10-Q 1 b43679lse10vq.txt LSB CORPORATION SECURITIES AND EXCHANGE COMMISSION Washington, DC 20529 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the quarterly period ended June 30, 2002 [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the transition period from ___ to ___ Commission File Number 000-32955 --------------------------- LSB CORPORATION (Exact name of registrant as specified in its Charter) --------------------------- MASSACHUSETTS 04-3557612 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 30 MASSACHUSETTS AVENUE, NORTH ANDOVER, MA 01845 (Address of principal executive offices) (Zip Code) --------------------------- (978) 725-7500 (Registrant's telephone number, including area code) --------------------------- Indicated by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AS OF JUNE 30, 2002 ----- ------------------------------- Common Stock, par value $.10 per share 4,386,005 shares LSB CORPORATION AND SUBSIDIARIES INDEX PART I -- FINANCIAL INFORMATION
PAGE ---- ITEM 1 FINANCIAL STATEMENTS: Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Changes in Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: FINANCIAL CONDITION: Investment Portfolio 8 Loan Portfolio 9 Loan Interest Income 9 Allowance for Loan Losses 9 Risk Assets 10 Deposit Portfolio 11 Deposit Interest Expense 11 Liquidity and Capital Resources 11 RESULTS OF OPERATIONS: Three Months ended June 30, 2002 and 2001 11-13 Six Months ended June 30, 2002 and 2001 13-15 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PART II -- OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS 16 ITEM 2 CHANGES IN SECURITIES 16 ITEM 3 DEFAULTS UPON SENIOR SECURITIES 16 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16 ITEM 5 OTHER INFORMATION 16 ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 16 SIGNATURES 17 EXHIBIT INDEX
-2- PART 1 -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LSB CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(unaudited) June 30, December 31, 2002 2001 --------- ------------ (In Thousands) ASSETS Assets: Cash and due from banks $ 9,594 $ 7,457 Federal funds sold 8,123 5,705 --------- --------- Total cash and cash equivalents 17,717 13,162 Investment securities held to maturity (market value of $135,613 in 2002 and $137,886 in 2001) 132,863 135,002 Investment securities available for sale (amortized cost of $45,630 in 2002 and $38,480 in 2001) 46,016 38,766 Federal Home Loan Bank stock, at cost 5,950 5,950 Loans, net of allowance for loan losses 232,633 232,327 Bank premises and equipment 3,094 3,167 Accrued interest receivable 2,732 2,604 Other real estate owned 17 22 Deferred income tax asset 4,832 5,737 Other assets 1,541 1,530 --------- --------- Total assets $ 447,395 $ 438,267 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Interest bearing deposits $ 263,961 $ 255,046 Non-interest bearing deposits 14,248 13,404 Federal Home Loan Bank advances 105,129 102,992 Securities sold under agreements to repurchase 1,866 4,220 Other borrowed funds 3,437 3,887 Advance payments by borrowers for taxes and insurance 498 573 Other liabilities 3,418 4,053 --------- --------- Total liabilities 392,557 384,175 --------- --------- Stockholders' equity: Preferred stock, $.10 par value per share: 5,000,000 shares authorized, none issued -- -- Common stock, $.10 par value per share; 20,000,000 shares authorized; 4,386,005 and 4,379,550 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively 439 438 Additional paid-in capital 57,821 57,813 Accumulated deficit (3,677) (4,348) Accumulated other comprehensive income 255 189 --------- --------- Total stockholders' equity 54,838 54,092 --------- --------- Total liabilities and stockholders' equity $ 447,395 $ 438,267 ========= =========
The accompanying note is an integral part of these unaudited financial statements. -3- LSB CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended Six months ended June 30, June 30, 2002 2001 2002 2001 ---------- ---------- ---------- ---------- (In Thousands, except share data) Interest and dividend income: Loans $ 4,176 $ 4,552 $ 8,432 $ 9,080 Investment securities held to maturity 1,728 2,141 3,382 4,183 Investment securities available for sale 500 408 915 847 Federal Home Loan Bank stock 56 93 111 199 Other interest and dividend income 20 88 61 371 ---------- ---------- ---------- ---------- Total interest and dividend income 6,480 7,282 12,901 14,680 ---------- ---------- ---------- ---------- Interest expense: Deposits 1,483 2,716 3,077 5,482 Borrowed funds 1,390 1,194 2,801 2,535 Other borrowed funds 63 97 161 186 ---------- ---------- ---------- ---------- Total interest expense 2,936 4,007 6,039 8,203 ---------- ---------- ---------- ---------- Net interest income 3,544 3,275 6,862 6,477 ---------- ---------- ---------- ---------- Provision for loan losses -- 50 -- 50 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 3,544 3,225 6,862 6,427 ---------- ---------- ---------- ---------- Non-interest income: Loan servicing fees 12 28 88 86 Deposit account fees 163 141 319 273 Gains on sales of mortgage loans 65 34 176 38 Other income 109 95 195 182 ---------- ---------- ---------- ---------- Total non-interest income 349 298 778 579 ---------- ---------- ---------- ---------- Non-interest expense: Salaries and employee benefits 1,482 1,306 3,019 2,601 Occupancy and equipment expenses 214 209 413 423 Professional expenses 220 143 367 310 Data processing expenses 203 178 366 336 Other expenses 482 467 895 841 ---------- ---------- ---------- ---------- Total non-interest expenses 2,601 2,303 5,060 4,511 ---------- ---------- ---------- ---------- Income before income tax expense 1,292 1,220 2,580 2,495 Income tax expense 473 430 945 914 ---------- ---------- ---------- ---------- Net income $ 819 $ 790 $ 1,635 $ 1,581 ==================================================================================================================================== Average shares outstanding 4,384,686 4,371,500 4,383,337 4,370,529 Average diluted shares outstanding 4,567,062 4,532,275 4,559,019 4,524,479 ==================================================================================================================================== Basic earnings per share $ 0.19 $ 0.18 $ 0.37 $ 0.36 Diluted earnings per share $ 0.18 $ 0.17 $ 0.36 $ 0.35 ====================================================================================================================================
The accompanying note is an integral part of these unaudited financial statements. -4- LSB CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
ACCUMULATED ADDITIONAL OTHER TOTAL COMMON PAID-IN (ACCUMULATED COMPREHENSIVE STOCKHOLDERS' STOCK CAPITAL DEFICIT) INCOME EQUITY --------------------------------------------------------------------------- (In Thousands) Balance at December 31, 2000 $ 436 $ 57,711 $ (5,956) $ 122 $ 52,313 Net income -- -- 1,581 -- 1,581 Other comprehensive income: Unrealized gain on securities available for sale (tax effect $67) -- -- -- 136 136 -------- Total comprehensive income 1,717 Exercise of stock options 1 29 -- -- 30 Dividends declared and paid ($0.20 per share) -- -- (874) -- (874) -------- -------- -------- -------- -------- Balance at June 30, 2001 $ 437 $ 57,740 $ (5,249) $ 258 $ 53,186 ======== ======== ======== ======== ======== Balance at December 31, 2001 $ 438 $ 57,813 $ (4,348) $ 189 $ 54,092 Net income -- -- 1,635 -- 1,635 Other comprehensive income: Unrealized gain on securities available for sale (tax effect $34) -- -- -- 66 66 -------- Total comprehensive income 1,701 Exercise of stock options 1 8 -- -- 9 Dividends declared and paid ($0.22 per share) -- -- (964) -- (964) -------- -------- -------- -------- -------- Balance at June 30, 2002 $ 439 $ 57,821 $ (3,677) $ 255 $ 54,838 ======== ======== ======== ======== ========
The accompanying note is an integral part of these unaudited financial statements. -5- LSB CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30, 2002 2001 --------- --------- (In Thousands) CASH FLOW FROM OPERATING ACTIVITIES: Net income $ 1,635 $ 1,581 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses -- 50 Gains on sales of mortgage loans (176) (38) Depreciation and amortization of premises and equipment, investments and other assets 666 119 Loans originated for sale (11,579) (4,984) Proceeds from sales of mortgage loans and mortgage-backed securities 13,466 3,405 (Increase) decrease in accrued interest receivable (128) 195 Decrease in deferred income tax asset 871 808 (Increase) decrease in other assets (11) 204 Increase (decrease) in advance payments by borrowers (75) 16 Decrease in other liabilities (635) (131) --------- --------- Net Cash Provided by Operating Activities 4,034 1,225 =================================================================================================================================== CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of investment securities held to maturity 221,618 273,687 Proceeds from maturities of investment securities available for sale 3,993 -- Proceeds from sales of investment securities available for sale -- 6,118 Purchases of investment securities held to maturity (231,885) (309,810) Purchases of mortgage-backed securities held to maturity (2,967) (4,335) Purchases of investment securities available for sale (18,092) -- Principal payments of securities held to maturity 15,175 9,868 Principal payments of securities available for sale 6,710 2,366 Purchase of other equity securities -- (46) Increase in loans, net (2,017) (9,717) Proceeds from payments on OREO 5 5 Purchases of Bank premises and equipment (156) (193) --------- --------- Net cash used in investing activities (7,616) (32,057) =================================================================================================================================== CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 9,759 10,694 Proceeds from issuance of Federal Home Loan Bank advances 6,000 30,000 Payments of Federal Home Loan Bank advances (3,863) (24,775) (Decrease) increase in securities sold under agreement to repurchase (2,354) 2,375 Increase (decrease) in other borrowed funds (450) 30 Dividends paid (964) (874) Proceeds from exercise of stock options 9 30 --------- --------- Net cash provided by financing activities 8,137 17,480 =================================================================================================================================== Net increase (decrease) in cash and cash equivalents 4,555 (13,352) Cash and cash equivalents, beginning of period 13,162 22,513 --------- --------- Cash and equivalents, end of period $ 17,717 $ 9,161 =================================================================================================================================== Cash paid during the year for: Interest on deposits $ 3,067 $ 5,482 Interest on borrowed funds 2,992 2,782 Supplemental Schedule of non-cash activities: Net change in valuation of investment securities available for sale 100 203 ===================================================================================================================================
The accompanying note is an integral part of these unaudited financial statements. -6- LSB CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (UNAUDITED) 1. BASIS OF PRESENTATION The LSB Corporation's consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry and include all necessary adjustments (consisting of only normal recurring adjustments), that, in the opinion of management, are required for a fair presentation of the results and financial condition of the Company. Accordingly, management is required to make estimates and assumptions that affect amounts reported in the balance sheets and statements of operations. Actual results could differ significantly from those estimates and judgments. Material estimates that are particularly susceptible to change relate to the allowance for loan losses and the deferred tax asset. LSB Corporation (the "Corporation" or the "Company") is a Massachusetts corporation and the holding company of the wholly-owned subsidiary Lawrence Savings Bank (the "Bank") a state-chartered Massachusetts savings bank. The Corporation was organized by the Bank on July 1, 2001 to be a bank holding company and to acquire all of the capital stock of the Bank. The consolidated financial statements presented herein reflect the accounts of the Corporation and its predecessor, Lawrence Savings Bank. The Corporation is supervised by the Board of Governors of the Federal Reserve System ("FRB"), and it is also subject to the jurisdiction of the Massachusetts Division of Banks, while the Bank is subject to the regulations of, and periodic examination by, the Federal Deposit Insurance Corporation ("FDIC") and the Massachusetts Division of Banks. The Bank's deposits are insured by the Bank Insurance Fund of the FDIC up to $100,000 per account, as defined by the FDIC, and the Depositors Insurance Fund, Inc. ("DIF") for customer deposit amounts in excess of $100,000. The consolidated financial statements include the accounts of LSB Corporation and its wholly-owned consolidated subsidiary, Lawrence Savings Bank, and its wholly-owned subsidiaries, Shawsheen Security Corporation, Shawsheen Security Corporation II, Pemberton Corporation, and Spruce Wood Realty Trust. All inter-company balances and transactions have been eliminated in consolidation. The interim results of consolidated operations are not necessarily indicative of the results for any future interim period or for the entire year. These interim consolidated financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the annual consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K as of and for the year ended December 31, 2001 filed with the Securities and Exchange Commission. -7- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS The Company has made forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 as amended) in this document that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of operations of the Company. Also, when words such as "believes," "expects," "anticipates" or similar expressions are used, forward-looking statements are being made. Stockholders should note that many factors, some of which are discussed elsewhere in this document and in the documents which we incorporate by reference, could affect the future financial results of the Company and could cause the results to differ materially from those expressed in or incorporated by reference in this document. Those factors include fluctuations in interest rate, inflation, government regulations and economic conditions and competition in the geographic and business areas in which the Company conducts its operations. FINANCIAL CONDITION The Company has maintained risk assets below 1% of total assets for the past several years. The Company maintains its commitment to servicing the needs of the local community in the Merrimack Valley area. The investment securities portfolio increased by $5.1 million as of June 30, 2002 to $178.9 million from December 31, 2001 funded by deposit growth. Deposits increased by $9.8 million at June 30, 2002 from year end 2001, with the growth primarily in NOW and savings accounts. INVESTMENTS The investment portfolio totaled $178.9 million or 40.0% of total assets at June 30, 2002, compared to $173.8 million, or 39.6% of total assets at December 31, 2001, an increase of $5.1 million from year end. The following table reflects the components and carrying values of the investment securities portfolio at June 30, 2002 and December 31, 2001:
6/30/02 12/31/01 ------- -------- (In Thousands) Investment securities held to maturity (at amortized cost): US Treasury obligations $ 6,012 $ 6,022 US Government Agency obligations 25,329 15,966 Mortgage-backed securities 16,080 16,633 Asset-backed securities 53,478 40,337 Corporate obligations 29,922 53,982 Municipal obligations 2,042 2,062 ---------- ---------- Total investment securities held to maturity $ 132,863 $ 135,002 ========== ========== Investment securities available for sale (at market value): US Government Agency obligations $ 31,282 $ 20,126 Mortgage-backed securities 3,505 5,689 Asset-backed securities 6,401 8,089 Corporate obligations 4,660 4,694 Equity securities 168 168 ---------- ---------- Total investment securities available for sale $ 46,016 $ 38,766 ========== ========== Total investment securities portfolio $ 178,879 $ 173,768 ========== ==========
The increase in the investment securities portfolio was the result of deposit growth in which the Company increased US Government Agency Obligations and Asset-Backed Securities while decreasing the Company's exposure to Corporate Obligations. -8- LOANS The following table reflects the loan portfolio at June 30, 2002 and December 31, 2001:
6/30/02 12/31/01 -------- -------- (In Thousands) Residential mortgage loans $ 73,792 $ 78,605 Loans held for sale 2,445 4,156 Equity loans 14,095 13,393 Construction loans 15,731 20,593 Commercial real estate loans 108,963 100,110 Commercial loans 20,791 18,549 Consumer loans 890 991 --------- ---------- Total loans 236,707 236,397 Allowance for loan losses (4,074) (4,070) --------- ----------- Total loans, net $ 232,633 $ 232,327 ========= ==========
Total loans increased to $236.7 million or 52.9% of total assets at June 30, 2002 from $236.4 million or 53.9% of total assets at December 31, 2001. The following table lists the components of loan interest income for the three month and six month periods ended June 30, 2002 and 2001:
Three months ended Six months ended 6/30/02 6/30/01 6/30/02 6/30/01 ------- ------- -------- ------- (In Thousands) Residential mortgage loans $ 1,295 $ 1,481 $ 2,612 $2,922 Loans held for sale 23 12 70 14 Equity loans 211 285 423 585 Construction loans 272 397 592 783 Commercial real estate loans 2,057 1,979 4,103 3,904 Commercial loans 300 371 595 816 Consumer loans 18 27 37 56 ------- ------- -------- ----- Total loan interest income $ 4,176 $4,552 $ 8,432 $9,080 ======= ====== ======== ======
ALLOWANCE FOR LOAN LOSSES The following table summarizes changes in the allowance for loan losses for the three month and six month periods ended June 30, 2002 and 2001:
Three months ended Six months ended 6/30/02 6/30/01 6/30/02 6/30/01 ------- ------- ------- ------- (In Thousands) Beginning balance $ 4,071 $ 3,730 $ 4,070 $ 3,685 Provision charged to operations -- 50 -- 50 Recoveries on loans previously charged-off 4 3 5 48 Loans charged-off (1) -- (1) -- -------- ------- --------- ------- Ending balance $ 4,074 $ 3,783 $ 4,074 $ 3,783 ======= ======= ======== =======
-9- The allowance for the loan losses balance reflects management's assessment of losses and is based on a review of the risk characteristics of the loan portfolio. The Company considers many factors in determining the adequacy of the allowance for loan losses. Collateral value on a loan by loan basis, trends of loan delinquencies on a portfolio segment level, risk classification identified in the Company's regular review of individual loans, and economic conditions are primary factors in establishing allowance levels. Management believes the allowance level is adequate to absorb estimated credit losses associated with the loan and lease portfolio, including all binding commitments to lend and off-balance sheet credit instruments. The allowance for loan losses reflects information available to management at the end of each period. RISK ASSETS Risk assets consist of non-performing loans and other real estate owned. Non-performing loans consist of both a) loans 90 days or more past due, and b) loans placed on non-accrual because full collection of the principal balance is in doubt. Other real estate owned (OREO) is comprised of foreclosed properties where the Company has formally received title or has possession of the collateral. Properties are carried at the lower of the investment in the related loan or the estimated fair value of the property or collateral less selling costs. Fair value of such property or collateral is determined based upon independent appraisals and other relevant factors. Management periodically reviews property values and makes adjustments as required. Gains from sales of properties, net operating expenses and any subsequent provisions to increase the allowance for losses on real estate acquired by foreclosure are charged to other real estate owned expenses. Losses are charged to the allowance. Total risk assets were $27 thousand at June 30, 2002. This represents a decrease of $946 thousand from December 31, 2001 and a decrease of $10 thousand from June 30, 2001. These changes were primarily attributable to a decrease in non-performing loans to $10 thousand at June 30, 2002 from $951 thousand at December 31, 2001, due to the sale of property at the foreclosure auction, the Company had impaired loans of $941 thousand at December 31, 2001 and zero at June 30, 2002 and 2001, respectively. The following table summarizes the Company's risk assets for the three months ended June 30, 2002, December 31, 2001 and June 30, 2001.
6/30/02 12/31/01 6/30/01 ------- ---------- -------- (Dollars in Thousands) Non-performing loans $ 10 $951 $ 10 Other real estate owned 17 22 27 ---- ---- ---- Total risk assets $ 27 $973 $ 37 ==== ==== ==== Risk assets as a percent of total assets 0.01% 0.22% 0.01% ==== ==== ====
The following table shows the allowance for loan losses as a percent of total loans:
6/30/02 12/31/01 6/30/01 ------- -------- ------- (Dollars in Thousands) Allowance for loan losses $ 4,074 $ 4,070 $ 3,783 Allowance for loan losses as a percent of total loans 1.72% 1.72% 1.62%
DEPOSITS Total interest bearing deposits amounted to $264.0 million at June 30, 2002 compared to $255.0 million at December 31, 2001, an increase of $9.0 million. Included in the certificates of deposit at June 30, 2002 were brokered deposits of $2.0 million. Deposits increased overall in the NOW and Savings accounts due to customers moving funds from the stock market or other financial institutions. -10- The following table reflects the components of interest bearing deposits at June 30, 2002 and December 31, 2001:
6/30/02 12/31/01 -------- -------- (In Thousands) NOW and Super NOW accounts $ 35,496 $ 30,080 Savings accounts 45,708 42,531 Money market investment accounts 57,182 57,575 Certificates of deposit 97,966 97,828 Retirement accounts 27,609 27,032 -------- -------- Total interest bearing deposits $263,961 $255,046 ======== ========
The following table lists the components of deposit interest expense for the three and six months ended June 30, 2002 and 2001:
Three months ended Six months ended 6/30/02 6/30/01 6/30/02 6/30/01 ------- ------- ------- ------- (In Thousands) NOW and Super NOW accounts $ 22 $ 41 $ 44 $ 79 Savings deposit accounts 112 201 219 390 Money market investment accounts 277 448 527 941 Certificates of deposit 793 1,641 1,709 3,301 Retirement accounts 279 385 578 771 ------ ------ ------ ------ Total deposit interest expense $1,483 $2,716 $3,077 $5,482 ====== ====== ====== ======
LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of funds is cash dividends from its wholly-owned subsidiary, Lawrence Savings Bank (the "Bank"). The Bank paid dividends to the Company in the amount of $2.5 million during the first half of 2002. The Company made payments of dividends to stockholders in the amount of $964 thousand in the first six months of 2002. Prior to the reorganization of the Bank into a holding company structure the Bank paid dividends to stockholders of the Bank in the amount of $874 thousand in the first six months of 2001. The Bank's primary sources of funds include collections of principal payments and prepayments on outstanding loans, increases in deposits, advances from the Federal Home Loan Bank of Boston (FHLB) and securities sold under agreements to repurchase. The Bank has a line of credit of $6.8 million with the FHLB. The Bank also has a $5 million unsecured Federal Funds line of credit. At June 30, 2002, the Company's stockholder's equity was $54.8 million as compared to $54.1 million at December 31, 2001. The increase during the first half of 2002 occurred due to net income of $1.6 million, a $66 thousand increase in market values on securities available for sale, net of taxes and was reduced by the declaration to pay dividends of $964 thousand. The Company's leverage ratio at June 30, 2002 and December 31, 2001 was 12.18% and 11.98%, respectively. The Company's and the Bank's total risk based capital ratios were 18.00% and 17.03% at June 30, 2002, respectively, compared with 16.97% and 16.39% at December 31, 2001, respectively. The Company exceeds all regulatory minimum capital ratio requirements set forth by the FRB, and the Bank exceeds all minimum capital ratio requirements as defined by the FDIC. -11- RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2002 AND 2001 OVERVIEW The Company reported net income of $819 thousand and $790 thousand for the three months ended June 30, 2002 and 2001, respectively. The increase in net income is primarily attributable to an increase in net interest income of $269 thousand and non-interest income of $51 thousand partially offset by an increase of $298 thousand in non-interest expenses. NET INTEREST INCOME FROM OPERATIONS Net interest income for the three months ended June 30, 2002 and 2001 was $3.5 million and $3.3 million, respectively. The net interest rate spread increased to 2.92% for the quarter ended June 30, 2002 from 2.66% for the same quarter of 2001. This increase occurred because the average balances on interest earning assets increased $19.9 million in the second quarter 2002 compared to 2001. The following table presents the components of net interest income and net interest spread:
INCOME/EXPENSE YIELD/RATE -------------------------- ------------------------ QUARTERS ENDED ------------------------------------------------------------- 6/30/02 6/30/01 6/30/02 6/30/01 -------------------------- ------------------------ (Dollars in Thousands) Interest income and average yield: Loans $4,176 $4,552 7.26% 8.10% Investments, mortgage-backed securities and other earning assets 2,304 2,730 4.79 6.06 ------ ------ Total 6,480 7,282 6.13 7.20 ------ ------ ---- ---- Interest expense and average rate paid: Deposits 1,483 2,716 2.28 4.04 Federal Home Loan Bank advances 1,390 1,194 5.59 6.07 Securities sold under agreements to repurchase and other borrowed funds 63 97 3.70 7.76 ------ ------ Total 2,936 4,007 3.21 4.54 ------ ------ ---- ---- Net interest income $3,544 $3,275 ------ ------ Net interest rate spread 2.92% 2.66% ---- ----
INTEREST INCOME Interest income for the second quarter of 2002 was $6.5 million as compared to $7.3 million for the same quarter of 2001. The decrease of $0.8 million in interest income is due to $1.1 million from lower yields earned on loans and investment securities. The decrease in interest income due to lower yields was offset slightly by higher average balances, which increased interest income by $0.3 million. Yields on loans were 7.26% and 8.10% for the quarters ended June 30, 2002 and 2001, respectively. The impact to interest income due to lower yields was $0.5 million. Higher average loan balances of $230.8 million versus $225.3 million for the quarters ended June 30, 2002 and 2001, respectively, increased interest income by $0.1 million. Yields on investment securities were 4.79% and 6.06% for the quarters ended June 30, 2002 and 2001, respectively, decreasing interest income by $0.6 million. Higher average investment securities balances of $193.1 million versus $180.6 million for the same periods increased interest income by $0.2 million. INTEREST EXPENSE Interest expense for the second quarter of 2002 totaled $2.9 million, a decrease of $1.1 million from the same quarter of 2001. This decrease is primarily due to lower rates paid on interest bearing liabilities, which impacted interest expense by $1.3 million. Higher average balances resulted in a $0.2 million increase. -12- Rates on deposits were 2.28% and 4.04% for the quarters ended June 30, 2002 and 2001, respectively. This decrease resulted in interest expense decreasing by $1.1 million. Average deposit balances were $260.8 million versus $269.8 million for the same periods, which resulted in a $0.1 million decrease in interest expense. Rates on FHLB advances were 5.59% and 6.07% for the second quarters of 2002 and 2001, respectively. The decrease in rates paid on FHLB advances resulted in interest expense decreasing by $0.1 million. The average balances of FHLB advances increased from quarter to quarter for the same periods to $99.8 million in the second quarter 2002 from $78.9 million for the second quarter of 2001, which resulted in an increase in interest expense of $0.3 million. Rates on short term and other borrowed funds were 3.70% and 7.76% for the second quarters of 2002 and 2001, respectively. The decrease in rates paid on these interest bearing liabilities resulted in interest expense decreasing by $0.1 million. The average balance increased to $6.8 million in 2002 from $5.0 million in 2001, which increased interest expense by a minimal amount. PROVISION FOR LOAN LOSSES The provision for loan losses was zero for the quarters ended June 30, 2002 and 2001. The amount of the provision for loan losses was due to the overall asset quality of the Company. NON-INTEREST INCOME Non-interest income amounted to $349 thousand and $298 thousand for the quarters ended June 30, 2002 and 2001, respectively. The increase in non-interest income was due to an increase in deposit account fees of $22 thousand, an increase in the gains on sales of mortgage loans of $31 thousand and other income increasing overall by $17 thousand in the second quarter 2002 as compared to the same quarter in 2001. NON-INTEREST EXPENSE Non-interest expense totaled $2.6 million and $2.3 million for the quarters ended June 30, 2002 and 2001, respectively. Salaries and employee benefits increased by $176 thousand in the second quarter 2002 mainly due to pension expense associated with the employees defined benefit plan and normal raises compared to the second quarter in 2001. Professional expenses decreased to $220 thousand in the second quarter 2002 compared to $143 thousand in the same period in 2001. The increase was due to legal expenses associated with collection efforts on delinquent and prior borrowers. Data processing expenses increased to $203 thousand in the second quarter of 2002 compared to $178 thousand in the same quarter in 2001. INCOME TAXES The Company reported an income tax expense of $473 thousand for the quarter ended June 30, 2002 or an effective income tax rate of 36.6%. This compares to an income tax expense of $430 thousand for the quarter ended June 30, 2001 or effective income tax expense of 35.2%. SIX MONTHS ENDED JUNE 30, 2002 AND 2001 OVERVIEW The Bank reported net income of $1.6 million for the six months ended June 30, 2002 and 2001, respectively. During the first half of 2002, there were several favorable impacts to earnings such as net interest income increasing to $6.9 million in 2002 up from $6.5 million in 2001, non-interest income increasing to $0.8 million in 2002 up from $0.5 million in 2001. Offsetting these favorable impacts to earnings were increases to non-interest expenses to $5.1 million for the first half of 2002 up from $4.5 million in the same period in 2001. NET INTEREST INCOME FROM OPERATIONS Net interest income for the six months ended June 30, 2002 and 2001 was $6.9 million and $6.5 million, respectively. The net interest rate spread increased to 2.83% from 2.65%. The rates paid on interest bearing liabilities decreased more than the yield on interest bearing -13- assets. The following table presents the components of net interest income and net interest spread:
INCOME/EXPENSE YIELD/RATE --------------------------- -------------------- SIX MONTHS ENDED ------------------------------------------------------------- 6/30/02 6/30/01 6/30/02 6/30/01 ----------- ----------- ------- ------- (In Thousands) Interest income and average yield: Loans $ 8,432 $ 9,080 7.34% 8.24% Investments, mortgage-backed securities and other earning assets 4,469 5,600 4.71 6.21 ------- -------- Total 12,901 14,680 6.15 7.33 ------- -------- ----- ---- Interest expense and average rate paid: Deposits 3,077 5,482 2.40 4.15 Federal Home Loan Bank advances 2,802 2,535 5.59 6.21 Short-term and other borrowed funds 160 186 4.21 8.57 ------- -------- Total 6,039 8,203 3.32 4.68 ------- -------- ----- ---- Net interest income $ 6,862 $ 6,477 ------- -------- Net interest rate spread 2.83% 2.65% ----- ----
INTEREST INCOME Interest income for the first half of 2002 was $12.9 million as compared to $14.7 million for the same period of 2001. The decrease in interest income of $1.8 million is due to lower yields on loans and investment securities, which decreased interest income by $2.4 million. Higher average balances on loans and investment securities increased interest income by $0.6 million. Yields on loans were 7.34% and 8.24% for the six months ended June 30, 2002 and 2001, respectively. The impact on interest income due to lower yields was $1.0 million. Higher average loan balances of $231.7 million in 2002 versus $222.1 million in 2001 resulted in interest income increasing by $0.4 million. Yields on investment securities decreased to 4.71% for the six months ended June 30, 2002. This compares to yields on investment securities of 6.21% for the same period in 2001. This resulted in interest income declining by $1.4 million. Higher average balances for investment securities of $191.3 million in 2002 versus $182.0 million in 2001 resulted in interest income increasing by $0.2 million. Other interest and dividend income declined to $61 thousand in the first half of 2002 from $371 thousand in the same period of 2001. The decrease is primarily attributed to a reduction in the average outstanding balances for six months of Federal funds sold from $14.1 million at June 30, 2001 to $7.7 million at June 30, 2002 coupled with a decrease in rates. INTEREST EXPENSE Interest expense for the first six months of 2002 and 2001 was $6.0 million and $8.2 million, respectively. The decrease of $2.2 million in interest expense is primarily due to lower rates paid on deposits and other interest bearing liabilities, which decreased interest expense by $2.7 million. Interest expense increased $0.5 million due to higher average balances for borrowed funds. Yields on deposits were 2.40% and 4.15% for the first half of 2002 and 2001, respectively. This decrease resulted in interest expense decreasing by $2.4 million. Average deposit balances decreased were $258.5 million in 2002 down slightly from $266.4 million in 2001, which resulted in interest expense declining by $0.1 million. Yields on FHLB advances and short-term borrowing resulted in interest expense decreasing by $0.3 million in 2002 from 2001. However, the average balances for these interest bearing liabilities increased to $108.8 million in 2002 from $86.8 million in 2001, which increased interest expense by $0.6 million. PROVISION FOR LOAN LOSSES The provision for loan losses was zero and $50 thousand for the six months ended June 30, 2002 and 2001, respectively. The amount of the provision for loan losses was due to the overall asset quality of the Company. -14- The allowance for loan losses increased slightly from December 31, 2001. This was because the Bank received net recoveries on loans previously charged off of $4 thousand. Any charge-offs that were made during the six month periods based upon management's analysis of the borrowers' financial situation and estimated collateral values. The allowance for loan losses at June 30, 2002 was 1.72% of total loans. The same ratio at December 31, 2001 was 1.72%. The allowance for loan losses reflects all information available at the end of each respective quarter. NON-INTEREST INCOME Non-interest income was $0.8 million and $0.6 million for the six months ended June 30, 2002 and 2001, respectively. The increase of $199 thousand in non-interest income primarily resulted from gains on sales of mortgage loans increasing to $176 thousand in 2002 from $38 thousand in 2001. NON-INTEREST EXPENSE Non-interest expense was $5.1 million and $4.5 million for the six months ended June 30, 2002 and 2001, respectively. The increase in non-interest expense is due to salaries and employee benefits increasing to $3.0 million in 2002 up by $0.4 million over the same period in 2001 due to pension expense associated with the employees defined benefit plan plus normal raises. Professional expense increased to $367 thousand for the first half of 2002 from $310 thousand in 2001 as the Bank continues to incur legal expenses associated with prior borrowers. INCOME TAXES The Bank reported an income tax expense of $945 thousand and $914 thousand for the six months ended June 30, 2002 and 2001 representing an effective tax rate of 36.6% for both periods. Item 3. Quantitative and Qualitative Disclosure About Market Risk The response is incorporated herein by reference to the discussion under the subcaption "Interest Rate Sensitivity" of the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" on pages 13 and 14 of the LSB Corporation's Annual Report for the fiscal year ended December 31, 2001. -15- Part II -- Other Information Item 1. Legal Proceedings The response is incorporated herein by reference to the discussion under the caption "CONTINGENCIES" on page 33 of the LSB Corporation's Annual Report for the fiscal year ended December 31, 2001. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders On May 7, 2002 LSB Corporation (the "Company") held its annual meeting of stockholders (the "Annual Meeting"). The stockholders elected each of the following four individuals as Class C directors of the Company to serve until the 2005 annual meeting of stockholders, with the following votes cast:
BROKER NON-VOTES NOMINEE FOR WITHHELD AND ABSTENTIONS ------- --------- -------- ---------------- Eugene A. Beliveau, DDS 3,748,482 59,456 0 Byron R. Cleveland, Jr. 3,750,132 57,806 0 Robert F. Hatem 3,752,923 55,015 0 Paul A. Miller 3,736,348 71,590 0
The following directors of the Company continued as directors after the Annual Meeting: Kathleen I. Boshar, Malcolm W. Brawn, Thomas J. Burke, Neil H. Cullen, Richard Hart Harrington and Marsha A. McDonough. The stockholders also elected Robert P. Perreault as Clerk of the Company. Mr. Perreault received 3,748,838 affirmative votes, 18,976 negative votes and 10,124 absentions. Finally, the stockholders ratified the appointment of KPMG LLP ("KPMG") as the Company's independent auditors for the fiscal year ending December 31, 2002. KPMG received 3,762,998 affirmative votes, 34,236 negative votes and 10,704 abstentions. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K a) Exhibits Please see the Exhibit Index attached hereto. b) Reports on Form 8-K None. -16- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LSB CORPORATION AND SUBSIDIARIES -------------------------------- August 13, 2002 /s/ Paul A. Miller -------------------------------------------- Paul A. Miller President and Chief Executive Officer August 13, 2002 /s/ John E. Sharland -------------------------------------------- John E. Sharland Senior Vice President Chief Financial Officer -17 LSB Corporation Quarterly Report on Form 10-Q For Quarter Ended June 30, 2002 EXHIBITS INDEX 99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Added by Section 906 of the Sarbanes-Oxley Act of 2002 -18-