- Income before income taxes 5,310 5,177 4,336 Income tax expense (note 8) 1,953 854 1,582 ----------- ----------- ----------- Net income $ 3,357 $ 4,323 $ 2,754 ===================================================================================================== Average shares outstanding 4,374,195 4,360,415 4,353,286 Average diluted shares outstanding 4,535,305 4,434,645 4,468,529 ===================================================================================================== Basic earnings per share $ 0.77 $ 0.99 $ 0.63 Diluted earnings per share $ 0.74 $ 0.97 $ 0.61 =====================================================================================================
The accompanying notes are an integral part of these financial statements. 19 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------ Net Unrealized Additional Gains (Losses) Total Common Paid-in Accumulated on Securities Stockholders' Years Ended Stock Capital Deficit Available for Sale Equity - ------------------------------------------------------------------------------------------------------------------------------------ (In Thousands) Balance at December 31, 1998 $ 433 $ 57,395 $(11,246) $ 131 $ 46,713 Net income -- -- 2,754 -- 2,754 Other comprehensive income unrealized gain (loss) on securities available for sale (tax effect $348) -- -- -- (682) (682) -------- Total comprehensive income 2,072 Exercise of stock options 3 273 -- -- 276 Dividends declared and paid ($0.15 per share) -- -- (653) -- (653) -------- -------- -------- -------- -------- Balance at December 31, 1999 436 57,668 (9,145) (551) 48,408 Net income -- -- 4,323 -- 4,323 Other comprehensive income unrealized gain (loss) on securities available for sale (tax effect $346) -- -- -- 673 673 -------- Total comprehensive income 4,996 Exercise of stock options -- 43 -- -- 43 Dividends declared and paid ($0.26 per share) -- -- (1,134) -- (1,134) -------- -------- -------- -------- -------- Balance at December 31, 2000 436 57,711 (5,956) 122 52,313 Net income -- -- 3,357 -- 3,357 Other comprehensive income unrealized gain (loss) on securities available for sale (tax effect $34) -- -- -- 67 67 -------- Total comprehensive income -- -- -- 3,424 Exercise of stock options 2 102 -- -- 104 Dividends declared and paid ($0.40 per share) -- -- (1,749) -- (1,749) -------- -------- -------- -------- -------- Balance at December 31, 2001 $ 438 $ 57,813 $ (4,348) $ 189 $ 54,092 ====================================================================================================================================
2001 2000 - -------------------------------------------------------------------------------- Disclosure of reclassification amount: Gross unrealized appreciation arising during the period $ 124 $ 980 Tax effect (42) (333) ----- ----- Unrealized holding appreciation net of tax 82 647 ----- ----- Less: reclassification adjustment for gains (losses) included in net income 22 (41) Tax effect (7) 15 ----- ----- Unrealized appreciation on securities, net of reclassification $ 67 $ 673 ================================================================================
The Bank had no sales of investment securities during 1999. The accompanying notes are an integral part of these financial statements. 20 CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------------- (In Thousands) Cash flow from operating activities: Net income $ 3,357 $ 4,323 $ 2,754 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 175 250 75 (Gains) losses on sales of mortgage loans and mortgage-backed securities (249) (47) 205 (Gains) losses on investment securities available for sale (22) 41 -- Gains on calls of investment securities held to maturity (29) -- -- Gains on sale of OREO -- (39) -- Depreciation and amortization of premises and equipment, investments and other assets 447 762 820 Loans originated for sale (25,301) (2,485) (7,694) Proceeds from sales of mortgage loans and mortgage-backed securities 21,394 2,532 16,439 (Increase) decrease in accrued interest receivable 365 (148) (725) Decrease (increase) in deferred income tax asset 1,742 1,999 1,141 Decrease (increase) in other assets 55 18 (569) (Decrease) increase in advance payments by borrowers 60 (137) 110 (Decrease) increase in other liabilities 498 (1,352) (166) ----------- ----------- ----------- Net cash provided by operating activities 2,492 5,717 12,390 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from maturities of investment securities held to maturity 642,579 8,611 15,765 Proceeds from maturities of investment securities available for sale 6,532 -- 4,000 Purchases of investment securities held to maturity (678,882) (16,430) (65,357) Purchases of investment securities available for sale (26,037) -- (29,433) Purchases of mortgage-backed securities held to maturity (4,335) -- (8,368) Purchases of mortgage-backed securities available for sale -- -- (4,905) Proceeds from sales of investment securities available for sale 6,119 21,899 -- Principal payments of securities held to maturity 23,557 10,748 16,498 Principal payments of securities available for sale 7,765 2,775 6,219 Purchase of Federal Home Loan Bank stock -- -- (1,650) Purchase of other equity securities (46) -- (122) Increase in loans, net (9,986) (23,893) (9,904) Proceeds from sales or payments on OREO 10 526 37 Purchases of Bank premises and equipment (314) (448) (346) ----------- ----------- ----------- Net cash provided by (used in) investing activities (33,038) 3,788 (77,566) - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase (decrease) in deposits (2,098) 24,508 (7,461) Additions to Federal Home Loan Bank advances 48,120 695,950 1,123,600 Payments on Federal Home Loan Bank advances (27,411) (683,163) (1,086,104) Net increase in agreements to repurchase securities 4,220 -- -- (Decrease) increase in other borrowed funds 9 (30,793) 32,457 Dividends paid (1,749) (1,134) (653) Proceeds from exercise of stock options 104 43 276 ----------- ----------- ----------- Net cash provided by financing activities 21,195 5,411 62,115 - ---------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (9,351) 14,916 (3,061) Cash and cash equivalents, beginning of year 22,513 7,597 10,658 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 13,162 $ 22,513 $ 7,597 ================================================================================================================================== Cash paid during the year for: Interest on deposits and borrowed funds $ 15,603 $ 16,098 $ 13,135 Income taxes 188 179 366 Supplemental Schedule of non-cash activities: Change in valuation of investment securities available for sale 99 1,019 1,030 ==================================================================================================================================
The accompanying notes are an integral part of these financial statements. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: A BASIS OF PRESENTATION - The LSB Corporation's consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Accordingly, management is required to make estimates and assumptions that affect amounts reported in the balance sheets and statements of operations. Actual results could differ significantly from those estimates and judgments. Material estimates that are particularly susceptible to change relate to the allowance for loan losses and the deferred tax asset. LSB Corporation (the "Corporation" or the "Company") is a Massachusetts corporation and the holding company of the wholly-owned subsidiary Lawrence Savings Bank (the "Bank") a state-chartered Massachusetts savings bank. The Corporation was organized by the Bank on July 1, 2001 to be a bank holding company and to acquire all of the capital stock of the Bank. The consolidated financial statements presented herein reflect the accounts of the Corporation and its predecessor, Lawrence Savings Bank. The Corporation is supervised by the Board of Governors of the Federal Reserve System ("FRB"), and it is also subject to the jurisdiction of the Massachusetts Division of Banks, while the Bank is subject to the regulations of, and periodic examination by, the Federal Deposit Insurance Corporation ("FDIC") and the Massachusetts Division of Banks. The Bank's deposits are insured by the Bank Insurance Fund of the FDIC up to $100,000 per account, as defined by the FDIC, and the Depositors Insurance Fund, Inc. ("DIF") for customer deposit amounts in excess of $100,000. The consolidated financial statements include the accounts of LSB Corporation and its wholly-owned consolidated subsidiary, Lawrence Savings Bank, and its wholly-owned subsidiaries, Shawsheen Security Corporation, Shawsheen Security Corporation II, Pemberton Corporation, and Spruce Wood Realty Trust. All inter-company balances and transactions have been eliminated in consolidation. The Company has one reportable operating segment. Certain amounts in prior periods have been re-classified to conform to the current presentation. INVESTMENT AND MORTGAGE-BACKED SECURITIES - Debt securities that the Company has the intent and ability to hold to maturity are classified as "held to maturity" and reported at amortized cost; debt, mortgage-backed and equity securities that are bought and held principally for the purpose of selling in the near term are classified as "trading" and reported at fair value, with unrealized gains and losses included in earnings; and debt, mortgage-backed and equity securities not classified as either held to maturity or trading are classified as "available for sale" and reported at fair value, with unrealized gains and losses excluded from earnings and reported as other comprehensive income, net of estimated income taxes. Premiums and discounts on investments and mortgage-backed securities are amortized or accreted into income by use of the interest method. If a decline in fair value below the amortized cost basis of an investment or mortgage-backed security is judged to be other than temporary, the cost basis of the investment is written down to fair value and the amount of the write-down is included as a charge to earnings. Gains and losses on the sale of investment and mortgage-backed securities are recognized at the time of sale on a specific identification basis. EQUITY SECURITIES - Includes Northeast Retirement Services ("NRS") stock. NRS stock is closely held and not publicly traded and is carried at cost. Dividend income is recorded when dividends are declared. INTEREST ON LOANS - Interest on loans is accrued as earned. Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. It is management's policy to discontinue the accrual of interest on a loan when there is a reasonable doubt as to its collectibility. Interest on loans 90 days or more contractually delinquent is generally excluded from interest income. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on loans that have been 90 days or more past due only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are expected to be fully collectible as to both principal and interest. ALLOWANCE FOR LOAN LOSSES - Losses on loans are provided for under the allowance method of accounting. The allowance is increased by provisions charged to operations on the basis of many factors including the risk characteristics of the portfolio, current economic conditions and trends in loan delinquencies and charge-offs. When management believes that the collection of a loan's principal balance is unlikely, the principal amount is charged against the allowance. Recoveries on loans which have been previously charged off are credited to the allowance as received. Management's methodology for assessing the appropriateness of the allowance consists of several key elements, which include a formula allowance, specific allowances for identified problem loans and an unallocated allowance. The formula allowance is calculated by applying loss factors to outstanding loans, in each case based on the internal risk grade of such loans. Changes in risk grades affect the amount of the formula allowance. Loss factors are based on the Bank's historical loss experience as well as regulatory guidelines. Specific allowances are established in cases where management has identified significant conditions related to a credit such that management believes it probable that a loss has been incurred in excess of the amount determined by the application of the formula allowance. The unallocated allowance recognizes the model and estimation risk associated with the formula allowance and specific allowances as well as management's evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance for loan losses based on judgments different from those of management. Impaired loans are commercial, commercial real estate, and individually significant residential mortgage and consumer loans for which it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans, except those loans that are accounted for at fair value or at lower of cost or fair value, are accounted for at the present value of the expected future cash flows discounted at the loan's effective interest rates. 22 LOAN FEES - Loan origination fees, net of direct loan acquisitions costs, are deferred and recognized over the contractual life of the loan as an adjustment of the loan's yield using a basis, which approximates the interest method. Amortization of loan fees is discontinued once a loan is designated as non-accrual status. When loans are sold or paid-off, the unamortized portion of net fees and costs is credited to income. MORTGAGE BANKING ACTIVITIES - Loans held for sale are valued at the lower of their amortized cost or market value. The Bank, from time-to-time, enters into forward commitments to sell loans or mortgage-backed securities for the purpose of reducing interest rate risk associated with the origination of loans for sale. Unrealized gains and losses on contracts used to hedge the Bank's closed loans and the pipeline of loans expected to close are considered in adjusting carrying values of loans and mortgage-backed securities held for sale. Gains or losses on sales of loans are recognized to the extent that the sale proceeds exceed or are less than the carrying amount of the loans. Gains and losses are determined using the specific identification method. When loans are sold with servicing rights retained, the Bank allocates the carrying amount of the loans between the underlying asset sold and the rights retained, based on their relative fair values. The resulting mortgage servicing rights are amortized over the period of estimated net servicing income using a method which approximates the interest method. Actual prepayment experience is reviewed periodically. When actual prepayments exceed estimated prepayments, the balance of the mortgage servicing rights is adjusted accordingly. Periodically, the mortgage servicing rights are assessed for impairment based on the fair value of such rights using market prices. PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less allowances for depreciation and amortization. Depreciation and amortization are computed principally on the straight-line method over the estimated useful lives of the assets or the terms of the leases, if shorter. OTHER REAL ESTATE OWNED - Other real estate owned (OREO) is comprised of foreclosed properties where the Bank has formally received title or has possession of the collateral. Properties are carried at the lower of the investment in the related loan or the estimated fair value of the property or collateral less selling costs. INCOME TAXES - Deferred tax assets and liabilities are recognized for estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax valuation allowances are established and based on management's judgment as to whether it is more likely than not that all or some portion of the future tax benefits of prior operating losses will be realized. PENSION EXPENSE - The Bank is a participant in a multiple employer defined benefit pension plan. Pension expense is recorded as the liability is incurred. The method recognizes the compensation cost of an employee's pension benefit over the employee's appropriate service period. Funding is provided as determined by the Savings Banks Employees' Retirement Association. EARNINGS PER SHARE - Basic EPS is calculated based on the weighted average number of common shares outstanding during each period. Stock options outstanding, accounted for under the Treasury Stock Method, have a dilutive effect to the computation of diluted EPS. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) INVESTMENT SECURITIES Proceeds from sales, realized gains and losses on investments available for sale for the years ended December 31, follow:
2001 2000 1999 - -------------------------------------------------------------------------------- (In Thousands) Proceeds from sales $ 6,119 $ 21,899 $ -- Realized gains on sales 38 52 -- Realized losses on sales -- (93) --
The amortized cost and market value of investment securities at December 31, follows:
2001 2000 -------------------------------------------- ------------------------------------------- AMORTIZED UNREALIZED MARKET AMORTIZED UNREALIZED MARKET COST GAIN (LOSS) VALUE COST GAIN (LOSS) VALUE - ------------------------------------------------------------------------------------------------------------------------------------ (In Thousands) Investment securities held to maturity: US Treasury obligations $ 6,022 $ 244 $ -- $ 6,266 $ 6,041 $ 86 $ -- $ 6,127 US Government Agency obligations 15,966 1,111 -- 17,077 38,705 600 (116) 39,189 Mortgage-backed securities 16,633 310 (8) 16,935 18,868 82 (122) 18,828 Asset-backed securities 40,337 694 (22) 41,009 31,220 257 (96) 31,381 Corporate obligations 53,982 542 -- 54,524 22,912 134 (238) 22,808 Municipal obligations 2,062 13 -- 2,075 60 -- -- 60 --------- --------- --------- --------- --------- --------- --------- --------- $ 135,002 $ 2,914 $ (30) $ 137,886 $ 117,806 $ 1,159 $ (572) $ 118,393 ==================================================================================================================================== Investment securities available for sale: US Treasury obligations $ -- $ -- $ -- $ -- $ 6,091 $ -- $ (35) $ 6,056 US Government Agency obligations 20,126 37 (37) 20,126 5,999 -- (12) 5,987 Mortgage-backed securities 5,629 67 (7) 5,689 9,439 55 (13) 9,481 Asset-backed securities 8,077 20 (8) 8,089 8,269 94 (3) 8,360 Corporate obligations 4,480 217 (3) 4,694 2,920 101 -- 3,021 Equity securities 168 -- -- 168 122 -- -- 122 --------- --------- --------- --------- --------- --------- --------- --------- $ 38,480 $ 341 $ (55) $ 38,766 $ 32,840 $ 250 $ (63) $ 33,027 ====================================================================================================================================
24 The following table is a summary of the contractual maturities of investment securities held to maturity and available for sale at December 31, 2001. These amounts exclude equity securities, which have no contractual maturities. Mortgage-backed securities consist of FHLMC, FNMA, and GNMA certificates. Mortgage-backed and asset-backed securities are shown at their final contractual maturity date but are expected to have shorter average lives.
HELD TO MATURITY AVAILABLE FOR SALE --------------------------------------- --------------------------------------- AMORTIZED MARKET WEIGHTED AMORTIZED MARKET WEIGHTED DECEMBER 31, 2001 COST VALUE AVG. YIELD COST VALUE AVG. YIELD - --------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) US Treasury & Agencies obligations 1 to 2 years $ 9,022 $ 9,390 5.77% $ 10,090 $ 10,127 3.14% 2 to 3 years 3,000 3,035 5.78 10,036 9,999 3.79 3 to 5 years 9,966 10,918 7.25 -- -- -- -------- -------- -------- -------- 21,988 23,343 6.44 20,126 20,126 3.47 -------- -------- -------- -------- Mortgage-backed securities: Within 1 year 55 56 6.64 -- -- -- 1 to 2 years 670 687 6.00 -- -- -- 2 to 3 years 3,085 3,142 5.66 -- -- -- 3 to 5 years -- -- -- 253 259 6.57 5 to 10 years 9,359 9,557 6.22 -- -- -- After 10 years 3,464 3,493 6.79 5,376 5,430 6.85 -------- -------- -------- -------- 16,633 16,935 6.23 5,629 5,689 6.83 -------- -------- -------- -------- Asset-backed securities: 2 to 3 years 5,163 5,153 5.42 -- -- -- 3 to 5 years 12,765 12,872 5.85 -- -- -- 5 to 10 years 12,028 12,412 6.40 3,287 3,302 6.24 After 10 years 10,381 10,572 6.54 4,790 4,787 3.12 -------- -------- -------- -------- 40,337 41,009 6.14 8,077 8,089 4.39 -------- -------- -------- -------- Corporate obligations: Within 1 year 32,993 33,030 2.55 1,538 1,536 2.83 1 to 2 years 12,585 12,831 5.53 -- -- -- 2 to 3 years 5,154 5,286 5.82 2,942 3,158 7.28 3 to 5 years 1,750 1,865 7.42 -- -- -- After 10 years 1,500 1,512 11.00 -- -- -- -------- -------- -------- -------- 53,982 54,524 3.95 4,480 4,694 5.75 -------- -------- -------- -------- Municipal obligations: 1 to 2 years 2,062 2,075 3.96 -- -- -- -------- -------- -------- -------- $135,002 $137,886 5.29% $ 38,312 $ 38,598 4.42% ===========================================================================================================================
Issuers may have the right to call or prepay obligations with or without call or prepayment penalties. This right may cause actual maturities and yields to differ from the contractual maturities summarized above. As of December 31, 2001, the Company had callable investment securities with an amortized cost and market value of $3.0 million in the held to maturity portfolio. There were no callable investment securities in the available for sale portfolio. (3) FEDERAL HOME LOAN BANK STOCK The Bank is required to own stock of the Federal Home Loan Bank of Boston ("FHLB"). The minimum investment is 5% of outstanding FHLB advances, or 1% of outstanding residential mortgages, whichever is largest. The Bank receives an amount equal to the par value of the stock when excess stock is redeemed. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (4) LOANS The components of the loan portfolio at December 31, follow:
2001 2000 - -------------------------------------------------------------------------------- (In Thousands) Residential mortgage $ 82,761 $ 77,926 Home equity 13,393 15,997 Construction 20,593 17,148 Commercial real estate 100,110 87,129 Commercial 18,549 22,602 Consumer 991 1,243 --------- --------- Total loans 236,397 222,045 Allowance for loan losses (4,070) (3,685) --------- --------- $ 232,327 $ 218,360 ================================================================================
The amounts above include deferred loan origination fees totaling $160 thousand at December 31, 2001 and $221 thousand at December 31, 2000. Mortgage loans serviced by the Company for others amounted to $68.1 million and $65.4 million at December 31, 2001 and 2000, respectively. Non-performing loans at December 31, 2001 and 2000 amounted to $1.0 million and $10 thousand, respectively. At December 31, 2001 impaired loans totaled $941 thousand, of which $210 thousand was allocated to the allowance for loan losses. There were no impaired loans at December 31, 2000. In the ordinary course of business, the Bank makes loans to its Directors and Officers and their associates and affiliated companies ("related parties") at substantially the same terms and conditions as those prevailing at the time of origination for comparable transactions with other borrowers. An analysis of total related party loans for the year ended December 31, 2001 follows:
BALANCE AT BALANCE AT JANUARY 1, 2001 ADDITIONS REPAYMENTS DECEMBER 31, 2001 - -------------------------------------------------------------------------------- (In Thousands) $1,999 $808 $775 $2,032 ================================================================================
The activity in the allowance for loan losses for the years ended December 31, follows:
2001 2000 1999 - -------------------------------------------------------------------------------- (In Thousands) Balance at beginning of year $ 3,685 $ 3,381 $ 3,272 Total charge-offs (3) (28) (17) Total recoveries 213 82 51 ------- ------- ------- Net recoveries 210 54 34 Provision for loan losses 175 250 75 ------- ------- ------- Balance at end of year $ 4,070 $ 3,685 $ 3,381 ================================================================================
(5) BANK PREMISES AND EQUIPMENT The components of premises and equipment at December 31, follow:
2001 2000 - -------------------------------------------------------------------------------- (In Thousands) Premises $3,572 $3,486 Equipment 2,245 2,017 Leasehold improvements 336 336 ------ ------ 6,153 5,839 Less accumulated depreciation and amortization 2,986 2,502 ------ ------ $3,167 $3,337 ================================================================================
26 Depreciation and amortization expense for the years ended December 31, 2001, 2000, and 1999 amounted to $484,000, $448,000, and $435,000, respectively. Rent expense for leased premises for the years ended December 31, 2001, 2000 and 1999 amounted to $144,000, $143,000 and $140,000, respectively. The Company is obligated, under non-cancelable leases for premises and equipment, for minimum payments in future periods of $154,000 in the year 2002, $112,000 in 2003, and $90,000 for each of the years 2004, 2005, and 2006, respectively. (6) DEPOSITS The following table shows the components of deposits at December 31, 2001 and 2000 and the range of interest rates paid as of December 31, 2001.
RATES AS OF DECEMBER 31, 2001 2001 2000 - ---------------------------------------------------------------------------------------- (Dollars in Thousands) Interest bearing accounts: NOW and Super NOW accounts 0.40-0.75% $ 30,080 $ 29,731 Savings accounts 0.50-1.00% 42,531 38,813 Money market investment accounts 0.25-2.00% 57,575 51,344 Certificates of deposit 2.00-6.85% 97,828 112,239 Retirement accounts 2.00-7.00% 27,032 27,198 -------- -------- Total interest bearing deposits 255,046 259,325 Non-interest bearing demand deposit accounts -- 13,404 11,223 -------- -------- $268,450 $270,548 ========================================================================================
The components of interest expense on deposits for the years ended December 31, follow:
2001 2000 1999 - -------------------------------------------------------------------------------- (In Thousands) Now and Super NOW accounts $ 150 $ 138 $ 126 Savings accounts 725 774 777 Money market investment accounts 1,664 1,935 1,424 Certificates of deposit 5,908 5,623 5,002 Retirement accounts 1,482 1,460 1,546 ------ ------ ------ $9,929 $9,930 $8,875 ================================================================================
The amount and weighted average interest rate on certificates of deposit, including retirement accounts, by periods to maturity at December 31, 2001 are summarized as follows:
EQUAL TO WEIGHTED LESS AND GREATER AVERAGE THAN THAN INTEREST $100,000 $100,000 TOTAL RATE - ------------------------------------------------------------------------------------ (Dollars in Thousands) 3 months or less $ 18,872 $ 5,874 $ 24,746 3.81% From three to six months 34,808 10,382 45,190 4.40 From six to twelve months 19,963 3,863 23,826 3.68 From one to two years 16,024 4,489 20,513 4.05 From two to three years 3,336 685 4,021 4.93 Three years and thereafter 5,503 1,061 6,564 4.94 -------- -------- -------- -------- $ 98,506 $ 26,354 $124,860 4.13% ====================================================================================
27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (7) FEDERAL HOME LOAN BANK ADVANCES SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED FUNDS The FHLB permits member institutions to borrow funds for various purposes. Outstanding advances at December 31, 2001 are collateralized by a blanket lien against residential mortgages and other qualifying collateral. Advances outstanding at December 31, follow:
2001 2000 - -------------------------------------------------------------------------------- WEIGHTED AVERAGE Weighted Average MATURITY AMOUNT INTEREST RATE Amount Interest Rate - -------------------------------------------------------------------------------- (Dollars In Thousands) 2001 $ -- --% $ 24,000 6.60% 2002 18,000 6.40 18,000 6.40 2003 16,941 4.99 10,000 6.14 2004 20,000 4.73 -- -- 2005 5,000 6.23 5,000 6.23 2006 5,000 4.69 -- -- 2007 5,000 6.20 5,000 6.20 2009 270 6.42 283 6.42 2010 20,000 6.03 20,000 6.03 2011 10,000 4.93 -- -- 2021 2,781 6.26 -- -- -------- -------- $102,992 5.52% $ 82,283 6.31% ================================================================================
Issuers may have the right to call or prepay obligations with or without call or prepayment penalties. This right may cause actual maturities to differ from the contractual maturities summarized above. As of December 31, 2001 the Company had callable advances totaling $43.0 million and amortizing advances totaling $6.5 million. The Company may enter into agreements to repurchase securities sold. These agreements are treated as secured borrowings and the obligations to repurchase securities sold are reflected as liabilities and the securities collateralized by the agreements remain as assets. Generally, the outstanding collateral consists of U.S. Treasury and Government Agency obligations and is held by third party custodians. Repurchase agreements totaled $4.2 million at December 31, 2001 at a rate of 0.31%. There were no repurchase agreements outstanding at December 31, 2000. Other borrowed funds at both December 31, 2001 and 2000 consisted of secured borrowings of $3.9 million, bearing an average interest rate of 7.46% and 9.53%, respectively. (8) INCOME TAXES An analysis of income tax expense for the years ended December 31, follows:
2001 2000 1999 - ------------------------------------------------------------------------------------ (In Thousands) Current expense: Federal $ 65 $ 69 $ 375 State 146 76 66 ------- ------- ------- Total current expense 211 145 441 ------- ------- ------- Deferred expense: Federal 1,730 1,462 1,166 State (11) 83 142 Change in valuation reserve 23 15 (167) ------- ------- ------- Total deferred expense 1,742 1,560 1,141 ------- ------- ------- Change in estimate for tax contingencies -- (851) -- ------- ------- ------- Total income tax expense $ 1,953 $ 854 $ 1,582 ====================================================================================
28 A reconciliation of the difference between the expected federal income tax expense computed by applying the federal statutory rate of 34% to the amount of actual income tax expense for the years ended December 31, follows:
2001 2000 1999 - ----------------------------------------------------------------------------------- (In Thousands) Expected federal income tax expense $ 1,805 $ 1,760 $ 1,474 Items affecting expected tax: State income tax, net of federal benefit 89 105 137 Other 36 (175) 138 Change in valuation reserve 23 15 (167) Change in estimate for tax contingencies -- (851) -- ------- ------- ------- Total income tax expense $ 1,953 $ 854 $ 1,582 ===================================================================================
The tax effects of temporary differences (the difference between financial statement carrying amounts of existing assets and liabilities and their respective tax basis that give rise to deferred tax assets and liabilities for the years ended December 31, follow:
2001 2000 - ------------------------------------------------------------------------------------------ (In Thousands) Deferred tax assets: Allowance for loan losses $ 2,464 $ 2,416 Net operating loss carryforward 2,094 3,969 Alternative minimum tax carryforward 347 236 Pension costs 443 517 Deferred compensation 367 310 Loan origination fees 50 32 Depreciation 299 300 Other 274 220 ------- ------- Gross deferred tax asset 6,338 8,000 Valuation reserve (38) (15) ------- ------- Net deferred tax asset 6,300 7,985 ------- ------- Deferred tax liabilities: Unrealized gains on investment securities available for sale (97) (65) Other (466) (409) ------- ------- Net deferred income tax asset $ 5,737 $ 7,511 ==========================================================================================
Operating losses in the early 1990's resulted in available tax loss carry-forwards. A deferred tax valuation allowance is required to reduce the potential deferred tax asset when it is more likely than not that all or some portion of the potential deferred tax asset will not be realized due to the lack of sufficient taxable income in the carryforward period. At December 31, 2001, the Bank has $6.2 million of tax loss carryforwards available that expire between 2011 and 2019. At December 31, 2001, the Bank would need to generate approximately $16.8 million of future net taxable income to realize the net deferred income tax asset. Management believes that it is more likely than not that the net deferred income tax asset at December 31, 2001 will be realized based upon recent operating results. It should be noted, however, that factors beyond Management's control, such as the general state of the economy and real estate values, can affect future levels of taxable income and that no assurance can be given that sufficient taxable income will be generated to fully absorb gross deductible temporary differences. The unrecaptured base year tax reserves as of October 31, 1998 will not be subject to recapture as long as the institution continues to carry on the business of banking. In addition, the balance of the pre-1988 bad debt tax reserves continue to be subject to a provision of the current law that requires recapture in the case of certain excess distribution to shareholders. The tax effect of pre-1988 bad debt tax reserves subject to recapture in the case of certain excess distributions is approximately $1.1 million. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (9) STOCKHOLDERS' EQUITY The Company and the Bank are regulated by federal and state regulatory agencies. Failure by the Company or the Bank to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by federal or state regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets (Leverage ratio). There are two categories of capital under the guidelines. Tier 1 capital as it applies to the Company and the Bank, includes stockholders' equity exclusive of the net unrealizable gains/losses on investment securities available for sale and the deferred tax asset is disallowed. Tier 2 capital includes the allowance for loan losses, subject to guideline limitations. At December 31, 2001 and 2000, the Company and the Bank not only exceeded each of the minimum capital requirements but also met the definition of "well capitalized" as defined by the FDIC under the regulatory framework for prompt corrective action. To be categorized as "well capitalized" the Company or the Bank must maintain Tier 1 Total, and Leverage ratios as set forth in the table below. There are no conditions or events that management believes have changed the Company's or the Bank's classification as "well capitalized." The Company's and the Bank's actual capital ratios and amounts at December 31, 2001 and 2000, follow:
Risk-Based Ratios -------------------------------------------------------------------------------------- Tier 1 Capital Total Capital Leverage Capital -------------------------- -------------------------- -------------------------- 2001 2000 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Capital Ratios: Adequately capitalized 4.00% 4.00% 8.00% 8.00% 4.00% 4.00% Well capitalized 6.00% 6.00% 10.00% 10.00% 5.00% 5.00% LSB Corporation 15.74% -- 16.97% -- 11.46% -- Lawrence Savings Bank 15.15% 15.67% 16.39% 16.86% 11.46% 11.71% Capital Amounts: Adequately capitalized LSB Corporation $ 13,236 $ -- $ 26,472 $ -- $ 17,392 $ -- Lawrence Savings Bank 13,155 12,381 26,310 24,762 17,390 16,567 Well capitalized LSB Corporation 19,854 -- 33,090 -- 21,740 -- Lawrence Savings Bank 19,733 18,572 32,888 30,953 21,737 20,709 Actual Amounts: LSB Corporation 52,081 -- 56,151 -- 52,081 -- Lawrence Savings Bank 49,824 48,516 53,894 52,201 49,824 48,516 =================================================================================================================
STOCKHOLDERS' RIGHTS PLAN In 1996, the Board of Directors adopted a stockholder rights plan declaring a dividend of one preferred stock purchase right for each share of outstanding common stock. The rights will remain attached to the common stock and are not exercisable except under limited circumstances relating to (i) acquisition of beneficial ownership of more than 10% of the outstanding shares of common stock, or (ii) a tender offer or exchange offer that would result in a person or group beneficially owning more than 10% of the outstanding share of common stock. The rights are not exercisable until those aforementioned circumstances occur. The rights expire in 2006. Until a right is exercised, the holder has no rights to vote or to receive dividends. The rights are not taxable to stockholders until exercisable. (10) EMPLOYEE BENEFITS The Company provides pension benefits for its employees through membership in the Savings Bank Employees' Retirement Association (the "Plan"). The Plan is a multiple-employer, non-contributory, defined benefit plan. Bank employees become eligible after attaining age 21 and completing one year of service. Additionally, benefits become fully vested after three years of eligible service. The Company's annual contribution to the Plan is based upon standards established by the Employee Retirement Income Security Act. The contribution is based on an actuarial method intended to provide not only for benefits attributable to service to date, but also for those expected to be earned in the future. 30 The following table sets forth the Plan's funded status and amounts recognized in the Company's consolidated financial statements through the Plan's latest valuation dates which were October 31, 2001 and 2000.
2001 2000 - -------------------------------------------------------------------------------- (In Thousands) Change in benefit obligation: Benefit obligation at beginning of year $ 4,640 $ 4,317 Service cost 280 258 Interest cost 360 334 Actuarial (gain) loss 195 (117) Benefits paid (79) (152) ------- ------- Benefit obligation at end of year $ 5,396 $ 4,640 ================================================================================ Change in plan assets: Fair value of plan assets at beginning of year $ 6,478 $ 5,570 Actual return on plan assets (704) 799 Employer contribution 21 261 Benefits paid (79) (152) ------- ------- Fair value of plan assets at end of year $ 5,716 $ 6,478 ================================================================================ Funded status $ 320 $ 1,838 Unrecognized net actuarial gain (1,386) (3,043) Unrecognized prior service cost (36) (40) ------- ------- Accrued benefit cost included in other liabilities $(1,102) $(1,245) ================================================================================
The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.00% and 7.75% for 2001 and 2000. Net pension cost components for the years ended October 31, follow:
2001 2000 1999 - -------------------------------------------------------------------------------- (In Thousands) Service cost $ 280 $ 258 $ 305 Interest cost 360 334 317 Expected return on plan assets (518) (416) (349) Amortization of net (gains) losses (240) (228) (112) Net amortization and deferrals (4) (4) (4) ----- ----- ----- Net periodic pension cost $(122) $ (56) $ 157 ================================================================================
Assumptions used to develop the net periodic pension cost were:
2001 2000 1999 - ---------------------------------------------------------------------------------------- Discount rate 7.75% 7.75% 6.75% Rate of increase in compensation levels 4.50 4.50 4.50 Expected long-term rate of return on assets 8.00 8.00 8.00 ========================================================================================
The Company provides an employee savings plan (the "Savings Plan") through the Savings Banks Employees' Retirement Association. The Savings Plan qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. Employees are eligible to participate in the Savings Plan immediately upon employment with the Company provided they have attained 21 years of age. Company employees become eligible for matching contributions after completing one year of service with 1,000 hours or more. On an annual basis, the Company determines whether or not to contribute to the Savings Plan. The Company contributed $91 thousand and $80 thousand on behalf of the employees who were in the Savings Plan in 2001 and 2000, respectively. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Board offers options on its common stock to Directors, Management and Officers to purchase unissued common stock of the Company at a price equal to the fair market value of the Company's common stock on the date of grant. All options expire ten years from the date of grant. The Company applies APB Opinion No. 25 and related interpretations in accounting for its Stock Option Plan. Had compensation cost for the Company's Stock Option Plan been determined consistent with SFAS 123, the Company's net income and earnings per share would have been reduced to the proforma amounts for the years ended December 31, and are presented in the table which follows:
2001 2000 1999 - ------------------------------------------------------------------------------------ (In Thousands except per share data) Net Income: As Reported $ 3,357 $ 4,323 $ 2,754 Pro forma 3,086 4,167 2,604 Basic earnings per share As Reported $ 0.77 $ 0.99 $ 0.63 Pro forma 0.71 0.96 0.60 Diluted earnings per share As Reported $ 0.74 $ 0.97 $ 0.61 Pro forma 0.68 0.94 0.58 ====================================================================================
Under the 1986 and 1997 Stock Option Plans, the Bank may grant options to Directors, Officers or employees up to 859,100 of which 151,970 shares have been exercised. As of December 31, 2001, 601,030 options were outstanding with 105,100 available for future use. The vesting schedule provided for 50% of options granted are vested after the first year and an additional 25% vest each year thereafter. Options are fully vested three years after the grant date. The summary of the status of the Stock Option Plan as of December 31, and changes during the years ended follow:
2001 2000 1999 ------------------- ------------------- ------------------- WEIGHTED Weighted Weighted AVERAGE Average Average NUMBER OF EXERCISE Number of Exercise Number of Exercise OPTIONS PRICE Options Price Options Price - ----------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 452,030 $ 6.67 463,030 $ 6.66 326,030 $ 5.32 Granted 165,000 13.87 -- -- 162,000 9.06 Exercised (14,750) 7.00 (8,000) 5.50 (25,000) 4.70 Canceled (1,250) 9.13 (3,000) 9.13 -- -- -------- -------- -------- Outstanding at end of year 601,030 8.63 452,030 6.67 463,030 6.66 ======== ======== ======== Options exercisable end of year 397,530 6.42 372,530 6.16 301,030 5.37 Weighted average fair value of options granted during the year $ 5.47 $ -- $ 3.18 =============================================================================================================================
The following table summarizes information about the Stock Option Plans based on a range of exercise prices as of December 31, 2001.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------- ----------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER OF EXERCISE REMAINING NUMBER OF EXERCISE Range of Exercise Price OPTIONS PRICE LIFE OPTIONS PRICE - ----------------------------------------------------------------------------------------------------- $2.00 to $5.00 107,530 $ 4.38 2.1 YEARS 107,530 $ 4.38 $5.01 to $8.00 185,000 6.05 4.4 YEARS 183,500 6.04 $8.01 to $11.00 143,500 9.13 7.6 YEARS 106,500 9.13 $11.01 to $14.00 165,000 13.87 9.6 YEARS -- -- ------- ------- Outstanding at end of year 601,030 8.63 6.2 YEARS 397,530 6.42 =====================================================================================================
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
2001 2000 1999 - -------------------------------------------------------------------------------- Expected volatility 35.00% -- 29.50% Risk-free interest rate 5.12% -- 6.07% Expected dividend yield 3.37% -- 2.30% Expected life in years 10 -- 8 ================================================================================
32 In addition to the Company's defined benefit pension plan, the Company sponsors a defined benefit post-retirement plan that provides limited post-retirement medical benefits to certain full-time employees who retire before age 65 and life insurance benefits to full-time employees who retire after age 62 and after completing 10 years of service. The plan is non-contributory. The Company's policy is to fund the cost of postretirement benefits in amounts determined at the discretion of management. The amounts of accrued postretirement benefit cost reported on the Company's consolidated balance sheet were $262 thousand and $234 thousand as of December 31, 2001 and 2000, respectively. (11) CONTINGENCIES The Bank is involved in various legal proceedings incidental to its business. After review with legal counsel, management does not believe resolution of such litigation will have a material adverse effect on the financial condition and operating results of the Bank. In one litigation matter, the Bank was awarded a $4.2 million judgment in 1997. The Bank expects to prevail on this appeal. The Bank expects to collect this judgment, at least in substantial part, which would have a material favorable impact to the Bank's financial statements. Post judgment interest accrues from the date of this judgment and approximates $1.9 million at December 31, 2001. However, collectibility of post-judgment interest in addition to the $4.2 million award has not yet been determined. In another litigation matter, the Bank was awarded $1.1 million by a jury verdict, during the fourth quarter 1999, in a legal case where the Bank sought to recover damages from loans previously charged off. In 2000, the court entered final judgment for approximately $1.8 million, which includes accrued interest. This award has been appealed by defendants and collectibility of this award is subject to this appeal and other contingencies. It is management's opinion the timing and final amount to be collected cannot be determined at this time. Accordingly, no recognition of these judgments has been recorded in the financial statements. (12) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is a party to financial instruments with off-balance sheet risk. These instruments, in the form of commitments to extend credit and financial and standby letters of credit, are offered in the normal course of business to meet the financing needs of customers. The company is exposed to varying degrees of credit and interest rate risk in excess of amounts recognized in the consolidated financial statements as a result of such transactions. Commitments to extend credit are agreements to lend to a customer as long as there is compliance with conditions established in the agreement. These extensions of credit are based upon traditional underwriting standards and generally have a fixed expiration date of less than five years. Letters of credit are documents issued by the Company on behalf of its customers in favor of third parties, who can present requests for drafts from the Company within specified terms and conditions. Letters of credit are secured by cash deposits. Standby letters of credit are conditional commitments issued by the Company to guarantee payment to a third party. Outstanding letters of credit generally expire within one year. The credit risk involved with these instruments is similar to the risk of extending loans and, accordingly, the underwriting standards are also similar. It is expected that most letters of credit will not require cash disbursements. The components of financial instruments with off-balance sheet risk at December 31, follow:
FIXED VARIABLE 2001 RATE RATE TOTAL - --------------------------------------------------------------------------------------------------------- (In Thousands) Financial instruments with contract amounts represent credit risk: Unused commitments to extend credit: Residential mortgages $ 2,918 $ 1,707 $ 4,625 Home equity lines of credit 2,355 6,706 9,061 Personal lines of credit 225 -- 225 Commercial real estate mortgage 5,682 13,848 19,530 Construction -- 16,635 16,635 Commercial loans 250 29,030 29,280 ------- ------- ------- Total unused commitments $11,430 $67,926 $79,356 ========================================================================================================= Letters of credit and standby letters of credit $ -- $ 1,978 $ 1,978 ========================================================================================================= Forward commitments to sell mortgage loans $ 7,475 $ -- $ 7,475 =========================================================================================================
33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------------------- Fixed Variable 2000 Rate Rate Total - --------------------------------------------------------------------------------------------------------- (In Thousands) Financial instruments with contract amounts represent credit risk: Unused commitments to extend credit: Residential mortgages $ 666 $ 1,517 $ 2,183 Home equity lines of credit 2,059 5.454 7,513 Personal lines of credit 237 -- 237 Commercial real estate mortgage 56 4,522 4,578 Construction -- 13,097 13,097 Commercial loans 3,105 30,480 33,585 ------- ------- ------- Total unused commitments $ 6,123 $55,070 $61,193 ========================================================================================================= Standby and financial letters of credit $ -- $ 2,357 $ 2,357 ========================================================================================================= Forward commitments to sell mortgage loans $ 165 $ -- $ 165 =========================================================================================================
Forward commitments to sell mortgage loans are contracts which the Company enters into for the purpose of reducing the interest rate risk associated with originating loans held for sale. Risk may arise from the possible inability of the Company to originate loans to fulfill the contracts. Unrealized gains or losses on contracts used to hedge the Company's closed loans and pipeline of loans expected to close are considered in determining the lower of cost or market value of loans held for sale. (13) FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND DUE FROM BANKS, SHORT-TERM INVESTMENTS, STOCK IN FEDERAL HOME LOAN BANK OF BOSTON, ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE. The carrying amount of each of these assets and liabilities is a reasonable estimate of fair value. INVESTMENT SECURITIES For investment securities, fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. LOANS Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, and other consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by classified and non-classified categories. The fair value of non-classified loans is calculated by discounting scheduled cash flows through the expected maturity using current rates at which similar loans would be made to borrowers with similar credit ratings. For non-classified residential mortgage loans, maturity estimates are based on secondary market sources. Fair value for significant classified loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. DEPOSITS AND MORTGAGORS' ESCROW ACCOUNTS The fair value of demand deposits, NOW accounts, money market deposit accounts, savings accounts, and mortgage escrow accounts of borrowers is the amount payable on demand at the balance sheet date. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. BORROWED FUNDS The fair value of borrowed funds is determined as the cost of extinguishing the debt inclusive of any and all prepayment penalties. The prepayment penalties are determined by the Federal Home Loan Bank of Boston. 34 The estimated fair values of the Bank's financial instruments at December 31, follow:
2001 2000 ---------------------- ---------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE - -------------------------------------------------------------------------------------- (In Thousands) Financial assets: Cash and due from banks $ 7,457 $ 7,457 $ 7,086 $ 7,086 Short-term investments 5,705 5,705 15,427 15,427 Investment securities 173,768 176,652 150,833 151,420 Federal Home Loan Bank stock 5,950 5,950 5,950 5,950 Accrued interest receivable 2,604 2,604 2,969 2,969 Loans, net 232,327 238,512 218,360 221,197 Financial liabilities: Deposits $268,450 $269,533 $270,548 $270,873 Borrowed funds 111,099 113,381 86,161 86,673 Mortgagors' escrow accounts 573 573 513 513 Accrued interest payable 498 498 460 460 ======================================================================================
FAIR VALUE OF FINANCIAL INSTRUMENTS OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Off-balance-sheet financial instruments generally have interest rates which reflect current market rates. Management has determined that the difference between the carrying and fair value of these instruments is not material. LIMITATIONS Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no active market exists for a portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions and market conditions could significantly affect these estimates. Fair value estimates are based on existing on and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets that are not considered financial assets include other real estate acquired, banking premises and equipment, and core deposit and other intangibles. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. - ----------------------------------------------------------------------------- (14) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS The condensed financial statements for LSB Corporation, referred to as the "Parent Company" for purposes of this Note only at and for the year ended December 31, follow:
Balance Sheet 2001 - -------------------------------------------------------------------------------- (In Thousands) Assets: Cash deposits in subsidiaries $ 248 Investment securities held to maturity at amortized cost 1,999 Investment in subsidiary, at equity 51,817 Other assets 44 ------- Total assets $54,108 ------- Liabilities and Stockholders' Equity: Liabilities: Accrued income taxes $ 11 Accrued expenses 5 ------- Total liabilities 16 ------- Total stockholders' equity 54,092 ------- Total liabilities and stockholders' equity $54,108 ================================================================================
35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------- Statement of Operations 2001 - -------------------------------------------------------------------------------- (In Thousands) Dividends from bank subsidiary $ 3,320 ------- Total operating income 3,320 Non-interest expenses 188 ------- Income before income taxes and undistributed earnings 3,132 Income tax benefit (7) ------- Income before undistributed earnings of subsidiary 3,139 Equity in undistributed earnings of subsidiary 218 ------- Net income $ 3,357 ================================================================================
The Parent Company's statements of changes in stockholders' equity are identical to the consolidated statements of changes in stockholders' equity and therefore are not presented here. - -------------------------------------------------------------------------------- (15) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
2001 ------------------------------------------- MARCH JUNE SEPTEMBER DECEMBER 31 30 30 31 - ---------------------------------------------------------------------------------------------------- (In Thousands, Except Per Share Data) Interest and dividend income $7,398 $7,282 $7,237 $6,875 Interest expense 4,196 4,007 3,928 3,480 ------ ------ ------ ------ Net interest income 3,202 3,275 3,309 3,395 Provision for loan losses -- 50 125 -- ------ ------ ------ ------ Net interest income after provision for loan losses 3,202 3,225 3,184 3,395 Non-interest income 281 298 354 493 Non-interest expense 2,208 2,303 2,312 2,299 ------ ------ ------ ------ Income before income tax 1,275 1,220 1,226 1,589 Income tax 484 430 472 567 ------ ------ ------ ------ Net income $ 791 $ 790 $ 754 $1,022 ==================================================================================================== Basic earnings per share $ 0.18 $ 0.18 $ 0.17 $ 0.23 Diluted earnings per share $ 0.18 $ 0.17 $ 0.17 $ 0.22 ====================================================================================================
2000 ------------------------------------------- March June September December 31 30 30 31 - ---------------------------------------------------------------------------------------------------- (In Thousands, Except Per Share Data) Interest and dividend income $7,015 $7,106 $7,330 $7,586 Interest expense 3,778 4,001 4,224 4,355 ------ ------ ------ ------ Net interest income 3,237 3,105 3,106 3,231 Provision for loan losses -- -- 125 125 ------ ------ ------ ------ Net interest income after provision for loan losses 3,237 3,105 2,981 3,106 Non-interest income 288 296 246 294 Non-interest expense 2,128 2,049 2,085 2,114 ------ ------ ------ ------ Income before income tax (benefit) 1,397 1,352 1,142 1,286 Income tax (benefit) 497 456 (185) (i) 86 (i) ------ ------ ------ ------ Net income $ 900 $ 896 $1,327 $1,200 ==================================================================================================== Basic earnings per share $ 0.21 $ 0.21 $ 0.30 $ 0.27 Diluted earnings per share $ 0.20 $ 0.20 $ 0.30 $ 0.27 ====================================================================================================
(i) Included tax benefits of $639 thousand and $213 thousand in the third and fourth quarters of 2000, respectively. 36 STOCKHOLDER INFORMATION The Company's stock trades on the Nasdaq Stock Market under the symbol "LSBX". Sales prices of the stock are reported in the Wall Street Journal as "LSBCorp". Prior to July 1, 2001, the Bank's common stock traded on the Nasdaq Stock Market under the symbol "LSBX". Prices of the Bank's common stock were reported in the Wall Street Journal as "LawrenceSvg". The following table sets forth for the fiscal periods indicated certain information with respect to the sales prices of the Company's common stock.
Price ----------------------- Fiscal Year High Low - -------------------------------------------------------------------------------- 2001 First Quarter $ 11.86 $ 9.81 Second Quarter 13.65 10.50 Third Quarter 14.00 9.81 Fourth Quarter 13.10 10.11 2000 First Quarter $ 7.625 $ 6.750 Second Quarter 7.500 6.813 Third Quarter 9.313 6.625 Fourth Quarter 10.875 8.000 1999 First Quarter $ 12.94 $ 9.50 Second Quarter 10.50 8.25 Third Quarter 9.50 7.50 Fourth Quarter 8.50 7.13
The Company declared and paid a cash dividend of $0.40 per share ($0.10 in each quarter) during 2001. The Company expects to pay dividends during 2002. On December 31, 2001 there were approximately 1,104 holders of common stock. This number does not reflect the number of persons or entities who hold their stock in nominee or "street" name through various brokerage firms. The Annual Meeting of the stockholders of LSB Corporation will be held at 10:00 a.m. on Tuesday, May 7, 2002 at the Andover Country Club, Canterbury Street, Andover, Massachusetts. CORPORATE HEADQUARTERS LSB Corporation 30 Massachusetts Avenue North Andover, MA 01845-3460 MAILING ADDRESS 30 Massachusetts Avenue North Andover, MA 01845-3460 INVESTOR RELATIONS Barbara Biondo Telephone (978) 725-7556 Fax (978) 725-7593 A COPY OF THE COMPANY'S FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO THE SECURITIES AND EXCHANGE ACT OF 1934, IS AVAILABLE WITHOUT CHARGE UPON WRITTEN REQUEST TO INVESTOR RELATIONS. TRANSFER AGENT EquiServe Trust Company 150 Royall Street Canton, MA 02021 INDEPENDENT AUDITORS KPMG LLP 99 High Street Boston, MA 02110 LEGAL COUNSEL Goulston & Storrs, P.C. 400 Atlantic Avenue Boston, MA 02110-3333 Book Value Per Share vs Stock Price [BAR CHART]
1997 1998 1999 2000 2001 Book Value $ 8.77 $ 10.78 $ 11.11 $ 11.99 $ 12.35 Stock Price $ 16.38 $ 12.81 $ 7.63 $ 10.50 $ 12.69
37 DIRECTORS OF LSB CORPORATION AND LAWRENCE SAVINGS BANK EUGENE A. BELIVEAU, D.D.S. Dentist KATHLEEN I. BOSHAR Sales Manager DeWolfe Companies MALCOLM W. BRAWN Executive Vice President & Secretary The Andover Companies THOMAS J. BURKE Chairman of the Board LSB Corporation and Lawrence Savings Bank Register of Deeds Attorney BYRON R. CLEVELAND, JR. President J. H. Horne & Sons NEIL H. CULLEN Chief Financial Officer Phillips Academy RICHARD HART HARRINGTON, CPA Chairman Gordon, Harrington & Osborn, P.C. ROBERT F. HATEM Executive Assistant to the President Northern Essex Community College MARSHA A. MCDONOUGH Regional Education Offices U.S. Department of State PAUL A. MILLER President and Chief Executive Officer LSB Corporation and Lawrence Savings Bank OFFICERS OF LSB CORPORATION PAUL A. MILLER President and Chief Executive Officer JOHN E. SHARLAND Senior Vice President, Treasurer and Chief Financial Officer ROBERT P. PERREAULT Executive Vice President, Clerk and Secretary RICHARD J. D'AMBROSIO Assistant Treasurer TIMOTHY L. FELTER Assistant Treasurer JEFFREY W. LEEDS Assistant Treasurer 38 OFFICERS OF LAWRENCE SAVINGS BANK PAUL A. MILLER President and Chief Executive Officer CARLA M. FRIEDRICH Vice President and Human Resources Officer ROBYN K. LEBUFF Vice President and Marketing Officer BRENDA MISKINIS Assistant Vice President Marketing Officer LENDING DIVISION JEFFREY W. LEEDS Executive Vice President and Chief Lending Officer COMMERCIAL BANKING JACOB KOJALO Senior Vice President and Senior Lending Officer ROBERT J. DELUCA Vice President STEVEN K. VENTRE Vice President COMMERCIAL REAL ESTATE LENDING FREDERICK P. MALOOF Vice President JOHN P. TEOLI Vice President PAUL M. VALLACE Vice President CREDIT POLICY AND ADMINISTRATION LEE D. DICKEY Senior Vice President JOHN P. MALYNN Vice President and Collections Manager LINDA A. BAILEY Assistant Vice President and Credit Administration Officer CONSUMER LENDING MAUREEN MCCARTHY Vice President and Compliance/CRA Officer RESIDENTIAL MORTGAGE LENDING ROBERT P. PERREAULT Executive Vice President Residential Mortgage Lending and Clerk SUSAN M. CAIN Assistant Vice President and Senior Mortgage Underwriter LYNETTE S. KIMBALL Assistant Vice President and Loan Closing Coordinator FINANCE DIVISION JOHN E. SHARLAND Senior Vice President, Treasurer and Chief Financial Officer LINDA M. CHASE BORRELLI Vice President and Controller PERSONAL BANKING DIVISION TIMOTHY L. FELTER Executive Vice President and Investment Officer SHARON S. PRIVITERA Vice President and Branch Administrator/Security Officer GAYLE M. FILI Vice President and Branch Manager CHERYL A. PARENT Vice President and Branch Manager ANNA CURRAO Assistant Vice President and Branch Manager SUSAN M. DANCAUSE Assistant Vice President and Retirement Services Officer LINDA BUELL Branch Manager PAUL M. FRANK Branch Manager SUPPORT SERVICE DIVISION RICHARD J. D'AMBROSIO Senior Vice President CARMELA CUTULI Vice President and Loan Servicing Manager CHERYL A. VINING Vice President and Deposit Servicing Manager STANLEY R. WARD, JR. Assistant Vice President LAURA LAVOIE Assistant Vice President Computer Network Engineer 39 CORPORATE HEADQUARTERS OF LSB CORPORATION 30 Massachusetts Avenue North Andover, MA 01845-3460 (978) 725-7500 BANKING OFFICES OF LAWRENCE SAVINGS BANK MAIN OFFICE: 30 Massachusetts Avenue North Andover, MA 01845-3460 (978) 725-7500 Fax: (978) 725-7607 BRANCH OFFICES: 342 North Main Street Andover, MA 01810 (978) 725-7590 300 Essex Street Lawrence, MA 01840 (978) 725-7530 20 Jackson Street Methuen, MA 01844 (978) 725-7545 148 Lowell Street Methuen, MA 01844 (978) 725-7570 Lawrence Savings Bank 24 Hour Information Phone:(978) 725-7700 www.LawrenceSavings.com Member FDIC Member DIF [RECYCLED LOGO] This Annual Report is printed on recycled paper. LSBCM-AR-02 EX-20 4 b42246lsex20.txt 2002 PROXY STATEMENT EXHIBIT 20 LSB CORPORATION 30 MASSACHUSETTS AVENUE NORTH ANDOVER, MASSACHUSETTS 01845 (978) 725-7500 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 7, 2002 Dear Stockholder of LSB Corp.: Notice is hereby given that the annual meeting of stockholders (the "Annual Meeting") of LSB Corporation (the "Company") will be held at 10:00 a.m. local time on Tuesday, May 7, 2002 at the Andover Country Club, Canterbury Street, Andover, Massachusetts, for the following purposes: 1. To elect four Class C Directors for a three-year term. 2. To elect Robert P. Perreault as the Clerk of the Company. 3. To ratify the appointment of KPMG LLP as the Company's independent auditors for the current fiscal year. 4. To transact such other business as may properly come before the meeting and any adjournments or postponements thereof. Pursuant to the By-Laws, the Board of Directors has fixed the close of business on March 8, 2002 as the record date for the determination of stockholders entitled to notice of and to vote at the Annual Meeting. The above matters are described in detail in the accompanying Proxy Statement. By Order of the Board of Directors, ROBERT P. PERREAULT, Clerk March 28, 2002 PURSUANT TO RULES OF THE FEDERAL DEPOSIT INSURANCE CORPORATION (12 C.F.R. PART 350) AND THE REQUIREMENT THAT LAWRENCE SAVINGS BANK MAKE AVAILABLE ITS ANNUAL DISCLOSURE STATEMENT, ANY PERSON, UPON REQUEST, IS ENTITLED TO RECEIVE A COPY OF THE 2001 ANNUAL REPORT OF THE COMPANY ON FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. TO RECEIVE A COPY OF THIS REPORT WITHOUT CHARGE, PLEASE WRITE TO: ROBERT P. PERREAULT, CLERK, LSB CORPORATION, 30 MASSACHUSETTS AVENUE, NORTH ANDOVER, MASSACHUSETTS 01845. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE COMPLETE AND SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU DO ATTEND THE ANNUAL MEETING AND DESIRE TO WITHDRAW YOUR PROXY AND VOTE IN PERSON, YOU MAY DO SO. LSB CORPORATION. 30 MASSACHUSETTS AVENUE NORTH ANDOVER, MASSACHUSETTS 01845 (978) 725-7500 PROXY STATEMENT ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 7, 2002 This Proxy Statement and the accompanying proxy card are furnished in connection with the solicitation of proxies by the Board of Directors of LSB Corporation (the "Company") for use at the Annual Meeting of Stockholders of the Company to be held at the Andover Country Club, Canterbury Street, Andover, Massachusetts at 10:00 a.m. on Tuesday, May 7, 2002 and any adjournments or postponements thereof (the "Annual Meeting"). At the Annual Meeting, stockholders of the Company will be asked to consider and vote upon the following matters: 1. To elect four Class C Directors, each for a three-year term to continue until the Company's annual meeting of stockholders in the year 2005 and until such Director's successor is duly elected and qualified. 2. To elect Robert P. Perreault as the Clerk of the Company. 3. To ratify the appointment of KPMG LLP as the Company's independent auditors for the current fiscal year. 4. To transact such other business as may properly come before the Annual Meeting and any adjournments or postponements thereof. This Proxy Statement and the accompanying form of proxy are first being mailed to stockholders of the Company on or about March 28, 2002 in connection with the solicitation of proxies for the Annual Meeting. THE COMPANY The Company is a one-bank holding company principally conducting business through Lawrence Savings Bank (the "Bank"). On July 1, 2001, the Company and the Bank completed a reorganization (the "Reorganization") in which the Bank became a wholly-owned subsidiary of the Company, the Company adopted the Shareholder Rights and Stock Option Plans of the Bank, and each issued and outstanding share of common stock of the Bank (and accompanying preferred stock purchase rights under the Rights Plan) was converted into and exchanged for one share of common stock, par value $.10 per share, of the Company and accompanying preferred stock purchase rights under the Rights Plan (the "Common Stock"). For purposes of this Proxy Statement, unless the context otherwise requires, any reference to the Company shall be deemed to be a reference to the Company and the Bank. RECORD DATE; VOTING The Board of Directors has fixed the close of business on March 8, 2002 as the record date for the determination of stockholders entitled to notice of and to vote at the Annual Meeting and any adjournments or postponements thereof (the "Record Date"). Only holders of the Common Stock at the Record Date will be entitled to notice of and to vote at the Annual Meeting or any adjournments or postponements thereof. At the Record Date, there were 4,382,243 shares of Common Stock outstanding and entitled to vote at the Annual Meeting, and each such outstanding share is entitled to one vote. QUORUM AND STOCKHOLDER VOTE REQUIRED The presence, in person or by proxy, of at least a majority of the total number of outstanding shares of Common Stock is necessary to constitute a quorum for transaction of business at the Annual Meeting. The affirmative vote of the holders of a plurality of Common Stock present or represented by proxy and voting is required to (i) elect the four (4) nominees for Class C Directors and (ii) elect Robert P. Perreault as Clerk of the Company. The approval of the holders of a majority of Common Stock present or represented by proxy and voting is required to ratify the appointment of KPMG LLP as the Company's independent auditors. Abstentions and "broker non-votes" will be counted as present for purposes of determining the presence or absence of a quorum for the transaction of business at the Annual Meeting. A "broker non-vote" is a proxy from a broker or other nominee indicating that such person has not received instructions from the beneficial owner or other person entitled to vote the shares on a particular matter with respect to which the broker or other nominee does not have discretionary voting power. Abstentions and broker non-votes will not be counted for purposes of determining the number of votes cast for a proposal. PROXIES Stockholders of the Company are requested to complete, date, sign, and promptly return the accompanying form of proxy in the enclosed envelope. Common Stock represented by properly executed proxies received by the Company and not revoked will be voted at the Annual Meeting in accordance with the instructions contained therein. If instructions are not given therein, properly executed proxies will be voted FOR the election of the four (4) nominees for Class C Directors listed in the Proxy Statement, FOR the election of Mr. Perreault as Clerk and FOR ratification of the appointment of KPMG LLP as the Company's independent auditors for the current fiscal year. Although it is anticipated that all the nominees for Director will be available to serve as Directors if elected, should any one or more of them be unable to serve, proxies may be voted for the election of a substitute nominee or nominees. It is not anticipated that any matters other than those set forth in the Proxy Statement will be presented at the Annual Meeting. If other matters are presented, proxies will be voted in accordance with the discretion of the proxy holders. Any properly completed proxy may be revoked at any time before it is voted by giving written notice of such revocation to the Clerk of the Company, or by signing and duly delivering a proxy bearing a later date, or by attending the Annual Meeting and voting in person. Attendance at the Annual Meeting will not in and of itself constitute revocation of a proxy. The cost of soliciting proxies will be borne by the Company. Morrow & Co. has been retained to assist in the solicitation process and will be compensated in the estimated amount of $4,000.00. After the initial mailing of this Proxy Statement, officers and regular employees of the Company may solicit proxies personally, by telephone or by facsimile without additional compensation. The Company intends to request banks, brokers and other institutions, nominees and fiduciaries who hold Common Stock for beneficial owners to forward the proxy materials to the beneficial owners and to obtain authorizations for the execution of proxies, and will reimburse such institutions and persons for their reasonable expenses. 2 The Company's Annual Report to Stockholders, including financial statements for the fiscal year ended December 31, 2001, is being mailed to stockholders of record of the Company concurrently with this Proxy Statement. The Annual Report, however, is not part of the proxy soliciting material. ADDITIONAL COPIES OF THE ANNUAL REPORT OF THE COMPANY ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (WITHOUT EXHIBITS), ARE AVAILABLE UPON WRITTEN REQUEST, WITHOUT CHARGE, FROM THE COMPANY. SUCH REQUESTS SHOULD BE DIRECTED TO: LSB CORPORATION, 30 MASSACHUSETTS AVENUE, NORTH ANDOVER, MASSACHUSETTS 01845, ATTENTION: SHAREHOLDER RELATIONS. 3 PROPOSAL 1 ELECTION OF A CLASS OF DIRECTORS The Board of Directors of the Company currently comprises ten members divided into three classes, Classes A, B and C. Classes A and B consist of three members each. Class C consists of four members. The Directors in each class serve a term of three years, with the terms of the various classes expiring in different years and when the Directors' successors are duly elected and qualified. At the Annual Meeting, four Class C Directors will be elected to serve until the Annual Meeting of stockholders of the Company in the year 2005 and until their successors are duly elected and qualified. The Board of Directors has nominated Eugene A. Beliveau, Byron R. Cleveland, Jr., Robert F. Hatem and Paul A. Miller as Class C Directors (each, a "Nominee", collectively, the "Nominees"). Each of the Nominees is currently serving as a Director of the Company. Unless authority to do so has been withheld or limited in a proxy, it is the intention of the persons named as proxies to vote the shares to which the proxy relates FOR the election of the Nominees to the Board of Directors. The Board of Directors anticipates that each of the Nominees will stand for election and serve, if elected, as a Director. However, if any person nominated by the Board of Directors fails to stand for election or is unable to accept election, the proxies will be voted for the election of such other person or persons as the Board of Directors may recommend. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE NOMINEES. 4 INFORMATION REGARDING DIRECTORS The following table sets forth, for each of the four (4) Nominees for election as Class C Director at the Annual Meeting, the Nominee's name and, as of February 28, 2002, the Nominee's age and the date from which the Nominee has served as a Director or Trustee of the Bank prior to the Reorganization. Similar information is provided for continuing Class B and Class A Directors (each, a "Continuing Director", collectively, the "Continuing Directors") whose terms do not expire until the annual meetings of the stockholders of the Company in 2004 and 2003, respectively, and until their successors are duly elected and qualified. Each Nominee and Continuing Director has served as a director of the Company since July 1, 2001, the effective date of the Reorganization (the "Effective Date"). Prior to the Effective Date, each Nominee and Continuing Director served as a Director of the Bank.
TRUSTEE OR DIRECTOR NAMES OF NOMINEES AND CONTINUING DIRECTORS AGE SINCE ------------------------------------------ --- ---------- NOMINEES CLASS C (TERM EXPIRING 2005) Eugene A. Beliveau.......................................... 71 1978 Byron R. Cleveland, Jr. .................................... 70 1968 Robert F. Hatem............................................. 66 1974 Paul A. Miller.............................................. 62 1989 CONTINUING DIRECTORS CLASS B (TERM EXPIRING 2004) Malcolm W. Brawn............................................ 62 1991 Neil H. Cullen.............................................. 59 1991 Richard H. Harrington....................................... 65 1995 CONTINUING DIRECTORS CLASS A (TERM EXPIRING 2003) Kathleen I. Boshar.......................................... 46 1991 Thomas J. Burke............................................. 61 1985 Marsha A. McDonough......................................... 57 1993
PRINCIPAL OCCUPATION OF NOMINEES AND CONTINUING DIRECTORS EUGENE A. BELIVEAU, practicing dentist in North Andover, Massachusetts. KATHLEEN I. BOSHAR, Sales Manager, DeWolfe Companies, North Andover, Massachusetts, a real estate brokerage company. MALCOLM W. BRAWN, Executive Vice President and Secretary of The Andover Companies, Andover, Massachusetts, a property and casualty insurance company. THOMAS J. BURKE, Register of Deeds of Essex County, Massachusetts and attorney. BYRON R. CLEVELAND, JR., President of J.H. Horne & Sons, Lawrence, Massachusetts, a manufacturer of paper mill machinery. NEIL H. CULLEN, Chief Financial Officer of Phillips Academy, Andover, Massachusetts, a private secondary school. RICHARD HART HARRINGTON, CPA, Chairman, Gordon, Harrington & Osborn, P.C., certified public accountants, North Andover, Massachusetts. ROBERT F. HATEM, Executive Assistant to the President, Northern Essex Community College, Lawrence/Haverhill, Massachusetts. 5 MARSHA A. MCDONOUGH, Regional Education Officer, U.S. Department of State, Office of Overseas Schools, Washington, D.C. PAUL A. MILLER, President and Chief Executive Officer of the Company and the Bank. Each of the Nominees and Continuing Directors has held such position(s) for five or more years with the exceptions of Robert F. Hatem, who has been in his present position since January 1998, and previously was Manager, Customer/Community Relations of Raytheon Corporation's Electronic System Division, Bedford, Massachusetts, a defense contractor; Kathleen I. Boshar, who has been in her present position since July 2000, and previously was Executive Director, Residential Association of Realtors, Greater Boston Real Estate Board, Boston, Massachusetts; and Marsha A. McDonough, who has been in her present position since August, 2000 and previously was Associate Dean, Endicott College, Beverly, Massachusetts. THE BOARD OF DIRECTORS AND ITS COMMITTEES The following sets forth certain information concerning the Board of Directors of the Company. The Board of Directors of the Company held 12 meetings in the fiscal year ended December 31, 2001. Each incumbent director, with the exception of Neil H. Cullen who attend 58%, attended at least 75% of the aggregate of the total number of meetings held by the Board and all committees of the Board on which such Director served during the period of such Director's service in 2001. The Board of Directors of the Company has five standing committees: an Executive Committee, a Nominating Committee, an Audit Committee, a Stock Option Committee, a Community Affairs Committee and a Compensation Committee. The members of the Executive Committee are Messrs. Burke (Chairman), Beliveau, Brawn, and Miller (President & CEO) plus two additional Board members on a rotating basis. The rotating members of the Executive Committee are drawn from the six other directors not listed in the preceding sentence. Each such rotating member serves as a member of the Executive Committee for a two-month interval (four meetings) approximately twice a year. The Executive Committee is vested with authority of the Board on most matters between meetings of the Board. The members of the Nominating Committee are Messrs. Burke (Chairman), Beliveau and Brawn. Persons wishing to nominate persons to the Board of Directors may make such nomination in writing and transmit it to the Nominating Committee of the Board of Directors, who will consider such nomination in accordance with the By-Laws of the Company. The Nominating Committee met 2 times in 2001. The members of the Audit Committee are Messrs. Beliveau (Chairman), Cleveland, Hatem and Harrington. The Audit Committee reviews the scope of the annual audit by the Company's independent auditors and internal auditors, monitors the Company's internal financial and accounting controls and procedures and recommends to the Board of Directors of the Company the appointment of independent auditors. The Audit Committee held 4 meetings in 2001. The Audit Committee and the full Board of Directors have adopted a written Audit Committee charter which is attached to this Proxy Statement as Appendix A. Each member of the Audit Committee is an independent director as defined in Rule 4200(a)(15) of the Nasdaq Stock Market's Marketplace Rules. The members of the Stock Option Committee are Messrs. Burke (Chairman), Beliveau and Brawn. The Stock Option Committee administers the Company's stock option plans. The Stock Option Committee met 4 times in 2001. 6 The members of the Community Affairs Committee are Messrs. Hatem (Chairman) and Miller. The Community Affairs Committee reviews and approves requests for money from non-profit organizations. The Community Affairs Committee held no meetings in 2001. The members of the Compensation Committee are Messrs. Burke (Chairman), Beliveau and Brawn. The Committee prepares an annual appraisal of the performance of the Chief Executive Officer of the Company and recommends the annual compensation and benefits for the Chief Executive Officer to the Company's Board of Directors for the approval of the Board. The Compensation Committee met 5 times in 2001. AUDIT COMMITTEE REPORT The Audit Committee reviews the scope of the annual audit by the Company's independent auditors and internal auditors, monitors the Company's internal financial and accounting controls and procedures and recommends to the Board of Directors the appointment of independent auditors. In fulfilling its responsibilities, the Audit Committee: - discussed and considered the independence of KPMG LLP, reviewing as necessary all relationships and services which might bear on KPMG LLP's independence as outside auditor; - received written affirmation from KPMG LLP that it is in fact independent; - discussed the overall audit process, receiving and reviewing all reports of KPMG LLP; - involved KPMG LLP in the Audit Committee's review of the Company's financial statements and related reports with management; - provided to KPMG LLP full access to the Audit Committee and the full Board of Directors to report on all appropriate matters; and - discussed with KPMG LLP all matters required under auditing standards generally accepted in the United States of America to be reviewed. The Audit Committee met with selected members of management and KPMG LLP to review financial statements (including quarterly reports), discussing such matters as the quality of earnings; estimates, reserves and accruals; the suitability of accounting principles; financial reporting decisions requiring a high degree of judgment; and audit adjustments, whether or not recorded. The Audit Committee recommended to the Board of Directors, subject to stockholder ratification, the selection of KPMG LLP as the Company's outside auditor. In addition, the Committee considered the quality and adequacy of the Company's internal controls and the status of pending litigation, taxation matters and such other areas of oversight of the Company's financial reporting and audit process as the Audit Committee felt appropriate. 7 Based upon its work and the information received in the inquiries outlined above, the Audit Committee recommended to the Company's Board of Directors that the Company's audited financial statements be included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 for filing with the Securities and Exchange Commission. Respectfully submitted, Eugene A. Beliveau (Chairman) Byron R. Cleveland, Jr. Robert F. Hatem Richard Hart Harrington COMPENSATION OF DIRECTORS The members of the Board of Directors of the Company who serve on the Executive Committee, except for the Chairman of the Board of Directors and Mr. Miller, currently receive an annual retainer of $15,865 plus a fee of $425 for each Executive Committee and Board meeting plus a fee of $835 for each Committee meeting attended (other than meetings of the Executive Committee, Compensation Committee, Nominating Committee and Stock Option Committee). The Chairman of the Board of Directors receives an annual retainer of $18,240 plus a fee of $480 for each meeting attended, except conferences and training meetings outside of the Company for which the fee is $835. Each Director of the Company other than members of the Executive Committee receives an annual retainer of $9,200 plus a fee of $425 for each Board or Committee meeting attended. Each Director receives a fee of $835 for all conferences and training meetings attended outside the Company. Mr. Miller does not receive any separate compensation for service as a Director or as a member of any of the Committees of the Board of Directors. 8 EXECUTIVE OFFICERS The following table sets forth, for each of the executive officers of the Company, as of February 28, 2002, each such person's name, age and position or office held with the Company as well as other biographical information. Each of the listed executive officers is employed by the Bank under the terms and conditions of certain employment agreements. The Bank has also entered into a special termination agreement with Mr. Perreault. In connection with the Reorganization, the Company assumed joint contractual responsibility as employer under each of the these agreements. See "EXECUTIVE COMPENSATION -- Employment Agreements; Special Termination Agreement" (page 11).
NAME POSITION AGE - ---- -------- --- Paul A. Miller............................ Director, President and Chief Executive Officer of 62 the Company and the Bank Jeffrey W. Leeds(1)....................... Executive Vice President and Chief Lending Officer of 62 the Bank, Assistant Treasurer of the Company Robert P. Perreault(2).................... Executive Vice President and Clerk of the Company, 62 Executive Vice President -- Residential Mortgage Lending and Clerk of the Bank Timothy L. Felter(3)...................... Executive Vice President, Personal Banking and 41 Investment Officer of the Bank, Assistant Treasurer of the Company John E. Sharland(4)....................... Senior Vice President, Chief Financial Officer and 39 Treasurer of the Company and the Bank Richard J. D'Ambrosio(5).................. Senior Vice President, Support Services Operations of 53 the Bank, Assistant Treasurer of the Company
- --------------- (1) Jeffrey W. Leeds, who joined the Bank in 1987, has been its Chief Lending Officer since 1988. He was appointed Assistant Treasurer of the Company in July 2001. (2) Robert P. Perreault, who joined the Bank in 1959, has served as its Clerk from 1978 to the present. From 1989 to January 1999, he served as Executive Vice President and Treasurer. In January 1999, he was appointed Executive Vice President, Residential Mortgage Lending. He was appointed Executive Vice President and Clerk of the Company in March 2001. (3) Timothy L. Felter, who joined the Bank in 1990, was appointed Senior Vice President of the Bank in 1993, Senior Vice President, Department Manager of Residential Lending in 1994, Investment Officer in 1995 and Executive Vice President, Personal Banking, and Investment Officer in January 1999. He was appointed Assistant Treasurer of the Company in July 2001. (4) John E. Sharland, who joined the Bank in 1992, was appointed Vice President and Chief Financial Officer in 1994, Senior Vice President in 1998 and Senior Vice President, CFO and Treasurer in January 1999. He was appointed Senior Vice President, CFO and Treasurer of the Company in March 2001. (5) Richard J. D'Ambrosio, who joined the Bank in 1983, was elected Vice President of Servicing 1986 and Senior Vice President of Support Services/Operations in 1998. He was appointed Assistant Treasurer of the Company in July 2001. 9 EXECUTIVE COMPENSATION The following table sets forth for the fiscal years ended December 31, 2001, 2000 and 1999 certain information concerning the compensation paid or accrued to the Chief Executive Officer of the Company and the other executive officers of the Company whose total salary and bonus exceeded $100,000 during the year ended December 31, 2001, for services rendered in all capacities to the Company (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION ---------------------------------- ---------------------------- SECURITIES UNDERLYING NAME AND YEAR ENDED OPTIONS/ ALL OTHER PRINCIPAL POSITION DECEMBER 31, SALARY BONUS SARS(#) COMPENSATION($) ------------------ ------------ -------- ------- ---------- --------------- Paul A. Miller............................. 2001 $345,294(1) $65,000 12,000 $144,414(2)(3) President and 2000 $326,896(1) $62,000 0 $141,234(2)(3) Chief Executive Officer 1999 $313,502(1) $59,000 12,000 $148,929(2)(3) Jeffrey W. Leeds........................... 2001 $165,957 $17,000 9,000 $ 4,523(3) Executive Vice President 2000 $156,183 $15,100 0 $ 4,503(3) and Chief Lending Officer 1999 $147,062 $15,000 9,000 $ 4,862(3) Robert P. Perreault........................ 2001 $124,216 $ 6,000 9,000 $ 3,542(3) Executive Vice President 2000 $119,520 $ 6,000 0 $ 3,535(3) Residential Lending and Clerk 1999 $114,785 $10,000 9,000 $ 3,744(3) Timothy L. Felter.......................... 2001 $117,930 $17,000 9,000 $ 3,517(3) Executive Vice President 2000 $108,476 $14,700 0 $ 3,240(3) Personal Banking, Investment Officer 1999 $100,703 $14,000 9,000 $ 3,441(3)
- --------------- (1) Includes benefits paid on behalf of Mr. Miller and reported as wage compensation to him. (2) Represents amounts accrued to fund supplemental retirement plans for the benefit of Mr. Miller pursuant to Supplemental Retirement Agreements with Mr. Miller. See "EXECUTIVE COMPENSATION -- Employment Agreements; Special Termination Agreement" (page 11). (3) Includes matching contributions by the Bank to the Bank's 401(k) Retirement Savings Plan for the Named Executive Officer. The Bank provides an automobile for use by Mr. Miller and pays his membership dues to certain organizations. The aggregate amount of such benefits is less than 10% of Mr. Miller's cash compensation. With the exception of certain insurance premiums paid by the Bank, no other benefits are made available to executive officers that are not made available to all employees of the Bank. See "EXECUTIVE COMPENSATION -- Benefits" (page 14). Employees of the Bank, including the executive officers, are covered by the Bank's group health insurance program, group life insurance program, long-term disability program and business related travel accident insurance plan. 10 The following table sets forth information regarding stock options granted during fiscal year 2001 to the Named Executive Officers. No stock appreciation rights were granted during fiscal year 2001. OPTIONS GRANTED IN LAST FISCAL YEAR
POTENTIAL REALIZABLE PERCENT OF VALUE AT ASSUMED ALTERNATIVE TO NUMBER OF TOTAL ANNUAL RATES OF STOCK (F) AND (G): SECURITIES OPTIONS PRICE APPRECIATION FOR GRANT DATE UNDERLYING GRANTED TO EXERCISE OPTION TERM VALUE OPTIONS EMPLOYEES OF ----------------------- --------------- GRANTED IN FISCAL BASE PRICE EXPIRATION GRANT DATE NAME (#) YEAR ($/SH) DATE 5%($) 10%($) PRESENT VALUE $ (A) (B) (C) (D) (E) (F) (G) (H) ---- ---------- ---------- ---------- ---------- ---------- ---------- --------------- Paul A. Miller.................... 12,000 7.27% $13.90 7/26/11 $104,904 $265,836 -- Jeffrey W. Leeds.................. 9,000 5.45% $13.90 7/26/11 $ 78,678 $199,377 -- Robert P. Perreault............... 9,000 5.45% $13.90 7/26/11 $ 78,678 $199,377 -- Timothy L. Felter................. 9,000 5.45% $13.90 7/26/11 $ 78,678 $195,377 --
The following table sets forth certain information concerning stock options exercised during the fiscal year ended December 31, 2001 and the number and value of shares of Common Stock of the Company subject to options held by the Named Executive Officers as of December 31, 2001: AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS/SARS OPTIONS/SARS SHARES AT FISCAL AT FISCAL ACQUIRED VALUE YEAR END (#) YEAR END($) ON REALIZED EXERCISABLE/ EXERCISABLE/ NAME EXERCISE ($) UNEXERCISABLE UNEXERCISABLE(1) - ---- -------- -------- -------------- ---------------- Paul A. Miller........................... 0 0 136,500/15,000 $965,685/$10,695 Jeffrey W. Leeds......................... 0 0 36,750/11,250 $ 224,764/$8,021 Robert P. Perreault...................... 0 0 36,750/11,250 $ 232,298/$8,021 Timothy L. Felter........................ 0 0 31,430/11,250 $ 214,193/$8,021
- --------------- (1) Based on a closing price of $12.69 per share of the Company's Common Stock on December 31, 2001, less the option exercise price. EMPLOYMENT AGREEMENTS; SPECIAL TERMINATION AGREEMENT The Company entered into employment agreements with Paul A. Miller and Robert P. Perreault effective on April 21, 1989 and May 9, 1986, respectively, each of which were amended effective December 23, 1992, and with Jeffrey W. Leeds and Timothy L. Felter effective on February 24, 2000. Each of the employment agreements requires the Company to pay the executive a "Base Salary," which may be increased but shall not be reduced during the term of the agreement and provides for the executive's participation in the Company's employee benefit plans and arrangements. In addition, the Company's agreement with Mr. Miller provides the executive with the use of an automobile. Each of the agreements prohibits the executive from disclosing or converting to the executive's own use the Company's confidential information. The agreements with Mr. Miller and Mr. Perreault each had an initial term of three years. The agreements with Mr. Leeds and Mr. Felter have an initial term of two years. Each of the agreements provides 11 that commencing on the second anniversary of the agreement and on each anniversary date thereafter, in the absence of notice of non-extension, the term of the agreement will automatically be extended for an additional one year period. Under the employment agreements, the Company may terminate the executive's employment at any time, with or without "cause" as defined in the agreements. If after notice and reasonable opportunity for the executive to respond, the Company terminates the executive's employment for "cause," the Company has no continuing obligations to the executive. If the Company terminates the executive's employment without cause, the Company is obligated to continue providing the executive compensation and benefits specified in the agreement for the then remaining term of the agreement. The employment agreement with Mr. Perreault prohibits the executive from competing with the Company and from soliciting employees or customers of the Company during a period in which the executive is receiving benefits from the Company under the agreement and for a one-year period following the executive's resignation or a termination of the executive's employment for cause. Each of the employment agreements except for the employment agreement with Mr. Perreault provides for payment of a lump sum to the executive equal to three times the "base amount" of the executive's compensation in the event of a termination of the executive's employment within two years following a "change in control" of the Company as defined in the agreement, provided that the Company may reduce this amount to the extent necessary to avoid tax under Section 4999 of the Internal Revenue Code. In addition to Mr. Miller's employment agreement, the Company has adopted two supplemental executive retirement plans for Mr. Miller. The purpose of the supplemental plans, when taken together with the Savings Banks Employees Retirement Association plan described below, is to provide Mr. Miller with annual retirement benefits equal to 70% of the average of his three highest consecutive years gross compensation. The plans also provide certain termination benefits under certain circumstances equal to Mr. Miller's earned and accrued benefits to date, subject to a vesting schedule and other conditions. The Company has also entered into a special termination agreement with Mr. Perreault. As amended, the agreement provides that if there is a "Change in Control" of the Company, which is generally defined to mean (i) the acquisition by a person or group of persons of beneficial ownership of 15% or more of the Common Stock during the term of the agreement which is not approved as provided in the agreements, or (ii) a merger, contested election or other business combination or sale which results in a change of a majority of the Board of Directors of the Company, and if at any time during the three-year period following the Change in Control, the Company were to terminate the contracting officer's employment for any reason other than for "cause," or if the contracting officer were to terminate his own employment following his demotion, loss of title, office or significant authority, or a reduction in his annual compensation, the officer would be entitled to receive certain severance benefits specified in the agreement. In the case of such termination, the officer would be entitled to receive a lump-sum payment in an amount equal to three times his average annual compensation over the five previous years of his employment with the Company. 12 COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The following report has been adopted by the Compensation Committee of the Company. Compensation Policy The Company's executive compensation program is designed to provide executives with annual salary and benefit plans which are competitive in the industry and with long-term incentives in the form of stock options. The Compensation Committee believes that in order to attract and retain talented executives and to motivate them to achieve the goals of the Company, compensation opportunities should be comparable to those offered to executives with similar responsibility and position by peer companies. To assist the Compensation Committee, various industry compensation surveys are made available to the Committee. The Chief Executive Officer makes executive salary adjustments annually and from time-to-time awards bonuses. The adjustments and bonuses made by the Chief Executive Officer reflect the overall performance of the Company, the performance of each named executive officer and information for comparable positions in other like institutions. Each executive salary adjustment and bonus is reported to the Board of Directors. The Company periodically grants stock options to some or all of its executive officers as long-term incentives. All stock options granted are at the market value of shares of Common Stock on the date of grant; therefore no benefit accrues to the executives from the stock option unless the market value of the Company's Common Stock increases and the options are exercised. These grants motivate executives to enhance equity value of the Company which in turn coincides with the interest of the stockholders. During fiscal year 2001, the Company granted 12,000 stock options to Mr. Miller and 9,000 stock options to each of Messrs. Perreault, Felter and Leeds, respectively. Executives may also participate in the Bank's 401(k) Savings Plan and Pension Plan. Chief Executive Officer Compensation The Bank's Chief Executive Officer's compensation is reviewed annually by the Compensation Committee and is based upon his performance, the overall performance of the Bank relative to budget objectives and information regarding compensation for the Chief Executive Officer position at like institutions. The Compensation Committee's recommendation for compensation adjustment and if applicable a bonus is then acted upon by the Board. Respectfully submitted, Thomas J. Burke (Chairman) Eugene A. Beliveau Malcolm W. Brawn The foregoing report is provided by the three named directors in their capacity as members of the Compensation Committee of the Company during fiscal year 2001. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Beliveau, Brawn and Burke served on the Compensation Committee of the Company during the fiscal year ended December 31, 2001. None of the members of the Compensation Committee has ever served as an officer or employee of the Company or the Bank. See also, "Indebtedness of Directors and Management and Certain Transactions with Management and Others" (page 16). 13 No executive officer of the Company served (i) as a member of the Compensation Committee of another entity, one of whose executive officers served on the Compensation Committee of the Company, (ii) as a director of another entity, one of whose executive officers served on the Compensation Committee of the Company , or (iii) as a member of the Compensation Committee of another entity, one of whose executive officers served as a director of the Company. STOCK OPTION PLANS On the Effective Date, the Company assumed the Bank's two stock option plans, the Lawrence Savings Bank 1986 Stock Option Plan (the "1986 Stock Option Plan") and the Lawrence Savings Bank 1997 Stock Option Plan (the "1997 Stock Option Plan"). The 1986 Stock Option Plan was in effect until 1996, expiring by its own terms in May, 1996. Notwithstanding the expiration of the 1986 Stock Option Plan, outstanding options granted under the 1986 Stock Option Plan continue to be exercisable in accordance with their terms. The 1997 Stock Option Plan was adopted by the Bank's Board of Directors on December 18, 1997 and approved by the Bank's stockholders on May 5, 1998. The Massachusetts Commissioner of Banks approved the 1997 Stock Option Plan on June 22, 1998. Both "incentive stock options" and "nonqualified stock options" may be granted pursuant to the 1997 Stock Option Plan. The 1997 Stock Option Plan also permits the inclusion of stock appreciation rights in any option granted. The 1986 and 1997 Stock Option Plans are administered by the Stock Option Committee of the Company, which is comprised of non-employee Directors of the Company. The Stock Option Committee currently consists of Messrs. Beliveau, Brawn and Burke. As of February 28, 2002 stock options for the purchase of an aggregate of 596,030 shares of Common Stock at an average purchase price per share of $8.65 were outstanding under the 1986 and 1997 Stock Option Plans. Of these options, 392,530 were exercisable on that date. There were 314,500 stock options outstanding under the 1997 Stock Option Plan included in the 596,030 outstanding options. In 2001, options were exercised to purchase 6,500 shares of Common Stock under the 1986 Stock Option Plan and 8,250 shares of Common Stock under the 1997 Stock Option Plan. BENEFITS Insurance and Other Benefits. The Company provides full-time officers and employees with hospitalization, major medical, life, dental, travel accident, and long-term disability insurance under group plans which are available generally and on the same basis to all full-time employees; provided, however, that with respect to the hospitalization and major medical insurance plan, full-time employees hired on or after September 1, 1984, other than Messrs. Miller and Leeds, are required to pay 25% of each month's premiums. The travel accident insurance plan is also made available to part-time employees. The Company also sponsors a 401(k) Savings Plan which allows participants to defer a percentage of their before-tax compensation from the Company as a contribution under this plan. Participants have several investment options, including a fund which invests solely in Common Stock of the Company. All full-time and certain part-time employees are eligible to participate in this plan. The Company made matching contributions of 50% of the officer and employee contribution during 2001 for all employees who participate in the 401(k) plan up to 3% of each such employee's salary or the maximum amount allowed under the governing tax regulations. Pension Plan. The Company provides a retirement plan for all eligible employees through Savings Banks Employees Retirement Association ("SBERA"), an unincorporated association of savings banks operating within Massachusetts and other organizations providing services to or for savings banks. SBERA's sole purpose is to enable participating employers to provide pensions and other benefits for their employees. 14 At October 31, 2001, the latest date for which information is available, the present value of accumulated benefits under the retirement plan was fully funded by the market values of related available assets. The following table illustrates annual pension benefits for retirement at age 65 under the most advantageous plan provisions available for various levels of compensation and years of service. The figures in this table are based upon the assumption that the plan continues in its present form and upon certain other assumptions regarding compensation trends and social security. ANNUAL PENSION BENEFIT* BASED ON YEARS OF SERVICE(1)(2)
AVERAGE 10 15 20 25 OR COMPENSATION(3) YEARS YEARS YEARS MORE YEARS - --------------- ------- ------- ------- ---------- $ 20,000 .................................... $ 2,500 $ 3,750 $ 5,000 $ 6,250 $ 40,000 .................................... $ 5,167 $ 7,751 $10,334 $12,918 $ 60,000 .................................... $ 8,867 $13,301 $17,734 $22,168 $ 80,000 .................................... $12,567 $18,851 $25,134 $31,418 $100,000 .................................... $16,267 $24,401 $32,534 $40,668 $120,000 .................................... $19,967 $29,951 $39,934 $49,918 $125,000 .................................... $20,892 $31,338 $41,784 $52,230 $140,000 .................................... $23,667 $35,501 $47,334 $59,168 $150,000 .................................... $25,517 $38,276 $51,034 $63,793 $170,000 **.................................. $29,217 $43,826 $58,434 $73,043
- --------------- * Based on age 65 retirement in 2001 (Plan Year 11/1/00 -- 10/31/01) ** Federal law does not permit defined benefit pension plans to recognize compensation in excess of $170,000 for plan year 2001. (1) The annual pension benefit is computed on the basis of a straight life annuity. (2) The Company provides additional retirement benefits to Mr. Miller through two supplemental retirement plans. See "Employment Agreements; Special Termination Agreement." (3) Average compensation for purposes of this table is based on the average of the highest three consecutive years preceding retirement. The estimated retirement benefits under the plan at normal retirement date computed on the basis of their present salary levels and years of service at such date for Mr. Miller, Mr. Perreault, Mr. Leeds and Mr. Felter are $45,948 and 16 years, $53,082 and 46 years and $51,691 and 18 years, and $50,853 and 36 years, respectively. 15 PERFORMANCE GRAPH Set forth below is a line graph comparing the yearly percentage change in the cumulative total stockholder return on the Company's Common Stock (or the Bank's Common Stock in the periods prior to the Reorganization), based on the market price of the Company's (or the Bank's) Common Stock and assuming reinvestment of dividends, with the total return of companies within the Standard & Poor's 500 Stock Index and the Advest New England Thrift Index. The calculation of total cumulative return assumes a $100 investment in the Company's Common Stock, the S&P 500 and the Advest New England Thrift Index on December 31, 1996. (GRAPH)
ADVEST NEW ENGLAND DATE THRIFT INDEX S&P 500 LSBX INDEX ---- ------------------ ------- ---------- 12/31/96 100.00 100.00 100.00 03/31/97 105.20 107.77 121.54 06/30/97 125.25 110.16 138.46 09/30/97 154.69 128.78 155.38 12/31/97 172.61 137.82 201.54 03/31/98 155.69 141.19 210.77 06/30/98 145.02 160.30 191.54 09/30/98 113.26 164.97 147.69 12/31/98 116.21 147.97 157.70 03/31/99 105.85 178.85 118.46 06/30/99 111.66 187.16 115.38 09/30/99 102.65 199.72 96.15 12/31/99 102.92 186.63 93.85 03/31/00 98.13 213.77 86.15 06/30/00 109.31 218.04 86.15 09/30/00 128.91 211.64 107.69 12/31/00 138.17 209.01 129.23 03/31/01 147.35 192.09 136.92 06/30/01 168.09 168.82 160.49 09/30/01 172.23 178.15 125.42 12/31/01 185.93 151.45 156.18
INDEBTEDNESS OF DIRECTORS AND MANAGEMENT AND CERTAIN TRANSACTIONS WITH MANAGEMENT AND OTHERS Certain of the Directors and officers of the Company are at present, as in the past, customers of the Company and from time-to-time have entered into transactions with the Company in the ordinary course of business. In addition, certain Directors of the Company are at present, as in the past, directors, officers or stockholders of corporations or members of partnerships that are customers of the Bank, and have transactions with the Company in the ordinary course of business. Such transactions with Directors and officers of the Company, and with such corporations and partnerships, are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not affiliated with the Company, and do not involve more than normal risk of collectability, or present other features unfavorable to the Company. As a matter of policy, the Company also makes certain loans to other employees. 16 In addition, from time-to-time, the Company obtains services from one or more of its Directors. However, at no time during the past year did payments to any Director for such services aggregate $60,000 or more. Extensions of credit to officers of the Company are restricted by Company policy and Massachusetts statute to an amount of not more than $20,000, whether secured or unsecured, and not more than $75,000 for educational purposes, except that a loan not exceeding $275,000 may be made to officers secured by a mortgage on their primary residence. All extensions of credit and loans to officers must be approved by the Executive Committee of the Board of Directors of the Company, and all extensions of credit and loans to executive officers must also be approved by the Bank's Board of Directors. In addition, the Company is subject to the provisions of Regulation "O" of the Board of Governors of the Federal Reserve System, which: (i) requires the Company's executive officers, directors and control persons to report to the Company's Board of Directors any indebtedness to the Company, (ii) establishes requirements and restrictions as to the terms, size of and approvals necessary for extensions of credit by the Company to its executive officers, directors, and control persons, and (iii) requires any such loans to be made at the same rates and on the same terms and conditions as comparable loans to unaffiliated persons. The Company's subsidiary, Lawrence Savings Bank (the "Bank"), has an arrangement (the "Participation Arrangement") whereby it may purchase up to a $10,000,000 participation interest in loans owned and serviced by entities affiliated with Mr. William P. DeLuca, Jr., a direct and indirect beneficial owner of 9.92% of the outstanding common stock of the Company. Through the Participation Arrangement, the Bank makes auto loans and provides automobile floor plan financing to various used car dealerships throughout the United States. At December 31, 2001, the outstanding balance under the Participation Arrangement is $6,587,000, or 2.6% of the gross loans of the Bank. The loans made in connection with the Participation Arrangement are on commercially reasonable terms and conditions and do not involve more than normal risk of collectibility or present other features unfavorable to the Bank. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information, as of February 28, 2002, regarding the beneficial ownership of Common Stock by: (i) each Director and Nominee for Director of the Company, including Mr. Miller; (ii) each of the other Named Executive Officers during the last fiscal year, (iii) all Directors, Nominees for Director and executive officers as a group; and (iv) each person who, to the knowledge of the Company, beneficially owned more than 5% of the Common Stock at the Record Date. Except as otherwise noted, the persons named in the table below have sole voting and investment power with respect to all shares shown as beneficially owned.
AMOUNT AND NATURE OF BENEFICIAL PERCENT NAME OF BENEFICIAL OWNER OWNERSHIP(1)(2) OF CLASS(3) ------------------------ --------------- ----------- Directors and Principal Officers Eugene A. Beliveau........................................ 6,725(4) * Kathleen I. Boshar........................................ 3,950 * Byron R. Cleveland, Jr. .................................. 4,350 * Robert F. Hatem........................................... 7,525 * Paul A. Miller............................................ 155,148** 3.54% Thomas J. Burke........................................... 9,600 * Marsha A. McDonough....................................... 3,550 * Malcolm W. Brawn.......................................... 20,250(5) * Neil H. Cullen............................................ 5,250 *
17
AMOUNT AND NATURE OF BENEFICIAL PERCENT NAME OF BENEFICIAL OWNER OWNERSHIP(1)(2) OF CLASS(3) ------------------------ --------------- ----------- Richard Hart Harrington................................... 3,505 * Jeffrey W. Leeds.......................................... 59,070 1.34% Robert P. Perreault....................................... 44,443(6) 1.01% Timothy L. Felter......................................... 43,875** 1.00% All Directors and Principal Officers as a Group (15 persons)................................................ 410,179(6)** 9.36% 5% Stockholders First Manhattan Co........................................ 326,400(7) 7.44% William P. Deluca Jr. and Lease and Rental Management Corp.................................................... 434,800(8) 9.92% David L. Babson & Company, Inc. .......................... 426,000(9) 9.72%
- --------------- * Less than one percent ** Includes shares held in the Company's 401(k) Plan. The estimated shares so held with respect to each such participant are: Paul A. Miller, 14,149 shares, Timothy L. Felter, 8,145 shares; John E. Sharland, 4,437 shares; and all Directors and Principal Officers as a Group (15 persons), 26,731 shares, respectively. (1) In accordance with the applicable rules of the SEC, a person is deemed to be the beneficial owner of shares of the Common Stock of the Company if he or she has or shares voting power or investment power with respect to such shares or has the right to acquire beneficial ownership of such shares at any time within 60 days. As used herein, "voting power" means the power to vote or direct the voting of shares, and "investment power" means the power to dispose or direct the disposition of shares. Unless otherwise indicated, each person named has sole voting and sole investment power with respect to all shares indicated. (2) Including shares of the Company's Common Stock which Directors and principal officers of the Company have the right to acquire within 60 days of February 28, 2002 pursuant to options granted under the 1986 and 1997 Stock Option Plans of the Company. The following persons have exercisable options to purchase the number of shares indicated: Mr. Miller, 136,500 shares; Mr. Leeds, 36,750 shares; Mr. Perreault, 31,750 shares; Mr. Felter, 31,230 shares; Mr. D'Ambrosio, 23,250 shares; Mr. Sharland, 22,124 shares; Mr. Burke, 8,250 shares; Messrs. Beliveau and Hatem, 4,250 shares each; Messrs. Cleveland and Harrington, 3,250 shares each; Ms. McDonough, 2,850 shares; Ms. Boshar and Messrs. Brawn and Cullen, 2,250 shares each; and all Directors and principal officers as a group, 307,580 shares. (3) Computed on the basis of 4,382,243 outstanding shares as of February 28, 2002 plus 307,580 shares subject to options exercisable within 60 days of February 28, 2002 held by the named individual or group. (4) Includes 700 shares owned by a household member, as to which Dr. Beliveau disclaims beneficial ownership. (5) Includes 1,000 shares owned by his spouse, as to which Mr. Brawn disclaims beneficial ownership. (6) The stated number of shares owned by principal officers and Directors of the Company includes 77,868 shares currently issued and outstanding and 307,580 shares subject to stock options exercisable within 60 days of February 28, 2002. (7) Based solely on Amendment No. 3 to Form 13G filed with the Securities and Exchange Commission on or about February 15, 2002, First Manhattan Co. reports beneficial ownership of 326,400 shares of Common Stock. First Manhattan Co. reports sole voting and dispositive power with respect to 270,400 shares, shared voting power with respect to 23,500 shares and shared dispositive power with respect to 56,000 shares. First Manhattan Co.'s address is 437 Manhattan Avenue, New York, NY 10022. 18 (8) Based solely on a Form 13G filed with the Federal Deposit Insurance Corporation (the "FDIC") on or about February 9, 2001, Lease and Rental Management Corp. reports beneficial ownership of 415,400 shares of Common Stock of the Bank (which shares represent the same number and percentage of shares of Company Common Stock pursuant to the Reorganization). Based solely on a Form 13G filed with the Federal Deposit Insurance Corporation on or about February 9, 2001, Mr. William P. DeLuca Jr. reports beneficial ownership of 434,800 shares of Common Stock of the Bank (which shares represent the same number and percentage of shares of Company Common Stock pursuant to the Reorganization), with sole voting and dispositive power with respect to 10,500 shares and shared voting and dispositive power with respect to 424,300 shares. Both Mr. DeLuca and Lease and Rental Management Corp. have an address of 45 Haverhill Street, Andover, Massachusetts 01810. (9) Based solely on Amendment No. 2 to a Form 13G filed with the Securities and Exchange Commission on or about March 4, 2002, David L. Babson & Company, Inc. reports beneficial ownership of 426,000 shares of Common Stock of the Company with sole voting and dispositive power with respect to all such shares. David L. Babson Company, Inc.'s address is One Memorial Drive, Cambridge, Massachusetts 02142-1300. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Pursuant to regulations of the SEC and Section 16(a) of the Securities Exchange Act of 1934, as amended, the Company's officers and Directors and persons who own more than ten percent of a registered class of the Company's equity securities must file reports of ownership and changes in ownership with the SEC and the Nasdaq Stock Market. Officers, Directors and greater-than-ten-percent stockholders are required to furnish the Company with copies of all ownership reports they file. Prior to the Reorganization, the Bank's officers, Directors and 10% stockholders were required to file comparable reports with the FDIC. Based solely on its review of the copies of such reports received by the Company with respect to its fiscal year 2001, or written representations from certain reporting persons, the Company believes that during 2001 all Section 16(a) filing requirements applicable to its officers, Directors, and greater-than-ten-percent stockholders were satisfied except as described herein. David L. Babson Company, Inc. did not file a Form 3 upon becoming a ten percent stockholder of the Company. PROPOSAL 2 PROPOSAL FOR ELECTION OF CLERK At the Annual Meeting, the Clerk of the Company will be elected to serve until the 2003 Annual Meeting and until his successor is duly elected and qualified. The Board of Directors has nominated Robert P. Perreault for the position of Clerk. Mr. Perreault is currently serving as Clerk of the Company and has served in that capacity since the formation of the Company in March 2001. He is also Clerk of the Bank and has served as such since 1978. For further biographical and employment information regarding Mr. Perreault, see "EXECUTIVE OFFICERS" (page 9) and "EXECUTIVE COMPENSATION" (page 10). Unless authority to do so has been withheld or limited in a proxy, it is the intention of the persons named as proxies to vote the shares to which the proxy relates FOR the election of Robert Perreault as Clerk of the Company. The Board of Directors anticipates that Mr. Perreault will stand for election and serve, if elected, as Clerk. However, if Mr. Perreault fails to stand for election or is unable to serve as Clerk, the Board of Directors may fill the vacancy in the office of Clerk until the next meeting of the stockholders of the Company. 19 PROPOSAL 3 RATIFICATION OF INDEPENDENT AUDITORS The Board of Directors of the Company has appointed KPMG LLP as independent auditors for the Company for the current fiscal year. KPMG LLP has served as the Company's independent auditors since the date of the Reorganization. KPMG LLP has served as the Bank's independent auditors since 1980. KPMG LLP has no direct or indirect financial interest in the Company, nor has it had any connection with the Company in the capacity of promoter, underwriter, voting trustee, director, officer or employee. The professional services provided by KPMG LLP include the audit of the annual consolidated financial statements of the Company, review of filings with various state and federal regulatory agencies, general accounting services and preparation of income tax returns. A representative of KPMG LLP will be present at the Annual Meeting to answer appropriate questions that may be raised orally and to make a statement if he or she desires to do so. AUDIT FEES The aggregate audit fees paid to KPMG LLP for fiscal year 2001 were $90,000. This sum includes the cost incurred by the Company in connection with KPMG LLP's audit of the year end financial statements as well as the reviews of the financial statements of Company included in the Company's Forms 10-Q for fiscal year 2001. FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION For fiscal year 2001, there were no fees billed by KPMG LLP relating to the design, implementation, operation or management of the Bank's financial information systems. ALL OTHER FEES The aggregate amount of all other fees billed by KPMG LLP for services rendered to the Company during fiscal year 2001 is $102,150. This sum includes fees for tax return preparation and tax advisory services for consulting services provided to the Bank and the Company in connection with the Reorganization and fees associated with the testing of the Bank's computer network security system. The Audit Committee of the Board of Directors of the Company has determined that the payment to KPMG LLP of these tax return preparation and advisory fees is compatible with maintaining KPMG LLP's independence as the Company's principal accountants. Unless authority to do so has been withheld or limited in a proxy, it is the intention of the persons named as proxies to vote the shares to which the proxy relates FOR the ratification of KPMG LLP as independent auditors for the current fiscal year. STOCKHOLDER PROPOSALS AT 2002 ANNUAL MEETING Under the rules of the Securities and Exchange Commission, if any stockholder intends to present a proposal at the Annual Meeting of stockholders and desires that it be considered for inclusion in the Company's proxy statement and form of proxy for such meeting, it must be received by the Company not less than 120 calendar days before the anniversary of the mailing date of the Company's proxy statement for the prior year. Accordingly, if any stockholder intends to present a proposal at the year 2003 Annual Meeting and wishes it to be considered in the Company's proxy statement and form of proxy, such proposal must be received by the Company on or before November 28, 2002. In addition, the Company's By-Laws provide that 20 any director nominations and new business submitted by a stockholder must be filed with the Clerk of the Company no fewer than 60 days, but no more than 90 days, prior to the date of the one-year anniversary of the previous Annual Meeting, and that no other nominations or proposals by stockholders shall be acted upon at the Annual Meeting. Certain exceptions under the By-Laws apply to annual meetings of stockholders at which newly created seats of the Board of Directors are to be filled. Any such proposal should be mailed to: Clerk, LSB Corporation, 30 Massachusetts Avenue, North Andover, Massachusetts 01845. OTHER MATTERS As of the date of this Proxy Statement, the Board of Directors of the Company knows of no matters to be brought before the Annual Meeting other than those specifically listed in the Notice of Annual Meeting of Stockholders. However, if further business is properly presented, the persons named as proxies in the accompanying proxy will vote such proxy in their discretion in accordance with their best judgment. 21 APPENDIX A LSB CORPORATION AUDIT COMMITTEE CHARTER I. AUDIT COMMITTEE There shall be a Committee of the Board of Directors to be known as the Audit Committee. The Audit Committee shall be composed of at least three Directors who are independent of the Management of the Company and are free of any relationship that, in the opinion of the Board of Directors, would interfere with their exercise of independent judgment as a Committee Member. Each Audit Committee member must be able to read and understand fundamental financial statements. At least one Committee Member must have past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background, including a current or past position as a chief executive or financial officer or other senior officer with financial oversight responsibilities. Audit Committee members are encouraged to enhance their familiarity with finance and accounting by participating in educational programs conducted by the Company or outside programs. The Audit Committee shall serve as the Audit Committee for both LSB Corporation and Lawrence Savings Bank. Wherever reference is made herein to the term "Company", such term includes, as applicable, both LSB Corporation and Lawrence Savings Bank. INDEPENDENCE A Director will not be considered "Independent" if, among other things, the Director has: - Been employed by the Company or any of its affiliates in the current or past three years. - Accepted compensation (other than compensation for board services, retirement plan benefits, or non-discretionary compensation) from the Company or its affiliates in excess of $60,000 during the previous fiscal year. - An immediate family member who is, or in the past three years has been, employed by the Company or any of its affiliates as an executive officer. - Been a partner, controlling shareholder or executive officer of any for-profit business to which the Company or any of its affiliates made, or from which the Company or any of its affiliates received, in any of the past three years, payments (other than those arising solely from investments in the Company's securities) exceeding the greater of five percent (5%) of the Company's or the business's consolidated gross revenues for that year, or $200,000. - Been employed as an executive of another entity for which any of the Company's executives serve on the compensation committee or similar body. II. STATEMENT OF POLICY The Audit Committee shall provide assistance to the Company's Directors in fulfilling their responsibilities to the Company's shareholders and the investment community relating to the Company's accounting and reporting practices, and the quality and integrity of the financial reports of the Company. In so doing, it shall be the responsibility of the Audit Committee to maintain free and open means of communications with the Board of Directors, the Independent Auditors, the Internal Auditors, and the financial management of the Company. The Independent Auditors shall be ultimately accountable to the Board of Directors. The Board of Directors, with the assistance of the Audit Committee, shall retain the ultimate authority and responsibility to 22 select, evaluate and, when warranted, replace the Independent Auditors, or to recommend such selection or replacement for approval at any meeting of stockholders. While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that the Bank's financial statements are complete and accurate and are in accordance with generally accepted accounting principles. These are responsibilities of Management and the Independent Auditors. III. MEETINGS The Audit Committee shall meet at least four times annually, or more frequently as circumstances warrant. The Audit Committee shall meet at least annually in separate executive sessions with Management, the Independent Auditors and the Internal Auditors to discuss any matters that the Audit Committee or any of such groups believe should be discussed privately. IV. AUDIT COMMITTEE RESPONSIBILITIES AND POWERS The responsibilities of the Audit Committee shall include the following and any additional responsibilities, not inconsistent herewith, that may be assigned to such Committee by the Board of Directors: GENERALLY 1. Review and update this Charter at least annually and as circumstances warrant. Ascertain that the Audit Committee Charter is reported in the Company's proxy statement at least once every three years. 2. Report periodically to the Board of Directors. 3. Review and recommend to the Board of Directors the selection of Independent Auditors to audit the financial statements of the Company and its subsidiaries. 4. Meet with the Independent Auditors and Management in advance to review the proposed scope of the audit for the current year and the audit procedures to be used, and, at the conclusion of the audit, review audit findings, including comments or recommendations, of the Independent Auditors. 5. Review with Management and the Independent Auditors the scope of the services required by the audit, the Company's significant accounting policies, and audit conclusions regarding the Company's significant accounting estimates. 6. Inquire as to the Independent Auditors' judgments regarding the quality and appropriateness of the Company's accounting principles and policies as applied in its financial statements. 7. Consider and approve, if appropriate, major changes in the Company's auditing and accounting principles, policies and practices as suggested by the Independent Auditors, Management or the Internal Auditors. 8. Oversee the Internal Audit function of the Company including its independence and authority, its reporting obligations, the proposed audit plan for the current year, and the coordination of such plans with the Independent Auditors. 9. Consult with the Independent and Internal Auditors regarding the integrity of the Company's financial reporting processes (internal and external) and review with the Independent Auditors and Management the assessments of the Independent and Internal Auditors of the adequacy of the Company's internal controls and the resolution of identified weaknesses and reportable conditions in internal controls, including the prevention or detection of management overrides or compromises of internal control systems. 23 10. Review and approve reports of the Audit Committee required to be included in the Company's proxy statement for the annual meeting of shareholders. 11. On an annual basis, receive from the Independent Auditors a formal written statement identifying all relationships between the Independent Auditor and the Company conforming to the requirements of Independence Standards Board Standard 1, as hereafter modified or supplemented. 12. Actively engage in a dialogue with the Independent Auditors as to any disclosed relationships or services that may impact its independence and take, or recommend that the Board of Directors take, appropriate actions to oversee and preserve the independence of the Independent Auditors. 13. Evaluate the performance of the Independent Auditors and recommend to the Board of Directors a change in or discharge of the Independent Auditors when circumstances warrant. 14. Discuss with Management decisions regarding the selection or termination of the Independent Auditors and any significant disagreements between the Independent Auditors and Management. 15. Review with Management and the Independent Auditors and legal counsel as appropriate the Company's compliance with applicable laws and regulations. "WHEN NECESSARY" ACTIVITIES 1. Review and recommend the appointment, replacement, reassignment, or dismissal of the Internal Auditors. 2. Review and approve requests for any management consulting engagement to be performed by the Company's Independent Auditors and be advised of any other study or engagement undertaken by the Independent Auditors at the request of management that is beyond the scope of the audit engagement letter. 3. Review periodically with legal counsel litigation, regulatory and other legal matters that may have a material impact on the Company's financial statements, regulatory status or good standing, or compliance policies and practices. 4. Conduct or authorize investigations into any matters within the Committee's scope of responsibilities. The Committee shall be empowered to retain independent legal counsel and other professionals to assist in the conduct of any such investigation. V. RESPONSIBILITIES OF INDEPENDENT AUDITORS 1. Each year the Independent Auditors shall present to the Audit Committee for its approval the audit plan and the estimated fees for performing the annual audit and quarterly reviews of the Company's interim financial reports in the form of an engagement letter. 2. The Independent Auditors shall meet with the Audit Committee to review the audit plan and results of their annual audit and to discuss any concerns of the Independent Auditors, including any items cited in the Management Letter with respect to the Company's internal controls. 3. The Independent Auditors shall discuss with the Audit Committee the matters required by Generally Accepted Auditing Standards (GAAS). 24 VI. INTERNAL AUDITORS The objective of the Company's internal audit function is to determine that the Company has established effective internal controls and compliance with managerial policies, laws, regulations and generally accepted accounting principles. 1. Internal audit responsibilities shall be fulfilled by either an employee or employees of the Company or an outside firm that provides internal audit services. On an annual basis, senior management and the Audit Committee shall evaluate the internal audit function and determine whether the internal audit function should be performed by Company employees or by an outside firm which provides internal audit services. 2. The internal auditors shall use follow-up procedures to ensure that exceptions noted during regulatory examinations, independent and internal audits are addressed in a satisfactory and timely manner. 3. The President and the Audit Committee shall have authority to approve special internal audit investigations which have not been included as part of the current Audit Plan. VII. UPDATE RESPONSIBILITY The Chief Financial Officer of the Company shall be responsible for ensuring that this Audit Committee Charter is modified as appropriate to reflect any updates, alterations or enhancements that may be approved or adopted by the Audit Committee and the Board of Directors. VIII. LEGAL REFERENCES 1. Rule 4350(d) of National Association of Securities Dealers, Inc. 2. FDIC Regulations, 12 CFR 363.2(b) and Appendix A to Part 363 25 EX-21 5 b42246lsex21.txt SUBSIDIARY OF LSB CORP Exhibit 21 SUBSIDIARY OF LSB CORPORATION Lawrence Savings Bank: LSB Corporation's wholly-owned subsidiary is a Massachusetts-chartered savings bank organized in 1868 and headquartered at 30 Massachusetts Avenue, North Andover, Massachusetts. SUBSIDIARIES OF LAWRENCE SAVINGS BANK Pemberton Corporation: Holds real estate for sale. Spruce Wood Realty Trust: Holds real estate used in the normal course of business. Shawsheen Security Corporation and Shawsheen Security Corporation II: Engages exclusively in buying, selling, dealing in and holding investment securities on its own behalf. Each of the subsidiaries is organized or incorporated in Massachusetts. EX-23.1 6 b42246lsex23-1.txt CONSENT OF KPMG LLP Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors LSB Corporation: We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-65438) of LSB Corporation of our report dated January 18, 2002, with respect to the consolidated balance sheets of LSB Corporation and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001, which report is incorporated by reference into the December 31, 2001 annual report on Form 10-K of LSB Corporation. /s/ KPMG LLP ------------- KPMG LLP Boston, Massachusetts March 26, 2002 -----END PRIVACY-ENHANCED MESSAGE-----