-----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, BQHggn6WrBEcKjhWl9FnK4fWRS/F/HHSLtIPqk3hUBMx/rUjqZk7IfUq7sJDqQsy cHpHo8JvocYUpeC8TcoTuQ== 0000950135-03-002060.txt : 20030328 0000950135-03-002060.hdr.sgml : 20030328 20030328163343 ACCESSION NUMBER: 0000950135-03-002060 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030328 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: 03625700 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 b45673lse10vk.txt LSB CORPORATION UNITED STATES 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, 2002 [ ] 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 [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes No X --- ---- State the aggregate market value of the voting stock held by non-affiliates* of the registrant based on the closing sale price of $12.81 per share as of March 21, 2003 Approximately $47,832,988 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, 2003 - ----- -------------------------------- Common Stock, par value $.10 per share 4,196,405 shares DOCUMENTS INCORPORATED BY REFERENCE. Portions of the LSB Corporation (the "Company") Annual Report to Stockholders for the fiscal year ended December 31, 2002 (the "Annual Report"), attached hereto as Exhibit (13) and the Company's Proxy Statement for the 2003 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, "BUSINESS" on pages 5 through 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" on pages 8 through 21 and Consolidated Financial Statements and Notes to Consolidated Financial Statements on pages 24 through 45 of the Annual Report. ITEM 2. PROPERTIES The Company conducts its business at its Corporate offices in North Andover and multiple branch locations listed here. The Company believes that all of its properties are well maintained and are suitable for banking needs and operations. Rent expense for 2002 totaled $152,000. 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, 2002:
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 prevailed on this appeal. 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 $2.3 million at December 31, 2002. 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. This case was heard by the appellate court on December 11, 2002. A decision by the court has not been rendered as of March 31, 2002. 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 Consolidated 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 "STOCKHOLDERS' INFORMATION" on page 46, the discussion under the subcaption "Capital Adequacy" of the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" on page 18 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 8 through 21 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 18 through 20 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 24 through 45 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 18 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 14 of the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The response is incorporated herein by reference from the discussion under the caption entitled "EQUITY COMPENSATION PLAN INFORMATION" on page 16 and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" on pages 16 through 18 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 15 and 16 of the Proxy Statement. 4 PART IV ITEM 14. CONTROLS AND PROCEDURES The Company's chief executive officer and chief financial officer, after evaluating the effectiveness of the company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of December 31, 2002 (the "Evaluation Date"), have concluded that as of the Evaluation Date, the company's disclosure controls and procedures were adequate and designed to ensure that material information relating to the Company and its subsidiaries would be made known to them by others within those entities. There were no significant changes in the Company's internal controls or, to the company's knowledge, in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the Evaluation Date. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 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 22 Independent Auditors' Report 23 Consolidated Balance Sheets as of 24 December 31, 2002 and 2001 Consolidated Statements of Operations 25 for the years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Changes 26 in Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows 27 for the years ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements 28-45 (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. Perreault 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. Perreault 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) 2002 Annual Report to Shareholders of LSB Corporation 6 (20) 2003 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 Statement Schedules: None. 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 27, 2003 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 27, 2003 - -------------------------------- Director Paul A. Miller (Principal Executive Officer) /s/ John E. Sharland Senior Vice President, Chief Financial March 27, 2003 - -------------------------------- Officer (Principal Financial and Principal John E. Sharland Accounting Officer) /s Thomas J. Burke Chairman of the Board March 27, 2003 - -------------------------------- Thomas J. Burke Director /s/ Eugene A. Beliveau Director March 27, 2003 - -------------------------------- Eugene A. Beliveau /s/ Malcolm W. Brawn Director March 27, 2003 - -------------------------------- Malcolm W. Brawn Director March 27, 2003 - -------------------------------- Byron R. Cleveland, Jr. /s/ Neil H. Cullen Director March 27, 2003 - -------------------------------- Neil H. Cullen /s/ Robert F. Hatem Director March 27, 2003 - -------------------------------- Robert F. Hatem /s/ Richard Hart Harrington Director March 27, 2003 - -------------------------------- Richard Hart Harrington /s/ Marsha A. McDonough Director March 27, 2003 - -------------------------------- Marsha A. McDonough /s / Kathleen Boshar Reynolds Director March 27, 2003 - -------------------------------- Kathleen Boshar Reynolds
8 CERTIFICATIONS I, Paul A. Miller, certify that: 1. I have reviewed this annual report on Form 10-K of LSB Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the Consolidated Financial Statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 27, 2003 /s/ Paul A. Miller ------------------------- Paul A. Miller President and Chief Executive Officer 9 I, John E. Sharland, certify that: 1. I have reviewed this annual report on Form 10-K of LSB Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the Consolidated Financial Statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 27, 2003 /s/ John E. Sharland ------------------------ John E. Sharland Senior Vice President Chief Financial Officer 10 INDEX TO EXHIBITS ATTACHED TO FORM 10-K ITEM DESCRIPTION - ---------------- (13) 2002 Annual Report to Shareholders of LSB Corporation (20) 2003 Proxy Statement (21) Subsidiary of the LSB Corporation and Lawrence Savings Bank (23.1) Consent of KPMG LLP EX-13 3 b45673lsexv13.txt 2002 ANNUAL REPORT TO SHAREHOLDERS OF LSB CORP EXHIBIT 13 LETTER TO THE STOCKHOLDERS LSB Corporation reported net income for the year ended December 31, 2002 of $3,100,000 or $0.69 diluted earnings per share as compared to $3,357,000 or $0.74 diluted earnings per share for the year ended in 2001. The Company paid dividends of $0.44 per share in 2002 and $0.40 per share in 2001, a 10% increase from 2001 and a 69% increase from 2000, in which $0.26 per share was paid. The decrease to net income for the year 2002 was due to higher non-interest expenses. Salaries and employee benefits increased to $6,006,000 in 2002 as compared to $5,264,000 in 2001 due to normal salary increases and an increase of $358,000 in pension expense associated with the employees defined benefit pension plan. Professional fees increased by $135,000 in 2002 compared to 2001 due to legal expenses. Other expenses increased due to increased holding company expenses, data processing and expenses and other customer related expenses. The Company had some positive impacts to earnings offsetting the rise in non-interest expenses. Net interest income increased by $392,000 for the year ended 2002 compared to 2001. The provisions for loan losses were zero in 2002 compared to $175,000 in 2001. Non-interest income increased to $1,493,000 for the year ended 2002 compared to $1,426,000 in 2001. This increase was due to gains on the sale of mortgage loans of $529,000 in 2002 compared to $249,000 in 2001. Deposit account fees increased to $665,000 in 2002 from $594,000 in 2001. Offsetting these increases to non-interest income was a decrease in loan fees to a loss of $145,000 from income of $155,000, respectively, for the years ended 2002 and 2001. The loss on loan fees was due primarily to provisions for losses on mortgage servicing rights of $233,000 in 2002. Net interest income increased by 3% to $13,573,000 for the year ended 2002 compared to $13,181,000 for the same period in 2001. The net interest margin was fairly level year-to-date at 3.20% from 3.21% in 2002 and 2001, respectively. Although interest income increased during 2002, lower interest rates had a negative impact due to the acceleration of the amortization of premiums associated with Collateralized Mortgage Obligations ("CMO's") in the amount of $243,000 due to the current low interest rate environment of mortgage loans which has decreased the duration of these investment securities. The Company continues to look for quality assets and seeks to maintain a low level of risk assets as it grows the loan portfolios, which increased by $6,730,000 in 2002 to $243,127,000. Non-performing loans were $1,000 at December 31, 2002 and $951,000 at December 31, 2001. The Company has not acquired property through foreclosure in the past four years. Total assets were $439,134,000 at December 31, 2002 up slightly from $438,267,000 at December 31, 2001. The increase in asset size at December 31, 2002 from December 31, 2001 is due to an increase in the loan portfolio of $6,730,000 and an increase in Federal Funds of $3,928,000 partially offset by a decrease in the investment portfolio as securities matured. Deposits increased by $11,015,000 which helped pay down borrowed funds of $9,508,000 as these borrowed funds became due. Total deposits at December 31, 2002 were $279,465,000 up from $268,450,000 at December 31, 2001. The increase in deposits at December 31, 2002 from December 31, 2001 was primarily due to an increase in NOW, money market and savings deposit accounts. The Corporation's leverage ratio was 12.10% and 11.98% at December 31, 2002 and December 31, 2001, respectively. The Corporation exceeds all regulatory minimum capital ratio requirements as defined by the Federal Reserve Bank as of and for December 31, 2002 and 2001. The Bank exceeds all regulatory minimum capital requirements as defined by the FDIC as of and for December 31, 2002 and 2001. 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. Robert P. Perreault was the Executive Vice President and Clerk of the Company. He decided to retire in January 2003. He had over 43 years of service and friendship with Lawrence Savings Bank employees and customers. He was involved in opening four branch offices. Mr. Perreault's service to the Bank and Company has been greatly appreciated, and we wish him the very best in the years to come. Photo of Robert P. Perreault /s/ Paul A. Miller Paul A. Miller President and Chief Executive Officer LSB CORPORATION 2 FINANCIAL TABLE OF CONTENTS 4 FINANCIAL HIGHLIGHTS 5 BUSINESS 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 22 REPORT OF MANAGEMENT RESPONSIBILITY 23 INDEPENDENT AUDITORS' REPORT 24 CONSOLIDATED BALANCE SHEETS 25 CONSOLIDATED STATEMENTS OF OPERATIONS 26 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 27 CONSOLIDATED STATEMENTS OF CASH FLOWS 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 46 STOCKHOLDERS' INFORMATION
3 FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------------------- December 31, 2002 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands, Except Per Share Data) BALANCE SHEET DATA: Total assets $ 439,134 $ 438,267 $ 413,090 $ 404,172 $ 340,041 Loans, gross 243,127 236,397 222,045 198,098 197,110 Allowance for loan losses 4,167 4,070 3,685 3,381 3,272 Other real estate owned 12 22 32 519 556 Federal funds sold 9,633 5,705 15,427 - 5,629 U.S. Treasury, Government agency and Corporate obligations 155,132 160,337 125,542 151,358 87,006 Municipal obligations 4,021 2,062 60 113 1,265 Other securities 7,256 11,369 25,231 26,301 25,216 Deposits 279,465 268,450 270,548 246,040 253,501 Borrowed funds 101,591 111,099 86,161 104,167 34,214 Equity 54,059 54,092 52,313 48,408 46,713 Year Ended December 31, 2002 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- OPERATING DATA: Interest income $ 25,138 $ 28,792 $ 29,037 $ 26,097 $ 25,060 Interest expense 11,565 15,611 16,358 13,183 13,257 --------- --------- --------- ---------- --------- Net interest income 13,573 13,181 12,679 12,914 11,803 Provision for loan losses - 175 250 75 450 Non-interest income 1,493 1,426 1,124 844 1,380 Non-interest expense 10,155 9,122 8,376 9,347 8,725 --------- --------- --------- --------- --------- Income before income taxes 4,911 5,310 5,177 4,336 4,008 Income tax expense (benefit) 1,811 1,953 854 1,582 (4,800) --------- --------- --------- --------- --------- Net income $ 3,100 $ 3,357 $ 4,323 $ 2,754 $ 8,808 ============================================================================================================================ Basic earnings per share $ .71 $ .77 $ .99 $ .63 $ 2.04 Diluted earnings per share $ .69 $ .74 $ .97 $ .61 $ 1.95 ============================================================================================================================ OTHER DATA: Interest rate spread 2.78% 2.64% 2.66% 3.05% 2.97% Net interest margin on average earning assets 3.20 3.21 3.22 3.55 3.54 Return on average assets (net income / average assets) 0.71 0.79 1.05 0.72 2.52 Return on average equity (net income / average stockholders' equity) 5.72 6.35 8.72 5.77 21.09 Dividend payout ratio (dividends declared per share divided by basic earnings per share) 61.97 51.95 26.26 23.81 - Cash dividends declared and paid per common share $ 0.44 $ 0.40 $ 0.26 $ 0.15 $ - Average stockholders' equity to average assets ratio 12.34 12.39% 12.06% 12.47% 11.96% - ---------------------------------------------------------------------------------------------------------------------------- Book value per share at year end $ 12.71 $ 12.35 $ 11.99 $ 11.11 $ 10.78 - ----------------------------------------------------------------------------------------------------------------------------
4 BUSINESS SUMMARY LSB Corporation (the "Corporation" or the "Company") 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 System ("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, 2002. 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. The Bank has a new remote ATM location in Haverhill, 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, 2002 were $243.1 million up from $236.4 million at December 31, 2001. 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 these loans are fixed or variable. 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. 5 RESIDENTIAL MORTGAGES. The Bank originates fixed and adjustable rate residential mortgage loans which are underwritten to be eligible for sale in the secondary market. These loans are secured primarily by owner occupied 1-4 family primary residential properties. Adjustable rate mortgage loans are generally held by the Bank in the loan portfolio as a means to manage interest rate risk. Fixed rate mortgages are 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 Financing Agency ("MHFA"). Sales of mortgage loans may be made at a premium or discount resulting in gains or losses on the transaction. Based on the structure of the sale, loans sold 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 Federal Reserve Bank ("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 Federal Deposit Insurance Corporation ("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. 6 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 George W. 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 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. SARBANES-OXLEY ACT OF 2002. On July 31, 2002, President George W. Bush signed into law the "Sarbanes-Oxley Act of 2002" (or the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act establishes a comprehensive framework for modernizing and reforming the oversight of public company financial accounting and disclosure practices. Principal components of the Sarbanes-Oxley Act include: - The creation of a public company accounting oversight board, with which all accounting firms performing audits for public companies are required to register, and which is empowered to set auditing, quality control and independence standards, to inspect registered firms, and to conduct investigations and to take disciplinary actions, subject to SEC oversight. - The strengthening of auditor independence from corporate management by limiting the type and scope of services that auditors can offer their public company audit clients, requiring periodic rotation of public company audit partners, requiring direct auditor reports to company audit committees, and prohibiting public companies from exerting improper influence over their outside auditors. - The imposition of new corporate governance requirements including among other things, independence and financial expertise requirements for audit committee membership and empowerment of public company audit committees to appoint, compensate and oversee their company's outside auditors. - Requirements that the Chief Executive Officer and the Chief Financial Officer certify financial statements included in public company filings with the SEC and disgorge bonuses and stock-based compensation for periods for which the company is forced to restate its financial results, a prohibition of insider stock trades during "black-out" periods when a company's employee benefits plans are precluded from trading, and a prohibition of public company loans or extensions of credit to directors and officers. - Requirements that public companies disclose whether they have a code of ethics for their senior financial officers and if not, why not, and that management periodically assess and report on the adequacy of the company's internal controls. - The imposition of new and accelerated public company disclosure requirements, requirements to report off balance sheet transactions and of accelerated reporting of insider transactions in company stock The SEC has issued final and proposed regulations implementing many of the Sarbanes-Oxley Act provisions. 7 SECURITIES AND EXCHANGE COMMISSION FILINGS OF COMPANY'S WEB SITE. Under the Securities Exchange Act of 1934 Sections 13 and 15(d), periodic and current reports must be filed with the Securities and Exchange Commission ("SEC"). The Company electronically files the following reports with the SEC: Form 10-K (Annual Report), Form 10-Q (Quarterly Report), Form 8-K (Report of Unscheduled Material Events), Form 3, 4 & 5 (Statements of Ownership), Form S-3 and 8-A (Registration Statements, and Form DEF 14A (Proxy Statement). The Company may file additional forms. The SEC maintains an Internet site, www.sec.gov in which all forms filed electronically may be accessed. The Company's website: www.lawrencesavings.com has a new section for SEC filings available free of charge and provides a link under About Us, Stockholder Information, Nasdaq-Symbol. Company filings. 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 the Corporation, projected or anticipated benefits, or events related to other future developments involving the Corporation or the industry in which it operates. Also, when verbs in the present tense such as "believes," "expects," "anticipates," "continues," "attempts" or similar expressions are used, forward-looking statements are being made. 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. CRITICAL ACCOUNTING POLICIES Critical accounting policies are defined as those policies that have significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Management believes that the Company's critical accounting policies upon which the financial statements depend on and which involve the most complex or subjective decisions or assessments are as follows: ALLOWANCE FOR LOAN LOSSES: 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 the year. The allowance is increased by provisions for loan losses, which are a charge to the income statement, and by recoveries on loans previously charged-off. The allowance is reduced by loans charged-off. For a further discussion of the Company's methodology of assessing the adequacy of the allowance for loan losses, see Management's Discussion and Analysis of Financial Condition and Results of Operation and see Note 1 to the Consolidated Financial Statements for more details on establishing the allowance for loan losses. INCOME TAXES: 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 carry-forward period. 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. 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. For a further discussion on income taxes, see Management's Discussion and Analysis of Financial Condition and Results of Operation and see Note 1 & 8 to the Consolidated Financial Statements. MORTGAGE SERVICING RIGHTS: When loans are sold with servicing rights retained, the Company allocates the carrying amount of the loan between the underlying asset sold and the rights retained, based on their relative fair values. The fair value is estimated using market prices when available or using a valuation model that calculates the present value of future servicing fee income using discount rates and prepayment assumptions that management believes represent current market conditions. The following risk characteristics are considered for determining fair value; loan type, interest rate, loan term and remaining maturities. 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 through the establishment of a valuation allowance. Periodically, the mortgage servicing rights are assessed for impairment based on the fair value of such rights and recognized by a charge to the valuation allowance. For further details on mortgage servicing rights see Note 1 & 4 to the Consolidated Financial Statement. 8 FINANCIAL CONDITION OVERVIEW Total assets amounted to $439.1 million at December 31, 2002 up slightly from $438.3 million at December 31, 2001. The increase in asset size during 2002 is the result of an increase in the gross loan portfolio of $6.7 million and an increase in Federal Funds of $3.9 million partially offset by a decrease in the investment portfolio as securities matured. Deposits increased by $11.0 million which helped pay down borrowed funds of $9.5 million as these became due. INTEREST 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 $424.8 million in 2002, an increase of $13.6 million or 3.3% from 2001. Average earning assets in 2001 totaled $411.2 million which was a $17.0 million or 4.0% increase from $394.2 million in 2000. 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 business loans increased in 2002, 2001 and 2000. Loan growth in these portfolios caused the average balance of the loan portfolio to increase in 2002 and 2001 by $4.4 million and $26.9 million, respectively, to $235.0 million and $230.6 million, respectively, from $203.7 million in 2000. 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 bonds and equity securities, and short-term investments amounted to $189.7 million in 2002 as compared to $180.6 million in 2001 and $190.5 million in 2000. These securities represent 43.2% of the Company's average assets at December 31, 2002 versus 42.3% and 46.3%, respectively, of average assets at December 31, 2001 and 2000. INVESTMENT SECURITIES The investment portfolio totaled $166.4 million and $173.8 million, respectively, at December 31, 2002 and 2001, a decrease of $7.4 million or 4.2%. The largest decrease was in corporate obligations which decreased $21.5 million during 2002 as securities matured. Mortgage-backed securities and asset-backed securities also experienced decreases in 2002 of $6.0 million and $3.8 million, respectively, due to the low interest rate environment and increased refinance activity the principal repayments on these securities have been higher than normal. Partially offsetting these decreases were increases in U.S. Agencies and municipal obligations of $22.0 million and $2.0 million, respectively, during 2002. For more information on investment securities, see Financial Highlights and Note 2 of the Consolidated Financial Statements. LOANS Total loans at December 31, 2002 and 2001 amounted to $243.1 million and $237.4 million, respectively, an increase of $6.7 million or 2.8%. Residential loans decreased $18.5 million or 23.5% during 2002, offset by increases in commercial real estate, commercial loans and construction loans of $12.6 million, $13.5 million and $2.9 million, respectively. The shift in the portfolio mix was accomplished to maximize these higher yielding assets. Equity loans decreased $1.9 million or 14.2% as a result of the heavy refinance market. Consumer loans decreased $337 thousand. For more information on loans, see Interest Rate Sensitivity and Note 4 of the Consolidated Financial Statements. 9 The components of the loan portfolio at December 31, follow:
2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Balance Percent Balance Percent Balance Percent Balance Percent Balance Percent - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) Residential real estate loans: Fixed rate $ 31,583 13.0% $ 40,861 17.3% $ 44,350 20.0% $ 49,825 25.1% $ 47,887 24.3% Adjustable rate 28,557 11.7 37,744 16.0 33,576 15.1 30,232 15.3 31,845 16.2 -------- ----- -------- ----- --------- ----- -------- ----- -------- ----- 60,140 24.7 78,605 33.3 77,926 35.1 80,057 40.4 79,732 40.5 -------- ----- -------- ----- --------- ----- -------- ----- -------- ----- Home equity loans: Fixed rate 7,915 3.3 10,155 4.3 12,367 5.6 8,716 4.4 7,652 3.9 Adjustable rate 3,575 1.5 3,238 1.4 3,630 1.6 3,890 2.0 3,805 1.9 -------- ---- -------- ---- --------- ---- -------- ----- -------- ----- 11,490 4.8 13,393 5.7 15,997 7.2 12,606 6.4 11,457 5.8 -------- ---- -------- ---- --------- ---- -------- ----- -------- ----- Commercial real estate loans: Fixed rate 16,651 6.8 16,447 7.0 10,247 4.6 10,898 5.5 9,206 4.7 Adjustable rate 96,094 39.4 83,663 35.3 76,882 34.6 69,995 35.3 62,052 31.4 -------- ----- -------- ----- --------- ----- -------- ----- -------- ----- 112,745 46.2 100,110 42.3 87,129 39.2 80,893 40.8 71,258 36.1 -------- ----- -------- ----- --------- ----- -------- ----- -------- ----- Construction loans 23,502 9.7 20,593 8.7 17,148 7.7 9,666 4.9 11,550 5.9 Loans held for sale 2,579 1.1 4,156 1.8 - 0.0 - 0.0 8,950 4.5 Commercial loans 32,017 13.2 18,549 7.8 22,602 10.2 13,143 6.6 12,558 6.4 Consumer loans 654 0.3 991 0.4 1,243 0.6 1,733 0.9 1,605 0.8 -------- ----- -------- ----- --------- ----- -------- ----- -------- ----- Total loans 243,127 100.0% 236,397 100.0% 222,045 100.0% 198,098 100.0% 197,110 100.0% ===== ===== ===== ===== ===== Allowance for loan losses 4,167 4,070 3,685 3,381 3,272 -------- -------- --------- -------- -------- Loans, net $238,960 $232,327 $ 218,360 $194,717 $193,838 ==================================================================================================================================
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 current year end 2002 level of the allowance for loan losses to be appropriate. The allowance as a percentage of total loans was 1.7% at December 31, 2002, 2001 and 2000. 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 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 loans. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment is determined by the difference between the present value of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or, as a practical expedient in the case of collateral dependent loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is based on the fair value of the collateral. The Company maintained a low level of risk assets and had minimal delinquencies during the year 2002. As a result, there was no charge to the provision for loan losses in the year 2002. The provision for loan losses for the years 2001 and 2000 was a charge of $175 thousand, and $250 thousand, respectively. The Company had net recoveries of $97 thousand in 2002, $210 thousand in 2001, and $54 thousand in 2000. 10 The following table summarizes changes in the allowance for loan losses for the years ended December 31:
2002 2001 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Balance at beginning of year $ 4,070 $ 3,685 $ 3,381 $ 3,272 $ 3,144 Charge-offs by loan type: Residential mortgage - - - (17) (224) Commercial - (3) - - - Commercial real estate - - (27) - (215) Consumer (1) - (1) - (16) ------- ------- ------- ------- ------- Total charge-offs (1) (3) (28) (17) (455) ------- ------- ------- ------- ------- Recoveries by loan type: Residential mortgage - 2 6 28 10 Commercial - - 5 3 60 Commercial real estate 89 201 62 13 49 Consumer 9 10 9 7 14 ------- ------- ------- ------- ------- Total recoveries 98 213 82 51 133 ------- ------- ------- ------- ------- Net recoveries (charge-offs) 97 210 54 34 (322) Provision for loan losses - 175 250 75 450 ------- ------- ------- ------- ------- Ending balance $ 4,167 $ 4,070 $ 3,685 $ 3,381 $ 3,272 ====================================================================================================================== Ratio of net recoveries (charge-offs) to average loans outstanding during the period 0.04% 0.09% 0.03% 0.02% (0.18)% ======================================================================================================================
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.
2002 2001 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- (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 $3,525 69.1% $3,251 58.8% $2,711 57.1% $1,933 52.3% $ 1,787 48.4% Residential mortgage and home equity 314 30.6 397 40.8 436 42.3 526 46.8 634 50.8 Consumer 29 0.3 41 0.4 49 0.6 55 0.9 55 0.8 Unallocated 299 N/A 381 N/A 489 N/A 867 N/A 796 N/A ------ ----- ------ ----- ------ ----- ------ ----- ------- ----- $4,167 100.0% $4,070 100.0% $3,685 100.0% $3,381 100.0% $ 3,272 100.0% =================================================================================================================================
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. 11 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, 2002 and 2001, there were $1,521 thousand and $941 thousand, respectively, identified as potential problem loans. 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:
2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Risk assets: Non-performing loans: Residential real estate $ 1 $ 10 $ 10 $ - $ 66 Commercial real estate - 730 - - - Commercial business - 211 - - - Consumer - - - - - ------- ------- ------- ------- ------- Total non-performing loans 1 951 10 - 66 ------- ------- ------- ------- ------- Other real estate owned: One to four family residential properties - - - - - Condominiums - - - - - Land 57 67 77 87 89 Commercial real estate - - - 477 512 OREO valuation allowance (45) (45) (45) (45) (45) ------- ------- ------- ------- ------- Total other real estate owned 12 22 32 519 556 ------- ------- ------- ------- ------- Total risk assets $ 13 $ 973 $ 42 $ 519 $ 622 ======================================================================================================== Risk assets as a percent of total loans and OREO 0.0% 0.4% 0.0% 0.3% 0.3% ======================================================================================================== Risk assets as a percent of total assets 0.0% 0.2% 0.0% 0.1% 0.2% ========================================================================================================
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, 2002 were $1 thousand, a decrease from $951 thousand at December 31, 2001 and $10 thousand at December 31, 2000. The Company actively monitors risk assets. The Company attempts to work with delinquent borrowers in order to bring loans current. If the borrower is not able to bring the loan current, the Company commences collection efforts. Valuation of property at foreclosure, and periodically thereafter, is based upon appraisals and 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. 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 2002 total average interest bearing liabilities were $368.4 million which was a $10.0 million or 2.8% increase from $358.4 million in 2001. Average total interest bearing deposits of $261.4 million comprised 71.0% of interest bearing liabilities in 2002 while in 2001 such deposits totaling $263.3 million comprised 73.5% of interest bearing liabilities. 12 Changing interest rates can affect the mix and level of various deposit categories. The lower average interest rate paid on money market accounts and certificates of deposit had an impact on the overall interest rate paid on deposits and caused a decrease of 155 basis points in 2002 and 28 basis points in 2001. The average balance of money market investment accounts increased by $4.7 million to $59.0 million in 2002 and by $6.1 million to $54.3 million in 2001. The average balance of NOW and Super NOW accounts increased by $2.4 million to $33.6 million in 2002 and by $4.1 million to $31.2 million in 2001. The average balance of certificates of deposit decreased by $13.3 million to $123.7 million in 2002 while it increased by $6.0 million to $137 million in 2001. Average borrowed funds in 2002, 2001 and 2000 were $107.0 million, $95.1 million and $101.9 million, respectively, including advances from the FHLB and other borrowed funds. The increase of $11.9 million in 2002 resulted from the utilization of available credit in a low interest rate environment with longer maturities of three to five years. 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. DEPOSITS Total deposits increased $11.0 million or 4.1% during 2002 to $279.5 million at December 31, 2002 from $268.5 million at December 31, 2002. Money market investment accounts had the largest increase of $7.1 million or 12.3%. NOW accounts and savings accounts also increased during 2002 by $5.5 million and $2.3 million, respectively. These increases likely resulted due to the uncertainty of the stock market. Certificates of deposit decreased $5.6 million or 5.7% during 2002 due to maturities and the low interest rate environment. Retirement accounts and non-interest bearing demand deposit accounts had increases of $950 thousand and $778 thousand, respectively, in 2002. For more information, see Note 6 to the Consolidated Financial Statements. BORROWED FUNDS Total borrowed funds decreased $9.5 million or 8.6% during 2002 to $101.6 million from $111.1 million at December 31, 2002 and 2001, respectively. FHLB advances totaled $94.2 million in 2002 and $103.0 million in 2001, a decrease of $8.8 million due to repayments of $19.8 million partially offset by new advances of $11.0 million. Other borrowed funds comprise of agreements to repurchase which totaled $4.0 million and $4.2 million, respectively, at December 31, 2002 and 2001, and other secured borrowings which totaled $3.4 million and $3.9 million, respectively, in 2002 and 2001. See Note 7 to the Consolidated Financial Statements for further information. RESULTS OF OPERATIONS. OVERVIEW The Company's net earnings amounted to $3.1 million during 2002, $3.4 million during 2001 and $4.3 million during 2000. The Company's earnings declined $257 thousand or 7.7% during 2002 impacted by net interest income increasing by $392 thousand compared to 2001. Non-interest income increased to $1.5 million for the year ended 2002 compared to $1.4 million in 2001. Non-interest expenses had a negative impact to earnings for the year ended 2002 increasing to $10.2 million in 2002 from $9.1 million in 2001. The Company's earnings decreased by 22% or $966 thousand in 2001 compared to 2000, 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. The Company's net interest income, which is the difference between interest earned on assets and interest paid on liabilities, totaled $13.6 million in 2002, $13.2 million in 2001 and $12.7 million in 2000. The increase in 2001 versus 2000 resulted from average earning assets growing faster than interest bearing liabilities. The Company's net interest margin remained fairly flat in 2002 and 2001 at 3.20% and 3.21%, respectively, versus 3.22% in 2000. 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. There was no provision for loan losses in 2002 due to the low level of risk assets and minimal delinquent loans. The provision for loan losses was a charge of $175 thousand in 2001 and $250 thousand in 2000. The provision for loan losses was made to maintain an appropriate allowance for loan losses in 2001 and 2000. Non-interest income amounted to $1.5 million, $1.4 million and $1.1 million in 2002, 2001 and 2000, respectively. The increase in 2002, 2001 and 2000 was primarily due to gains on sales of mortgage loans of $529 thousand, $249 thousand and $47 thousand, respectively. Deposit account fees increased $71 thousand during 2002, offsetting these increases was a decrease in loan fees to a net loss of $145 thousand from income of $155 thousand in 2001. Non-interest expense totaled $10.2 million in 2002, $9.1 million in 2001 and $8.4 million in 2000. Salaries and employee benefits increased during 2002 by $742 thousand, of which $358 thousand was attributable to pension expense associated with the employees defined benefit pension plan, and professional fees increased by $135 thousand in 2002 due to legal expenses. 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 from $496 thousand in 2000. The Company recognized an income tax expense of $1.8 million in 2002, $2.0 million in 2001 and $854 thousand in 2000. The lower provision for taxes in 2002 as compared with 2001 resulted from a reduction in income before income taxes to $4.9 million for the year ended 2002 versus $5.3 million in 2001. 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. 13 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.
2002 2001 2000 ----------------------------- ----------------------------- --------------------------- Average Average Average Average Interest Average Interest Average Interest Balance Interest Rate Balance Interest Rate Balance Interest Rate - ----------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) ASSETS Loans: Residential real estate $ 87,122 $ 5,848 6.71% $ 97,982 $ 7,123 7.27% $ 92,547 $ 6,875 7.43% Commercial real estate 126,083 9,759 7.74 112,021 9,577 8.55 93,683 8,644 9.23 Commercial business 20,918 1,256 6.00 19,379 1,490 7.69 16,111 1,512 9.38 Consumer 905 69 7.62 1,236 105 8.50 1,337 108 8.08 -------- -------- ---- --------- -------- -------- ------- Total loans 235,028 16,932 7.20 230,618 18,295 7.93 203,678 17,139 8.41 -------- -------- --------- -------- -------- ------- Investment securities: U.S. Treasury and Government Agency obligations 105,438 4,763 4.52 67,293 4,189 6.23 94,353 5,640 5.98 Other bonds and equity securities 57,228 2,275 3.98 76,789 4,237 5.52 61,421 4,039 6.58 Mortgage-backed securities 18,715 1,040 5.56 26,290 1,618 6.15 32,423 2,077 6.41 Short-term investments 8,351 128 1.53 10,236 453 4.43 2,334 142 6.08 -------- -------- ---- --------- -------- ---- -------- ------- Total investment securities 189,732 8,206 4.33 180,608 10,497 5.81 190,531 11,898 6.24 -------- -------- --------- -------- -------- ------- Total interest earning assets 424,760 25,138 5.92% 411,226 28,792 7.00% 394,209 29,037 7.37% -------- -------- ------- Allowance for loan losses (4,131) (3,864) (3,491) Cash and due from banks 7,132 5,950 5,124 Other real estate owned 18 28 189 Other assets 11,841 13,432 15,338 -------- --------- -------- Total assets $439,620 $ 426,772 $411,369 =========================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Regular savings accounts $ 45,102 $ 389 0.86% $ 40,938 $ 720 1.76% $ 39,045 $ 770 1.97% NOW and Super NOW accounts 33,596 86 0.26 31,187 155 0.50 27,084 142 0.52 Money market accounts 59,011 1,097 1.86 54,266 1,664 3.07 48,199 1,935 4.01 Certificates of deposit 123,673 4,232 3.42 136,952 7,390 5.40 130,976 7,083 5.41 -------- -------- --------- -------- -------- ------- Total interest bearing deposits 261,382 5,804 2.22 263,343 9,929 3.77 245,304 9,930 4.05 Borrowed funds 107,001 5,761 5.38 95,089 5,682 5.98 101,913 6,428 6.31 -------- -------- --------- -------- -------- ------- Total interest bearing liabilities 368,383 11,565 3.14% 358,432 15,611 4.36 347,217 16,358 4.71% -------- -------- --------- -------- -------- ------- Non-interest bearing deposits 13,515 12,015 9,877 Other liabilities 3,488 3,469 4,672 -------- --------- -------- Total liabilities 385,386 373,916 361,766 Stockholders' equity 54,234 52,856 49,603 -------- --------- -------- Total liabilities and stockholders' equity $439,620 $ 426,772 $411,369 =========================================================================================================================== Net interest rate spread 2.78% 2.64% 2.66% Net interest income $ 13,573 $ 13,181 $12,679 =========================================================================================================================== Net interest margin on average earning assets 3.20% 3.21% 3.22% ===========================================================================================================================
14 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).
2002 vs. 2001 2001 vs. 2000 ----------------------------------------- ----------------------------------------- Total Rate/ Total Rate/ Change Volume Rate Volume Change Volume Rate Volume - ----------------------------------------------------------------------------------------------------------------------------------- (In Thousands) INTEREST INCOME: Loans: Residential real estate $ (1,275) $ (789) $ (546) $ 60 $ 248 $ 404 $ (147) $ (9) Commercial real estate 182 1,202 (906) (114) 933 1,692 (635) (124) Commercial business (234) 118 (326) (26) (22) 307 (273) (56) Consumer (36) (28) (11) 3 (3) (8) 6 (1) -------- -------- -------- -------- -------- -------- -------- -------- Total loans (1,363) 503 (1,789) (77) 1,156 2,395 (1,049) (190) -------- -------- -------- -------- -------- -------- -------- -------- Investment securities: U.S. Treasury and Government Agency obligations 574 2,375 (1,149) (652) (1,451) (1,618) 233 (66) Other bonds and equity securities (1,962) (1,079) (1,184) 301 198 1,011 (650) (163) Mortgage-backed securities (578) (466) (157) 45 (459) (393) (82) 16 Short-term investments (325) (83) (296) 54 311 481 (39) (131) -------- -------- -------- -------- -------- -------- -------- -------- Total investments (2,291) 747 (2,786) (252) (1,401) (519) (538) (344) -------- -------- -------- -------- -------- -------- -------- -------- Total interest income (3,654) 1,250 (4,575) (329) (245) 1,876 (1,587) (534) -------- -------- -------- -------- -------- -------- -------- -------- INTEREST EXPENSE: Deposits: Regular savings accounts (331) 73 (367) (37) (50) 37 (83) (4) NOW and Super NOW accounts (69) 12 (75) (6) 13 22 (7) (2) Money market accounts (567) 145 (655) (57) (271) 244 (457) (58) Certificates of deposit (3,158) (717) (2,704) 263 307 323 (15) (1) -------- -------- -------- -------- -------- -------- -------- -------- Total interest bearing deposits (4,125) (487) (3,801) 163 (1) 626 (562) (65) Borrowed funds 79 712 (562) (71) (746) (430) (338) 22 -------- -------- -------- -------- -------- -------- -------- -------- Total interest expense (4,046) 225 (4,363) 92 (747) 196 (900) (43) -------- -------- -------- -------- -------- -------- -------- -------- Net interest income $ 392 $ 1,025 $ (212) $ (421) $ 502 $ 1,680 $ (687) $ (491) ====================================================================================================================================
NET INTEREST INCOME Net interest income is the difference between the interest income earned on earning assets and the interest expense paid on interest bearing liabilities. Interest income and interest expense are affected by changes in earning assets and interest bearing liability balances in addition to changes in interest rates. The Company's net interest income was $13.6 million in 2002, $13.2 million in 2001 and $12.7 million in 2000. Interest income from earning assets was $25.1 million, $28.8 million and $29.0 million in 2002, 2001 and 2000, respectively. The decrease in interest income during 2002 compared to 2001 was due to a decrease in rates earned on investment securities and loans coupled with the acceleration of the amortization of premiums associated with collateralized mortgage obligations in the amount of $243 thousand due to the current low interest rate environment of mortgage loans which has decreased the duration of these investment securities. The increase in interest income during 2001 versus 2000 resulted from loan growth funded by an increase in deposits, partially offset by an overall decrease in rates. 15 Interest expense on interest bearing deposits was $5.8 million in 2002 compared to $9.9 million in both 2001 and 2000. Average deposit balances decreased in 2002 from 2001. The primary decrease was in certificates of deposit. Although there were increases in all other deposit categories, interest expense decreased due to a decrease in rates paid on all deposit categories. Average deposit balances increased in 2001 from 2000 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 1.86% in 2002 from 3.07% in 2001 which resulted in $567 thousand net decrease in interest expense. Average rates paid on certificates of deposit decreased to 3.42% during 2002 from 5.40% in 2001 resonating from a net decrease of $3.2 million in interest expense during 2002. Average rates paid on certificates of deposit remained stable at 5.40% in 2001 and 5.41% in 2000; however, average balances of certificates of deposit increased $6.0 million in 2001 causing interest expense to also rise $307 thousand in total. Interest expense on borrowed funds remained stable at $5.8 million in 2002 and $5.7 million in 2001 compared to an increase to $6.4 million in 2000. The increase in interest expense in 2002 resulted from an increase in average balances partially offset by a decrease in rates paid. The decrease in interest expense of $746 thousand in 2001 resulted from a decrease in average balances coupled with a decrease in the rates paid. Interest expense on total interest bearing liabilities totaled $11.6 million, $15.6 million and $16.4 million during 2002, 2001 and 2000, respectively. The average yield on earning assets in 2002 was down 108 basis points at 5.92% and was down 37 basis points at 7.00% in 2001 from 7.37% in 2000. The average rate paid on interest bearing liabilities in 2002 was 3.14%, a decrease of 122 basis points and in 2001 was 4.36%, a decrease of 35 basis points from 4.71% in 2000. The net interest rate spread in 2002 was 2.78% up 14 basis points from 2.64% and 2.66% in 2001 and 2000, respectively. The decrease in 2001 was due to interest rates on earning assets falling before interest rates on earning liabilities. PROVISION FOR LOAN LOSSES There was no provision for loan losses in 2002 due to the low level of risk assets and minimal delinquent loans. The provision for loan losses was a charge of $175 thousand in 2001 and $250 thousand in 2000. NON-INTEREST INCOME Non-interest income increased 4.7% and totaled $1.5 million versus $1.4 million and $1.1 million for the years ended 2001 and 2000, respectively. This increase in 2002 was due to gains on the sale of mortgage loans of $529 thousand compared to $249 thousand in 2001. Deposit fees and other income both increased during 2002 to $665 thousand and $444 thousand, respectively, from $594 thousand and $390 thousand, respectively in 2001. Partially offsetting these increases in 2002 were decreases in both loan servicing fees by $300 thousand and gains on sale of investment securities by $38 thousand. The primary decrease in loan servicing fees is due to the decline in fair value of mortgage servicing rights which is recognized by a charge to loan servicing fees of $302 thousand. See Note 4 in the Consolidated Financial Statements on Mortgage Servicing Rights (MSR's). 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. NON-INTEREST EXPENSE Non-interest expense increased to $10.2 million in 2002 from $9.1 million in 2001 versus $8.4 million in 2000. The increase in 2002 was primarily due to an increase in salaries and employee benefits of $742 thousand and an increase of $135 thousand in professional expenses which include legal expenses relating to collection efforts. 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. Professional fees, which include legal expenses, totaled $671 thousand in 2001, $496 thousand in 2000. Salaries and employee benefits expense totaled $6.0 million in 2002, $5.3 million in 2001 and $5.0 million in 2000. Full-time equivalent employees were 105 at December 31, 2002, 102 at December 31, 2001 and 100 at December 31, 2000. Increases in normal merit raises and an increase of $358 thousand in pension expense associated with the employees defined benefit pension plan accounted for the increase in 2002. Increases in normal merit raises offset by reduced pension expense associated with the employees defined benefit pension plan accounted for the increase between 2001 and 2000. The Company continually evaluates staffing levels in order to control salaries and employee benefits while managing business volumes. Data processing expenses increased to $749 thousand during 2002 compared to $705 thousand during 2001 and up from $590 thousand in 2000. 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 decreased to $790 thousand in 2002 and increased to $872 thousand in 2001 from $763 thousand in 2000. Insurance expenses totaled $153 thousand, $146 thousand and $139 thousand in 2002, 2001 and 2000, respectively, and other expenses increased to $1.7 million in 2002 from $1.4 million in both 2001 and 2000, respectively. 16 INCOME TAXES The Company reported income tax expense of $1.8 million in 2002, $2.0 million in 2001 and $854 thousand in 2000. The increase in the provision for taxes in 2001 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 2002 was 36.9% compared to 36.8% in 2001 and 16.5% in 2000. 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 $3.7 million at December 31, 2002 compared to $5.7 million at December 31, 2001. 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. 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 consists of high quality, and, therefore, readily marketable, U.S. Treasury and Government Agency obligations. At December 31, 2002, the Bank's investment securities and mortgage-backed securities available for sale totaled $53.1 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, 2002 and had the full $11.8 million available. The liquidity position of the Company is managed by the Asset/Liability Management Committee ("ALCO"). The duties of ALCO are to periodically review the Company's level of liquidity under prescribed policies and procedures. It is the responsibility of ALCO to report to the Board of Directors on a regular basis the Company's liquidity position as it relates to these policies and procedures. At December 31, 2002, the Company's liquidity position was above policy guidelines. Management believes that the Bank has adequate liquidity to meet current and future liquidity demands. CONTRACTUAL OBLIGATIONS AND COMMITMENTS The company enters info off-balance sheet contractual obligations and commitments in the normal course of business. The Company has contractual obligations such as payments on FHLB advances, operating lease obligations and customer repurchase agreements. The Company has commitments in the form of financial instruments that are for loan originations, lines of credit, letters of credit and to sell mortgage loans. These commitments have various expiration dates. The following table summarizes the expiration dates if these commitments at December 31, 2002.
Payments Due - By Period ------------------------------------------------------------ Less than One to Four to After Contractual Obligations Total One Year Three Years Five Years Five Years - -------------------------------------------------------------------------------------------------------- (In Thousands) FHLB Advances $ 94,237 $ 15,275 $ 26,000 $ 20,000 $ 32,962 Lease Obligations 472 112 180 180 - Customer Repurchase Agreements 3,950 3,950 - - - - -------------------------------------------------------------------------------------------------------- Total Contractual Cash Obligations $ 98,659 $ 19,337 $ 26,180 $ 20,180 $ 32,962 ========================================================================================================
17
Amount of Commitment Expiring - By Period ------------------------------------------------------------ Less than One to Four to After Commitments Total One Year Three Years Five Years Five Years - -------------------------------------------------------------------------------------------------------- (In Thousands) Loan Originations $ 25,103 $ 25,103 $ - $ - $ - Lines of Credit 37,877 27,037 4,737 3,881 2,222 Letters of Credit 1,120 1,120 - - - Sell mortgage Loans 5,349 5,349 - - - - -------------------------------------------------------------------------------------------------------- Total commitments $ 69,449 $ 58,609 $ 4,737 $ 3,881 $ 2,222 ========================================================================================================
The Corporation has no off-balance sheet arrangements except those discussed in the commitment table in the Liquidity section or Note 12 of the Consolidated Financial Statements. CAPITAL ADEQUACY The Company and the Bank are required to maintain a leverage capital ratio of 5% and risk-based capital ratios of at least 10% in order to be categorized as "well capitalized" in accordance with definitions in regulatory guidelines promulgated by the FDIC and FRB. At December 31, 2002 and 2001, 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. On July 25, 2002, the Board of Directors of the Company adopted a stock repurchase program (the "Repurchase Program") authorizing the Company to repurchase up to five percent of its common stock outstanding as of June 30, 2002 for cash. As of December 31, 2002 the number of shares repurchased and included as Treasury Stock was 136,500, which had an average purchase price of $12.72. The Company's book value per share was $12.71 at December 31, 2002. The Company was able to purchase shares of Treasury Stock at a price close to book value, which had a minimal impact in the calculation of book value at December 31, 2002. The book value per share increased from $12.35 at December 31, 2001 due to net income of $3.1 million, unrealized gains on securities available for sale of $490 thousand and exercise of stock options of $33 thousand. 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, 2002, the Company had interest rate sensitive assets which repriced or matured within one year of $228.0 million and interest rate sensitive liabilities which repriced or matured within one year of $173.5 million. As of December 31, 2001, the Company had interest rate sensitive assets which matured or repriced within one year of $179.0 million and interest rate sensitive liabilities which repriced or matured within one year of $174.1 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 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. 18 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 100 or 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, 2002 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, 2002, 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 2002 Flat Rates 100 bp 200 bp - ------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Year One $ 13,501 $ 13,227 $ 14,190 Year Two 12,953 12,236 14,141 --------- -------- --------- Total net interest income for 2 year period $ 26,454 $ 25,463 $ 28,331 =============================================================================================================
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 =============================================================================================================
The income simulation model reflects negative exposure to net interest income in a declining interest rate environment from 100 to 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. 19 The Company's one-year cumulative GAP to total assets increased from 1% at December, 2001, to 12% at December, 2002. The table below shows the interest rate sensitivity gap position as of December 31, 2002. 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, 2002 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 $ 40,158 $ 12,333 $ 20,999 $ 37,906 $ 1,603 $ 326 Investments securities available for sale 3,461 8,199 9,741 29,486 1,000 1,029 Federal Home Loan Bank Stock and other earning assets 16,524 - - - - 168 Fixed rate mortgages loans 5,693 2,851 5,084 13,835 7,086 7,529 Adjustable rate mortgages loans 7,186 2,435 5,643 10,715 5,604 548 Consumer loans 410 104 126 14 - - Fixed rate commercial real estate loans 917 831 1,789 3,487 3,660 5,968 Adjustable rate commercial real estate loans 17,655 5,500 13,507 37,484 21,947 - Construction loans 18,415 2,114 33 142 162 2,636 Fixed rate commercial business loans 597 510 921 1,851 287 10 Adjustable rate commercial business loans 24,129 39 80 3,593 - - ---------- --------- --------- --------- --------- ---------- Total earning assets 135,145 34,916 57,923 138,513 41,349 18,214 ---------- --------- --------- --------- --------- ---------- INTEREST BEARING LIABILITIES: Savings and escrow accounts - - - - - 45,357 NOW and Super Now accounts - - - - - 35,568 Money market accounts 64,653 - - - - - Certificates of deposit and retirement accounts 27,204 18,205 44,000 21,500 9,314 - FHLB advances and other borrowed funds 4,026 7,077 8,317 29,833 20,486 31,852 ---------- --------- --------- --------- --------- ---------- Total interest bearing liabilities 95,883 25,282 52,317 51,333 29,800 112,777 ---------- --------- --------- --------- --------- ---------- Interest Sensitivity Gap $ 39,262 $ 9,634 $ 5,606 $ 87,180 $ 11,549 $ (94,563) ======================================================================================================================== Cumulative GAP $ 39,262 $ 48,896 $ 54,502 $ 141,682 $ 153,231 $ 58,668 ======================================================================================================================== Cumulative GAP as a percent of total assets 9% 11% 12% 32% 35% 13% ========================================================================================================================
RECENT ACCOUNTING DEVELOPMENTS In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement No. 144 provides additional implementation guidance and supercedes Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. It is effective for financial statements issued for fiscal years beginning after December 15, 2001. Statement No. 144 was adopted on January 1, 2002 with no impact to the financial condition or results of operations of the Company. In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS 148 amends SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Companies are able to eliminate a "ramp-up" effect that the SFAS No. 123 transition rule creates in the year of adoption. Companies can choose to elect a method that will provide for comparability amongst years reported. In addition, this Statement amends the disclosure requirement of Statement 123 to require prominent disclosures in both annual and interim financial statements about the fair value based method of accounting for stock-based employee compensation and the effect of the method used on reported results. 20 FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," considers standby letters of credit, excluding commercial letters of credit and other lines of credit, a guarantee of the Company. The Company enters into standby letters of credit to assure performance of a customer to a third party. These letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved is represented by the contractual amounts of those instruments. In the event the customer fails to meet its contractual obligation to the beneficiary, the Company is required to make payments to the beneficiary upon request by the beneficiary so long as all performance criteria have been met. Most letters of credit extend up to one year. At December 31, 2002, the Company had letters of credit with potential amounts of future payments aggregating $1,120,000. The Company requires that all such letters of credit be secured by acceptable collateral. The majority of the Company's letters of credit are collateralized by cash. Other collateral can be pledged based upon management's credit evaluation of the customer which may include accounts receivable, inventory, property, plant and equipment and income-producing real estate. The recourse provisions of the agreements allow the Company to liquidate the cash used to collateralize the agreement. If another business asset is used as collateral and cash is not available, the Company creates a loan for the customer with the same criteria of its other lending activities. The fair value of letters of credit and other off-balance sheet financial instruments are discussed in Note 13 to the Consolidated Financial Statements. The fair value of these instruments is not reflected on the balance sheet. IMPACT OF INFLATION AND CHANGING PRICES The 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. 21 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, 2002 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 /s/ John E. Sharland Paul A. Miller John E. Sharland President and Senior Vice President and Chief Executive Officer Chief Financial Officer December 31, 2002 22 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS LSB CORPORATION: We have audited the accompanying consolidated balance sheets of LSB Corporation and its subsidiary as of December 31, 2002 and 2001 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, 2002. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Boston, Massachusetts January 18, 2003 23 CONSOLIDATED BALANCE SHEETS
December 31, 2002 2001 - ------------------------------------------------------------------------------------------------------------ (In Thousands) ASSETS: Cash and due from banks $ 7,136 $ 7,457 Fed funds sold 9,633 5,705 ------------ ----------- Total cash and cash equivalents 16,769 13,162 Investment securities held to maturity market value of $116,321 in 2002 and $137,886 in 2001 (notes 2 and 7) 113,325 135,002 Investment securities available for sale amortized cost of $52,055 in 2002 and $38,480 in 2001 (notes 2 and 7) 53,084 38,766 Federal Home Loan Bank stock, at cost (note 3) 5,950 5,950 Loans, net of allowance for loan losses of $4,167 in 2002 and $4,070 in 2001 (notes 4 and 7) 238,960 232,327 Bank premises and equipment (note 5) 3,050 3,167 Accrued interest receivable 2,459 2,604 Other real estate owned 12 22 Deferred income tax asset (note 8) 3,686 5,737 Other assets 1,839 1,530 ------------ ----------- Total assets $ 439,134 $ 438,267 ============================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY: Liabilities: Interest bearing deposits (note 6) $ 265,283 $ 255,046 Non-interest bearing deposits (note 6) 14,182 13,404 Federal Home Loan Bank advances (note 7) 94,237 102,992 Other borrowed funds (note 7) 7,354 8,107 Advance payments by borrowers for taxes and insurance 518 573 Other liabilities 3,501 4,053 ------------ ----------- Total liabilities 385,075 384,175 ------------ ----------- 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; 4,389,705 and 4,379,550 shares issued in 2002 and 2001, respectively, 4,253,205 and 4,379,550 shares outstanding in 2002 and 2001, respectively 439 438 Additional paid-in capital 57,845 57,813 Accumulated deficit (3,168) (4,348) Treasury stock, at cost (136,500 shares in 2002) (1,736) - Accumulated other comprehensive income 679 189 ------------ ----------- Total stockholders' equity 54,059 54,092 ------------ ----------- Total liabilities and stockholders' equity $ 439,134 $ 438,267 ============================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 24 CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 2002 2001 2000 - --------------------------------------------------------------------------------------------------------- (In Thousands, Except Share Data) Interest and dividend income: Loans $ 16,932 $ 18,295 $ 17,139 Investment securities held to maturity 6,056 8,166 8,089 Investment securities available for sale 1,817 1,514 3,202 Federal Home Loan Bank stock 205 364 454 Other interest income 128 453 153 ------------- ------------- ------------- Total interest and dividend income 25,138 28,792 29,037 - --------------------------------------------------------------------------------------------------------- Interest expense: Deposits (note 6) 5,804 9,929 9,930 Borrowed funds 5,458 5,278 4,525 Securities sold under agreements to repurchase and other borrowed funds 303 404 1,903 ------------- ------------- ------------- Total interest expense 11,565 15,611 16,358 - --------------------------------------------------------------------------------------------------------- Net interest income 13,573 13,181 12,679 Provision for loan losses (note 4) - 175 250 ------------- ------------- ------------- Net interest income after provision for loan losses 13,573 13,006 12,429 - --------------------------------------------------------------------------------------------------------- Non-interest income: Deposit account fees 665 594 500 Loan servicing fees, net (145) 155 281 Gains on sales of mortgage loans, net 529 249 47 Gains (losses) on sale of investment securities - 38 (41) Other income 444 390 337 ------------- ------------- ------------- Total non-interest income 1,493 1,426 1,124 - --------------------------------------------------------------------------------------------------------- Non-interest expense: Salaries and employee benefits 6,006 5,264 5,033 Occupancy and equipment expenses 790 872 763 Data processing expenses 749 705 590 Professional expenses 806 671 496 Insurance expenses 153 146 139 Other expenses 1,651 1,464 1,355 ------------- ------------- ------------- Total non-interest expense 10,155 9,122 8,376 - --------------------------------------------------------------------------------------------------------- Income before income taxes 4,911 5,310 5,177 Income tax expense (note 8) 1,811 1,953 854 ------------- ------------- ------------- Net income $ 3,100 $ 3,357 $ 4,323 ========================================================================================================= Average shares outstanding 4,348,085 4,374,195 4,360,415 Average diluted shares outstanding 4,518,649 4,535,305 4,434,645 ========================================================================================================= Basic earnings per share $ 0.71 $ 0.77 $ 0.99 Diluted earnings per share $ 0.69 $ 0.74 $ 0.97 =========================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 25 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Common Paid-in Accumulated Stock Capital Deficit - -------------------------------------------------------------------------------------------- (In Thousands) Balance at December 31, 1999 $ 436 $ 57,668 $ (9,145) Net income - - 4,323 Other comprehensive income unrealized gain (loss) on securities available for sale (tax effect $346) - - - Total comprehensive income Exercise of stock options - 43 - Dividends declared and paid ($0.26 per share) - - (1,134) ---------- ---------- ---------- Balance at December 31, 2000 436 57,711 (5,956) Net income - - 3,357 Other comprehensive income unrealized gain (loss) on securities available for sale (tax effect $34) - - - Total comprehensive income - - - Exercise of stock options 2 102 - Dividends declared and paid ($0.40 per share) - - (1,749) ---------- ---------- ---------- Balance at December 31, 2001 438 57,813 (4,348) Net income - - 3,100 Other comprehensive income unrealized gain (loss) on securities available for sale (tax effect $253) - - - Total comprehensive income - - - Exercise of stock options 1 32 - Purchase of treasury stock - - - Dividends declared and paid ($0.44 per share) - - (1,920) ---------- ---------- ---------- Balance at December 31, 2002 $ 439 $ 57,845 $ (3,168) =========================================================================================
Accumulated Other Total Treasury Comprehensive Stockholders' Stock Income (Loss) Equity - ------------------------------------------------------------------------------------------ (In Thousands) Balance at December 31, 1999 $ - $ (551) $ 48,408 Net income - - 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 Dividends declared and paid ($0.26 per share) - - (1,134) ---------- ---------- ---------- Balance at December 31, 2000 - 122 52,313 Net income - - 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 - - 104 Dividends declared and paid ($0.40 per share) - - (1,749) ---------- ---------- ---------- Balance at December 31, 2001 - 189 54,092 Net income - - 3,100 Other comprehensive income unrealized gain (loss) on securities available for sale (tax effect $253) - 490 490 ---------- Total comprehensive income - 3,590 Exercise of stock options - - 33 Purchase of treasury stock (1,736) - (1,736) Dividends declared and paid ($0.44 per share) - - (1,920) ---------- ---------- ---------- Balance at December 31, 2002 $ (1,736) $ 679 $ 54,059 =========================================================================================
DISCLOSURE OF RECLASSIFICATION AMOUNT: 2002 2001 2000 - -------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Gross unrealized appreciation arising during the period $ 743 $ 124 $ 980 Tax effect (253) (42) (333) ---------- ---------- ---------- Unrealized holding appreciation net of tax 490 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 $ 490 $ 67 673 ==============================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 26 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2002 2001 2000 - -------------------------------------------------------------------------------------------------------------- (In Thousands) Cash flows from operating activities: Net income $ 3,100 $ 3,357 $ 4,323 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses - 175 250 Gains on sales of mortgage loans and mortgage-backed securities (529) (249) (47) (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) Net amortization (accretion) of investment securities 1,426 (37) 314 Depreciation of premises and equipment and other assets 454 484 448 Loans originated for sale (35,415) (25,301) (2,485) Proceeds from sales of mortgage loans and mortgage-backed securities 37,521 21,394 2,532 Decrease (increase) in accrued interest receivable 145 365 (148) Decrease in deferred income tax asset 1,798 1,742 1,999 (Increase) decrease in other assets (309) 55 18 (Decrease) increase in advance payments by borrowers (55) 60 (137) (Decrease) increase in other liabilities (552) 498 (1,352) ---------- ---------- ---------- Net cash provided by operating activities 7,584 2,492 5,717 - -------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from maturities of investment securities available for sale 5,493 6,532 - Proceeds from maturities of investment securities held to maturity 337,318 642,579 8,611 Purchases of investment securities held to maturity (351,927) (678,882) (16,430) Purchases of investment securities available for sale (31,194) (26,037) - Purchases of mortgage-backed securities held to maturity (2,967) (4,335) - Proceeds from sales of investment securities available for sale - 6,119 21,899 Principal payments of securities held to maturity 38,283 23,557 10,748 Principal payments of securities available for sale 11,670 7,765 2,775 Purchase of other equity securities - (46) - Increase in loans, net (8,210) (9,986) (23,893) Proceeds from sales or payments on OREO 10 10 526 Purchases of Bank premises and equipment (337) (314) (448) ---------- ---------- ---------- Net cash (used in) provided by investing activities (1,861) (33,038) 3,788 - -------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase (decrease) in deposits 11,015 (2,098) 24,508 Additions to Federal Home Loan Bank advances 11,000 48,120 695,950 Payments on Federal Home Loan Bank advances (19,755) (27,411) (683,163) Net (decrease) increase in agreements to repurchase securities (270) 4,220 - (Decrease) increase in other borrowed funds (483) 9 (30,793) Dividends paid (1,920) (1,749) (1,134) Treasury stock purchased (1,736) - - Proceeds from exercise of stock options 33 104 43 ---------- ---------- ---------- Net cash (used in) provided by financing activities (2,116) 21,195 5,411 - -------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 3,607 (9,351) 14,916 Cash and cash equivalents, beginning of year 13,162 22,513 7,597 ---------- ---------- ---------- Cash and cash equivalents, end of year $ 16,769 $ 13,162 $ 22,513 ============================================================================================================== Cash paid during the year for: Interest on deposits and borrowed funds $ 11,632 $ 15,603 $ 16,098 Income taxes 271 188 179 Cash received during the year for: Income taxes 133 - - Supplemental Schedule of non-cash activities: Change in valuation of investment securities available for sale 743 99 1,019 ==============================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION - LSB Corporation (the "Corporation" or the "Company") is a Massachusetts corporation and the holding company of 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. The LSB Corporation's consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Accordingly, management is required to make estimates and assumptions that affect amounts reported in the balance sheets and statements of operations. Actual results could differ significantly from those estimates and judgments. Material estimates that are particularly susceptible to change relate to the allowance for loan losses, income taxes and mortgage servicing rights. CASH AND CASH EQUIVALENTS - For the purpose of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and Federal Funds sold. Generally, Federal Funds are sold with overnight maturities. INVESTMENT 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. 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. 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. 28 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. TRANSFERS AND SERVICING OF ASSETS AND EXTINGUISHMENTS OF LIABILITIES - The Company accounts and reports for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial components approach that focuses on control. This approach distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. After a transfer of financial assets, the Company recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. This financial components approach focuses on the assets and liabilities that exist after the transfer. Many of these assets and liabilities are components of financial assets that existed prior to the transfer. If a transfer does not meet the criteria for the sale, the Company accounts for the transfer as a secured borrowing with a pledge of collateral. ALLOWANCE FOR LOAN LOSSES - Losses on loans are provided for under the allowance method of accounting. The allowance is increased by provisions charged to operations on the basis of many factors including the risk characteristics of the portfolio, current economic conditions and trends in loan delinquencies and charge-offs. When management believes that the collection of a 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 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 rate. 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. 29 STOCK OPTIONS - The Corporation measures compensation cost for stock-based plans using the intrinsic value method. The intrinsic value method measures compensation cost as the difference between the exercise price of options granted and the fair market value of the Company's stock at the grant date. All options granted have an exercise price equivalent to the fair market value at the date of grant accordingly no compensation cost has been recorded. 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:
2002 2001 2000 - ----------------------------------------------------------------------------------------------------------- (In Thousands except per share data) Net Income: As Reported $ 3,100 $ 3,357 $ 4,323 Pro forma 2,867 3,086 4,167 Basic earnings per share: As Reported $ 0.71 $ 0.77 $ 0.99 Pro forma 0.66 0.71 0.96 Diluted earnings per share: As Reported $ 0.69 $ 0.74 $ 0.97 Pro forma 0.63 0.68 0.94
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:
2002 2001 2000 ---- -------- ---- Expected volatility - 35.00% - Risk-free interest rate - 5.12% - Expected dividend yield - 3.37% - Expected life in years - 10 years - ========================================================================================================
PENSION EXPENSE - The Bank is a participant in a multiple employer defined benefit pension plan. Pension expense is recognized on a net periodic pension cost method over the employee's approximate service period. Pension costs are funded in the year of accrual using the aggregate cost method. 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. 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. RECENT ACCOUNTING DEVELOPMENTS In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement No. 144 provides additional implementation guidance and supercedes Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. It is effective for financial statements issued for fiscal years beginning after December 15, 2001. Statement No. 144 was adopted on January 1, 2002 with no impact to the financial condition or results of operations of the Company. In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS 148 amends SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Companies are able to eliminate a "ramp-up" effect that the SFAS No. 123 transition rule creates in the year of adoption. Companies can choose to elect a method that will provide for comparability amongst years reported. In addition, this Statement amends the disclosure requirement of Statement 123 to require prominent disclosures in both annual and interim financial statements about the fair value based method of accounting for stock-based employee compensation and the effect of the method used on reported results. 30 FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," considers standby letters of credit, excluding commercial letters of credit and other lines of credit, a guarantee of the Company. The Company enters into standby letters of credit to assure performance of a customer to a third party. These letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved is represented by the contractual amounts of those instruments. In the event the customer fails to meet its contractual obligation to the beneficiary, the Company is required to make payments to the beneficiary upon request by the beneficiary so long as all performance criteria have been met. Most letters of credit extend up to one year. At December 31, 2002, the Company had letters of credit with potential amounts of future payments aggregating $1,120,000. The Company requires that all such letters of credit be secured by acceptable collateral. The majority of the Company's letters of credit are collateralized by cash. Other collateral can be pledged based upon management's credit evaluation of the customer which may include accounts receivable, inventory, property, plant and equipment and income-producing real estate. The recourse provisions of the agreements allow the Company to liquidate the cash used to collateralize the agreement. If another business asset is used as collateral and cash is not available, the Company creates a loan for the customer with the same criteria of its other lending activities. The fair value of letters of credit and other off-balance sheet financial instruments are discussed in Note 13 to the Consolidated Financial Statements. The fair value of these instruments is not reflected on the balance sheet. (2) INVESTMENT SECURITIES The amortized cost and market value of investment securities at December 31, follows:
2002 2001 ------------------------------------------- ----------------------------------------- Amortized Unrealized Market Amortized Unrealized Market Cost Gain Loss Value Cost Gain Loss Value - --------------------------------------------------------------------------------------------------------------------------------- (In Thousands) Investment securities held to maturity: US Treasury obligations $ 6,002 $ 58 $ - $ 6,060 $ 6,022 $ 244 $ - $ 6,266 US Government Agency obligations 26,243 1,471 - 27,714 15,966 1,111 - 17,077 Mortgage-backed securities 13,440 407 (7) 13,840 16,633 310 (8) 16,935 Asset-backed securities 32,551 610 (14) 33,147 40,337 694 (22) 41,009 Corporate obligations 33,068 456 (16) 33,508 53,982 542 - 54,524 Municipal obligations 2,021 31 - 2,052 2,062 13 - 2,075 -------- ------- ------- --------- --------- ------ ------- --------- $113,325 $ 3,033 $ (37) $ 116,321 $ 135,002 $2,914 $ (30) $ 137,886 ================================================================================================================================= Investment securities available for sale: US Government Agency obligations $ 31,078 $ 742 $ - $ 31,820 20,126 37 (37) 20,126 Mortgage-backed securities 2,770 80 - 2,850 5,629 67 (7) 5,689 Asset-backed securities 12,074 14 (9) 12,079 8,077 20 (8) 8,089 Corporate obligations 3,965 212 (10) 4,167 4,480 217 (3) 4,694 Municipal obligations 2,000 - - 2,000 - - - - Equity securities 168 - - 168 168 - - 168 -------- ------- ------- --------- --------- ------ ------- --------- $ 52,055 $ 1,048 $ (19) $ 53,084 $ 38,480 $ 341 $ (55) $ 38,766 =================================================================================================================================
Proceeds from sales, realized gains and losses on investments available for sale for the years ended December 31, follow:
2002 2001 2000 - ------------------------------------------------------------------------------------- (In Thousands) Proceeds from sales $ - $ 6,119 $ 21,899 Realized gains on sales - 38 52 Realized losses on sales - - (93)
31 (2) INVESTMENT SECURITIES - (CONTINUED) The following table is a summary of the contractual maturities of investment securities held to maturity and available for sale at December 31, 2002. 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 ---------------------------------- ---------------------------------- Weighted Weighted Amortized Market Average Amortized Market Average December 31, 2002 Cost Value Yield Cost Value Yield ==================================================================================================================== (Dollars in Thousands) US Treasury & Agencies obligations: Within 1 year $ 9,002 $ 9,104 5.89% $ 10,025 $ 10,155 3.18% 1 to 2 years 2,040 2,082 3.33 16,056 16,512 3.75 2 to 3 years 14,958 16,177 6.28 4,997 5,153 3.90 3 to 5 years 6,245 6,411 3.43 - - - -------- --------- -------- --------- 32,245 33,774 5.43 31,078 31,820 3.59 -------- --------- -------- --------- Mortgage-backed securities: Within 1 year 209 212 7.65 - - - 1 to 2 years 2,211 2,282 6.04 - - - 2 to 3 years 2,910 2,903 4.39 111 114 2.98 3 to 5 years 576 618 7.06 - - - 5 to 10 years 5,680 5,933 6.46 - - - After 10 years 1,854 1,892 5.33 2,659 2,736 5.33 -------- --------- -------- --------- 13,440 13,840 5.83 2,770 2,850 5.24 -------- --------- -------- --------- Asset-backed securities: 3 to 5 years 10,729 10,993 5.22 - - - 5 to 10 years 12,647 12,875 5.33 7,277 7,269 4.43 After 10 years 9,175 9,279 5.79 4,797 4,810 5.44 -------- --------- -------- --------- 32,551 33,147 5.42 12,074 12,079 4.83 -------- --------- -------- --------- Corporate obligations: Within 1 year 25,492 25,560 3.64 - - - 1 to 2 years 5,098 5,266 5.81 2,965 3,177 7.34 2 to 3 years 1,060 1,123 4.81 - - - 3 to 5 years 1,418 1,559 7.71 1,000 990 2.68 After 10 years - - - - - - ------- --------- -------- --------- 33,068 33,508 4.19 3,965 4,167 6.16 -------- --------- -------- --------- Municipal obligations: Within 1 year 2,021 2,052 3.99 2,000 2,000 1.76 -------- --------- -------- --------- $113,325 $ 116,321 5.09% $ 51,887 $ 52,916 4.09% ==================================================================================================================
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, 2002, the Company had callable investment securities with an amortized cost of $9.2 million and a market value of $9.5 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. 32 (4) LOANS The components of the loan portfolio at December 31, follow:
2002 2001 - --------------------------------------------------------------------------- (In Thousands) Residential real estate $ 60,140 $ 78,605 Loans held for sale 2,579 4,156 Home equity 11,490 13,393 Construction 23,502 20,593 Commercial real estate 112,745 100,110 Commercial business 32,017 18,549 Consumer 654 991 ----------- ----------- Total loans 243,127 236,397 Allowance for loan losses (4,167) (4,070) ----------- ----------- $ 238,960 $ 232,327 ===========================================================================
The amounts above include net deferred loan origination fees and costs totaling $153 thousand at December 31, 2002 and $160 thousand at December 31, 2001. Mortgage loans serviced by the Company for others amounted to $77.1 million and $68.1 million at December 31, 2002 and 2001, respectively. Non-performing loans at December 31, 2002 and 2001 amounted to $1 thousand and $951 thousand, respectively. There were no impaired loans at December 31, 2002. At December 31, 2001 impaired loans totaled $941 thousand, of which $210 thousand was allocated for in the allowance for loan losses. 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, 2002 follows:
Balance at Balance at January 1, 2002 Additions Repayments December 31, 2002 - ------------------------------------------------------------------------------------------------------- (In Thousands) $2,032 $835 $934 $1,933 ========================================================================================================
The activity in the allowance for loan losses for the years ended December 31, follows:
2002 2001 2000 - ----------------------------------------------------------------------------------------------------------- (In Thousands) Balance at beginning of year $ 4,070 $ 3,685 $ 3,381 Total charge-offs (1) (3) (28) Total recoveries 98 213 82 -------- --------- -------- Net recoveries 97 210 54 Provision for loan losses - 175 250 -------- --------- -------- Balance at end of year $ 4,167 $ 4,070 $ 3,685 ===========================================================================================================
33 (4) LOANS - (CONTINUED) The following table summarizes the balances of mortgage service fees at December 31:
2002 2001 - ---------------------------------------------------------------------------------------------------------- (In Thousands) Balance at beginning of year $ 948 $ 854 Additions 336 252 Amortization ( 269) (158) -------- ------- Mortgage servicing rights 1,015 948 Valuation allowance (377) (75) -------- ------- Balance at end of year $ 638 $ 873 ==========================================================================================================
The following table summarizes activity in the mortgage service fees valuation allowance for the years ended December 31:
2002 2001 2000 - ----------------------------------------------------------------------------------------------------------- (In Thousands) Balance at beginning of year $ 75 $ - $ - Provision charged to operations 302 75 - -------- --------- ------- Balance at end of year $ 377 $ 75 $ - ===========================================================================================================
The following table summarizes activity in the loan servicing fees net for the years ended December 31:
2002 2001 2000 - ----------------------------------------------------------------------------------------------------------- (In Thousands) Service fee income $ 269 $ 281 $ 315 Amortization of mortgage servicing rights (269) (158) (161) Provision for valuation allowance (302) (75) - -------- --------- ------- Mortgage servicing income (expense) (302) 48 154 Late charges and other loan fees 157 107 127 -------- --------- ------- Loan servicing fees, net $ (145) $ 155 $ 281 ===========================================================================================================
(5) BANK PREMISES AND EQUIPMENT The components of premises and equipment at December 31, follow:
2002 2001 - ------------------------------------------------------------------------------------------------------------- (In Thousands) Premises $ 3,609 $ 3,572 Equipment 2,503 2,245 Leasehold improvements 378 336 -------- -------- 6,490 6,153 Less accumulated depreciation and amortization 3,440 2,986 -------- -------- $ 3,050 $ 3,167 ============================================================================================================
Depreciation and amortization expense for the years ended December 31, 2002, 2001, and 2000 amounted to $454,000, $484,000, and $448,000, respectively. Rent expense for leased premises for the years ended December 31, 2002, 2001 and 2000 amounted to $152,000, $144,000 and $143,000, respectively. The Company is obligated, under non-cancelable leases for premises and equipment, for minimum payments in future periods of $112,000 in the year 2003, and $90,000 for each of the years 2004 through 2007. 34 6) DEPOSITS The following table shows the components of deposits at December 31, 2002 and 2001 and the range of interest rates paid as of December 31, 2002. Rates as of December 31, 2002
Rates as of December 31, 2002 2002 2002 - -------------------------------------------------------------------------------------------- (Dollars in Thousands) Interest bearing accounts: NOW and Super NOW accounts 0.10-0.50% $ 35,568 $ 30,080 Savings accounts 0.50% 44,839 42,531 Money market investment accounts 0.25-1.69% 64,653 57,575 Certificates of deposit 1.24-6.25% 92,241 97,828 Retirement accounts 1.24-6.25% 27,982 27,032 --------- -------- Total interest bearing deposits 265,283 255,046 Non-interest bearing demand deposit accounts - 14,182 13,404 --------- -------- $ 279,465 $268,450 ============================================================================================
The components of interest expense on deposits for the years ended December 31, follow:
2002 2001 2000 - -------------------------------------------------------------------------- (In Thousands) Now and Super NOW accounts $ 81 $ 150 $ 138 Savings accounts 394 725 774 Money market investment accounts 1,097 1,664 1,935 Certificates of deposit 3,109 5,908 5,623 Retirement accounts 1,123 1,482 1,460 --------- -------- ------ $ 5,804 $ 9,929 $9,930 ==========================================================================
The amount and weighted average interest rate on certificates of deposit, including retirement accounts, by periods to maturity at December 31, 2002 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 $ 20,816 $ 6,386 $ 27,202 2.33% From three to six months 14,616 3,589 18,205 2.18 From six to twelve months 34,507 9,494 44,001 3.11 From one to two years 14,130 2,414 16,544 3.30 From two to three years 4,517 441 4,958 4.70 Three years and thereafter 6,731 2,582 9,313 4.35 ---------- -------- --------- $ 95,317 $ 24,906 $ 120,223 2.98% ==================================================================================================================
Brokered deposits at December 31, 2002 totaled $2.0 million. There were no brokered deposits at December 31, 2001. 35 (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, 2002 are collateralized by a blanket lien against residential mortgages and other qualifying collateral. Advances outstanding at December 31, follow:
2002 2001 - ------------------------------------------------------------------------------------------- Weighted Average Weighted Average Maturity Amount Interest Rate Amount Interest Rate - ------------------------------------------------------------------------------------------- (Dollars in Thousands) 2002 $ - -% $ 18,000 6.40% 2003 15,275 4.84 16,941 4.99 2004 20,000 4.73 20,000 4.73 2005 6,000 5.91 5,000 6.23 2006 5,000 4.69 5,000 4.69 2007 15,000 4.53 5,000 6.20 2009 255 6.42 270 6.42 2010 20,000 6.03 20,000 6.03 2011 10,000 4.93 10,000 4.93 2021 2,707 6.23 2,781 6.23 --------- ---------- $ 94,237 5.13% $ 102,992 5.52% =========================================================================================
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, 2002 the Company had callable advances totaling $53.0 million and amortizing advances totaling $4.7 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 $4.0 million at December 31, 2002 at a rate of 0.75%. Repurchase agreements outstanding at December 31, 2001 totaled $4.2 million at a rate of 0.31%. Other borrowed funds at both December 31, 2002 and 2001 consisted of secured borrowings of $3.4 million and $3.9 million, respectively, bearing average interest rates of 8.86% and 7.46%, respectively. Information relating to other borrowed funds for the years ended, follows:
2002 2001 2000 - -------------------------------------------------------------------------------------------------------------------------- Repurchase FHLB/FRB Repurchase FHLB/FRB Repurchase FHLB/FRB Agreements Advances Agreements Advances Agreements Advances - -------------------------------------------------------------------------------------------------------------------------- (Dollars In Thousands) Outstanding at December 31 $ 3,950 $ - $ 4,220 $ - $ - $ - Weighted average rate at December 31 0.75% -% 0.31% -% -% -% Average balance outstanding during the year $ 3,254 $ 41 $ 2,468 $ 21 $ 24,539 $ 24,364 Weighted average rate during the year 0.58% 2.11% 2.35% 4.42% 6.29% 6.14% Maximum outstanding at any month end $ 5,463 $ - $ 5,836 $ - $ 42,544 $ 71,000
36 (8) INCOME TAXES An analysis of income tax expense for the years ended December 31, follows:
2002 2001 2000 - ----------------------------------------------------------------------------------------------- (In Thousands) Current expense (benefit): Federal $ (214) $ 65 $ 69 State 227 146 76 -------- --------- -------- Total current expense 13 211 145 -------- --------- -------- Deferred expense (benefit): Federal 1,791 1,730 1,462 State (11) (11) 83 Change in valuation reserve 18 23 15 -------- --------- -------- Total deferred expense 1,798 1,742 1,560 -------- --------- -------- Change in estimate for tax contingencies - - (851) -------- --------- -------- Total income tax expense $ 1,811 $ 1,953 $ 854 ===============================================================================================
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:
2002 2001 2000 - ----------------------------------------------------------------------------------------------- (In Thousands) Expected federal income tax expense $ 1,670 $ 1,805 $ 1,760 Items affecting expected tax: State income tax, net of federal benefit 143 89 105 Other (20) 36 (175) Change in valuation reserve 18 23 15 Change in estimate for tax contingencies - - (851) ------- --------- -------- Total income tax expense $ 1,811 $ 1,953 $ 854 ===============================================================================================
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:
2002 2001 - ------------------------------------------------------------------------------------------- (In Thousands) Deferred tax assets: Allowance for loan losses $ 2,464 $ 2,464 Net operating loss carryforward 438 2,094 Alternative minimum tax carryforward 244 347 Pension costs 379 443 Deferred compensation 426 367 Loan origination fees 37 50 Depreciation 314 299 Other 292 274 ---------- --------- Gross deferred tax asset 4,594 6,338 Valuation reserve (56) (38) ---------- --------- Deferred tax asset 4,538 6,300 ---------- --------- Deferred tax liabilities: Unrealized gains on investment securities available for sale (350) (97) Other (502) (466) ---------- --------- Gross deferred tax liability (852) (563) ---------- --------- Net deferred income tax asset $ 3,686 $ 5,737 - -------------------------------------------------------------------------------------------
Operating losses in the early 1990's resulted in available tax loss carryforwards. 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, 2002, the Bank has $1.3 million of tax loss carryforwards available that expire between 2011 and 2019. 37 (8) INCOME TAXES - (CONTINUED) At December 31, 2002, the Bank would need to generate approximately $10.8 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, 2002 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. (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, 2002 and 2001, 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 and the Federal Reserve Bank 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, 2002 and 2001, follow:
Risk-Based Ratios ----------------------------------------------------------------------------------- Tier 1 Capital Total Capital Leverage --------------------------- ---------------------- ------------------------ Capital 2002 2001 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------------- (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 16.49% 15.74% 17.74% 16.97% 12.10% 11.98% Lawrence Savings Bank 15.68% 15.15% 16.93% 16.39% 11.49% 11.46% Capital Amounts: Adequately capitalized LSB Corporation $ 12,799 $ 13,236 $ 25,599 $ 26,472 $ 17,445 $ 17,392 Lawrence Savings Bank 12,720 13,155 25,441 26,310 17,356 17,390 Well capitalized LSB Corporation 19,199 19,854 31,999 33,090 21,807 21,740 Lawrence Savings Bank 19,081 19,733 31,801 32,888 21,695 21,737 Actual Amounts: LSB Corporation 52,775 52,081 56,777 56,151 52,775 52,081 Lawrence Savings Bank 49,869 49,824 53,846 53,894 49,869 49,824 ===============================================================================================================
38 (9) STOCKHOLDERS' EQUITY - (CONTINUED) 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. 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, 2002 and 2001.
2002 2001 - ------------------------------------------------------------------------------------ (In Thousands) Change in benefit obligation: Benefit obligation at beginning of year $ 5,396 $ 4,640 Service cost 319 280 Interest cost 377 360 Actuarial loss 157 195 Benefits paid (207) (79) ---------- ---------- Benefit obligation at end of year $ 6,042 $ 5,396 ===================================================================================== Change in plan assets: Fair value of plan assets at beginning of year $ 5,710 $ 6,478 Actual return on plan assets (550) (710) Employer contribution 355 21 Benefits paid (207) (79) ---------- ---------- Fair value of plan assets at end of year $ 5,308 $ 5,710 ===================================================================================== Funded status $ (734) $ 314 Unrecognized net actuarial gain (136) (1,380) Unrecognized prior service cost (32) (36) ---------- ---------- Accrued benefit cost included in other liabilities $ (902) $ (1,102) =====================================================================================
The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 6.75% and 4.50% for 2002 and 7.00% and 4.50% for 2001. Net pension cost components for the years ended October 31, follow:
2002 2001 2000 - --------------------------------------------------------------- (In Thousands) Service cost $ 319 $ 280 $ 258 Interest cost 377 360 334 Expected return on plan assets (456) (518) (416) Amortization of net (gains) losses (81) (240) (228) Net amortization and deferrals (4) (4) (4) ----- ----- ----- Net periodic pension cost $ 155 $(122) $ (56) - --------------------------------------------------------------
39 (10) EMPLOYEE BENEFITS - (CONTINUED) Assumptions used to develop the net periodic pension cost were:
2002 2001 2000 - ------------------------------------------------------------------------------------- Discount rate 7.00% 7.75% 7.75% 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 $104 thousand and $91 thousand on behalf of the employees who were in the Savings Plan in 2002 and 2001, respectively. 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. Under the 1986 and 1997 Stock Option Plans, the Company may grant options to Directors, Officers or employees up to 859,100 of which 166,670 shares have been exercised. As of December 31, 2002, 586,330 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:
2002 2001 2000 -------------------- --------------------- ---------------------- 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 601,030 $ 8.63 452,030 $ 6.67 463,030 $ 6.66 Granted - - 165,000 13.87 - - Exercised (14,700) 6.32 (14,750) 7.00 (8,000) 5.50 Canceled - - (1,250) 9.13 (3,000) 9.13 -------- --------- ---------- Outstanding at end of year 586,330 8.69 601,030 8.63 452,030 6.67 ======== ========= ========== Options exercisable end of year 503,830 7.84 397,530 6.42 372,530 6.16 Weighted average fair value of options granted during the year $ - $ 5.47 $ -
The following table summarizes information about the Stock Option Plans based on a range of exercise prices as of December 31, 2002.
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 $5.00 105,830 $ 4.40 1.6 years 105,830 $ 4.40 $5.01 to $8.00 175,000 6.05 3.5 175,000 6.05 $8.01 to $11.00 140,500 9.13 6.6 140,500 9.13 $11.01 to $14.00 165,000 13.87 8.6 82,500 13.87 ------- ------- Outstanding at end of year 586,330 8.69 5.1 503,830 7.84 ====================================================================================================================
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 $291 thousand and $262 thousand as of December 31, 2002 and 2001, respectively. 40 (10) EMPLOYEE BENEFITS - (CONTINUED) The Company has two supplemental executive retirement plans with one of its key officers. At December 31, 2002 and 2001 the accrued liability was $1.0 million and $897 thousand, respectively. Expense associated with the plans was $143 thousand, $139 thousand and $136 thousand for the years ended December 31, 2002, 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 prevailed on this matter in appellate court. 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 $2.3 million at December 31, 2002. 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. This case was heard by the appellate court on December 11, 2002. A decision by the court has not been rendered as of March 31, 2003. 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 Consolidated 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 2002 Rate Rate Total - ------------------------------------------------------------------------------------------------------ (In Thousands) Financial instruments with contract amounts represent credit risk: Unused commitments to extend credit: Residential mortgages $ 2,866 $ 1,311 $ 4,177 Home equity lines of credit 1,919 6,342 8,261 Personal lines of credit 223 - 223 Commercial real estate mortgage 3,199 9,748 12,947 Construction 345 11,296 11,641 Commercial loans 9,062 16,669 25,731 --------- -------- -------- Total unused commitments $ 17,614 $ 45,366 $ 62,980 ======================================================================================================= Letters of credit and standby letters of credit $ - $ 1,120 $ 1,120 ======================================================================================================= Forward commitments to sell mortgage loans $ 5,349 $ - $ 5,349 =======================================================================================================
41 (12) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK - (CONTINUED)
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 =======================================================================================================
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. (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. 42 (13) FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED) 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. The estimated fair values of the Bank's financial instruments at December 31, follow:
2002 2001 --------------------- ----------------------- Carrying Fair Carrying Fair Value Value Value Value - ------------------------------------------------------------------------------------------- (In Thousands) Financial assets: Cash and due from banks $ 7,136 $ 7,136 $ 7,457 $ 7,457 Short-term investments 9,633 9,633 5,705 5,705 Investment securities 166,409 169,405 173,768 176,652 Federal Home Loan Bank stock 5,950 5,950 5,950 5,950 Accrued interest receivable 2,459 2,459 2,604 2,604 Loans, net 238,960 240,311 232,327 238,512 Financial liabilities: Deposits $ 279,465 $ 281,216 $ 268,450 $ 269,533 Borrowed funds 101,591 107,134 111,099 113,381 Mortgagors' escrow accounts 518 518 573 573 Accrued interest payable 431 431 498 498
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. 43 (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 Sheets 2002 2001 - --------------------------------------------------------------------------------------------------------- (In Thousands) Assets: Cash deposits in subsidiaries $ 958 $ 248 Investment securities held to maturity at amortized cost 1,999 1,999 Investment in subsidiary, at equity 51,045 51,817 Other assets 61 $ 44 ---------- ----------- Total assets $ 54,063 $ 54,108 ========== =========== Liabilities and Stockholders' Equity: Liabilities: Accrued income taxes $ (4) $ 11 Accrued expenses 8 5 ---------- ----------- Total liabilities 4 16 ---------- ----------- Total stockholders' equity 54,059 54,092 ---------- ----------- Total liabilities and stockholders' equity $ 54,063 $ 54,108 ========== =========== Statements of Operations 2002 2001 - --------------------------------------------------------------------------------------------------------- (In Thousands) Dividends from bank subsidiary $ 4,547 $ 3,320 ---------- ----------- Total operating income 4,547 3,320 Non-interest expenses 235 188 ---------- ----------- Income before income taxes and undistributed earnings 4,312 3,132 Income tax benefit (50) (7) ---------- ----------- Income before undistributed earnings of subsidiary 4,362 3,139 Equity in undistributed earnings of subsidiary (1,262) 218 ---------- ----------- Net income $ 3,100 $ 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.
Cash flows 2002 - ----------------------------------------------------------------------------------------------------------- (In Thousands) Cash flows from operating activities: $ 3,100 Net income Adjustments to reconcile net income to net cash provided by operating activities: Increase in deferred income tax asset (43) Net distributed earnings of subsidiaries 1,262 Decrease in other assets 26 Decrease in other liabilities (12) Accretion of discounts (47) ----------- Net cash provided by operating activities 4,286 ----------- Cash flows from investing activities: Purchases of investment securities held to maturity (50,153) Proceeds from maturities of investment securities held to maturity 50,200 ----------- Net cash provided by investing activities 47 ----------- Cash flows from financing activities: Proceeds from exercise of stock options 33 Treasury stock purchased (1,736) Dividends paid (1,920) ----------- Net cash provided by financing activities (3,623) ----------- Net increase in cash and cash equivalents 710 Cash and cash equivalents, beginning of year 248 ----------- Cash and cash equivalents, end of year $ 958 =========== Supplemental cash flow information: Cash paid during the year for: Income taxes $ 30 ===========
Cash flows for the parent company are presented for the year ended 2002 only. The parent company became the holding company for the Bank on July 1, 2001 and thus the cash flows were immaterial for the year ended December 31, 2001. 44 (15) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
2002 ---------------------------------------------------- March June September December 31 30 30 31 - ---------------------------------------------------------------------------------------------------------------- (In Thousands, Except Per Share Data) Interest and dividend income $ 6,421 $ 6,480 $ 6,158 $ 6,079 Interest expense 3,103 2,936 2,923 2,603 ------- -------- -------- -------- Net interest income 3,318 3,544 3,235 3,476 Provision for loan losses - - - - ------- -------- -------- -------- Net interest income after provision for loan losses 3,318 3,544 3,235 3,476 Non-interest income 429 349 323 392 Non-interest expense 2,459 2,601 2,529 2,566 ------- -------- -------- -------- Income before income tax 1,288 1,292 1,029 1,302 Income tax 472 473 334 532 ------- -------- -------- -------- Net income $ 816 $ 819 $ 695 $ 770 =============================================================================================================== Basic earnings per share $ 0.19 $ 0.19 $ 0.16 $ 0.18 Diluted earnings per share $ 0.18 $ 0.18 $ 0.15 $ 0.17 ===============================================================================================================
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 ===============================================================================================================
45 STOCKHOLDERS' INFORMATION The Company's stock trades on the Nasdaq Stock Market under the symbol "ALSBX@". Sales prices of the stock are reported in the Wall Street Journal as "ALSBCorp@". 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 - -------------------------------------------------- 2002 First Quarter $ 13.20 $ 12.00 Second Quarter 14.02 12.26 Third Quarter 14.00 12.00 Fourth Quarter 13.51 11.00 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
The Company declared and paid a cash dividend of $0.44 per share ($0.11 in each quarter) during 2002. The Company expects to pay dividends during 2003. On December 31, 2002 there were approximately 1,063 holders of common stock. This number does not reflect the number of persons or entities who hold their stock in nominee or "Astreet@" 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 6, 2003 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 A. 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 P.O. Box 43010 Providence, RI 02940-3010 INDEPENDENT AUDITORS KPMG LLP 99 High Street Boston, MA 02110 LEGAL COUNSEL Goulston & Storrs, P.C. 400 Atlantic Avenue Boston, MA 02110-3333 46 DIRECTORS OF LSB CORPORATION AND LAWRENCE SAVINGS BANK Eugene A. Beliveau, D.D.S. Neil H. Cullen Dentist Chief Financial Officer Phillips Academy Kathleen Boshar Reynolds Richard Hart Harrington, CPA Prudential/Howe and Doherty Chairman Gordon, Harrington & Osborn, P.C. Malcolm W. Brawn Robert F. Hatem Executive Vice President & Secretary Business Consultant The Andover Companies Thomas J. Burke Marsha A. McDonough Chairman of the Board Regional Education Offices Lawrence Savings Bank U.S. Department of State Register of Deeds Attorney Byron R. Cleveland, Jr. Paul A. Miller President President and J. H. Horne & Sons Chief Executive Officer Lawrence Savings Bank and LSB Corporation
OFFICERS OF LSB CORPORATION Paul A. Miller Richard J. D'Ambrosio President and Assistant Treasurer Chief Executive Officer John E. Sharland Timothy L. Felter Senior Vice President, Treasurer and Assistant Treasurer and Chief Financial Officer Investment Officer Robert P. Perreault Jeffrey W. Leeds Executive Vice President Assistant Treasurer Barbara A. Biondo Secretary
47 OFFICERS OF LAWRENCE SAVINGS BANK PAUL A. MILLER COMMERCIAL REAL ESTATE LENDING SHARON S. PRIVITERA President and FREDERICK P. MALOOF Vice President and Chief Executive Officer Vice President Branch Administrator/Security Officer ROBERT P. PERREAULT PAUL M. VALLACE GAYLE M. FILI Executive Vice President Vice President Vice President and Branch Manager BARBARA A. BIONDO CREDIT POLICY AND ADMINISTRATION CHERYL A. PARENT Clerk LEE D. DICKEY Vice President and Senior Vice President Branch Manager CARLA M. FRIEDRICH JOHN P. MALYNN MARIA FINA Vice President and Vice President and Branch Manager Human Resources Officer Collections Manager ROBYN K. LeBUFF LINDA A. BAILEY SUSAN M. DANCAUSE Vice President and Assistant Vice President and Assistant Vice President and Marketing Officer Credit Administration Officer Retirement Services Officer BRENDA MISKINIS CONSUMER LENDING LINDA BUELL Assistant Vice President MAUREEN McCARTHY Branch Manager Marketing Officer Vice President and Compliance/CRA Officer Lending Division RESIDENTIAL MORTGAGE LENDING PAUL M. FRANK JEFFREY W. LEEDS JOHN P. TEOLI Branch Manager Executive Vice President and Vice President Chief Lending Officer Commercial Banking SUSAN M. CAIN SUPPORT SERVICE DIVISION JACOB KOJALO Assistant Vice President and RICHARD J. D'AMBROSIO Senior Vice President and Senior Mortgage Underwriter Senior Vice President Senior Lending Officer ROBERT J. DeLUCA FINANCE DIVISION CARMELA CUTULI Vice President JOHN E. SHARLAND Vice President and Senior Vice President, Treasurer Loan Servicing Manager and Chief Financial Officer STEVEN K. VENTRE LINDA M. CHASE BORRELLI CHERYL A. VINING Vice President Vice President and Controller Vice President and Deposit Servicing Manager SCOTT P. McDUFFEE PERSONAL BANKING DIVISION STANLEY R. WARD, JR. Commercial Credit Officer TIMOTHY L. FELTER Assistant Vice President Executive Vice President and Investment Officer LAURA LaVOIE Assistant Vice President Senior Computer Network Engineer
48 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 REMOTE ATM LOCATION: 36 Knipe Road Haverhill, MA 01835 www.LawrenceSavings.com Member FDIC Member DIF v This Annual Report is printed on recycled paper. LSBCM-AR-03 EX-20 4 b45673lsexv20.txt 2003 PROXY STATEMENT [LSB CORPORATION LETTERHEAD] March 27, 2003 Dear LSB Corporation Stockholders: You are cordially invited to attend LSB Corporation's (the "Company") Annual Meeting of Stockholders to be held at the Andover Country Club, Canterbury Street, Andover, Massachusetts, on Tuesday, May 6, 2003 at 10:00 a.m. Accompanying this letter are the official Notice of Annual Meeting, proxy statement and form of proxy. The matters listed in the Notice of Annual Meeting are described in detail in the proxy statement. At this year's Annual Meeting, we are asking stockholders to (a) elect three Class A Directors, each to a three year term and (b) ratify the appointment of KPMG LLP as our outside auditors. Every stockholder's vote is important to us. Whether or not you expect to attend the meeting in person, we urge you to submit your proxy as soon as possible. You may submit your proxy by signing, dating, and returning the enclosed proxy card and mailing it in the envelope provided. For stockholders mailing from within the United States, the postage is prepaid. Please complete and submit your proxy even if you plan to attend the meeting in person. We look forward to seeing those of you who are able to attend the meeting in person. Sincerely, /s/ PAUL A MILLER Paul A. Miller President and Chief Executive Officer LSB CORPORATION 30 MASSACHUSETTS AVENUE NORTH ANDOVER, MASSACHUSETTS 01845 (978) 725-7500 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 6, 2003 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 6, 2003 at the Andover Country Club, Canterbury Street, Andover, Massachusetts, for the following purposes: 1. To elect three Class A Directors for a three-year term. 2. To ratify the appointment of KPMG LLP as the Company's independent auditors for the current fiscal year. 3. 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 7, 2003 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, BARBARA A. BIONDO Clerk March 27, 2003 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 2002 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: BARBARA A. BIONDO, 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 6, 2003 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 6, 2003 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 three Class A Directors, each for a three-year term to continue until the Company's annual meeting of stockholders in the year 2006 and until their successors are duly elected and qualified. 2. To ratify the appointment of KPMG LLP as the Company's independent auditors for the current fiscal year. 3. 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 27, 2003 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 an 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 7, 2003 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, the Company had Common Stock of 4,410,705 shares issued, of which 4,191,405 shares were 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 elect the three (3) nominees for Class A Directors. 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 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 three (3) nominees for Class A Directors listed in the Proxy Statement 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, 2002, 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, 2002 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, three Class A Directors will be elected to serve until the Annual Meeting of stockholders of the Company in the year 2006 and until their successors are duly elected and qualified. The Board of Directors has nominated Thomas J. Burke, Marsha A. McDonough and Kathleen Boshar Reynolds as Class A 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 three (3) Nominees for election as Class A Director at the Annual Meeting, the Nominee's name and, as of February 28, 2003, 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 C 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 2005, 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 A (TERM EXPIRING 2006) Thomas J. Burke............................................. 62 1985 Marsha A. McDonough......................................... 59 1993 Kathleen Boshar Reynolds.................................... 47 1991 CONTINUING DIRECTORS CLASS C (TERM EXPIRING 2005) Eugene A. Beliveau.......................................... 72 1978 Byron R. Cleveland, Jr. .................................... 71 1968 Robert F. Hatem............................................. 67 1974 Paul A. Miller.............................................. 63 1989 CONTINUING DIRECTORS CLASS B (TERM EXPIRING 2004) Malcolm W. Brawn............................................ 63 1991 Neil H. Cullen.............................................. 60 1991 Richard Hart Harrington..................................... 66 1995
PRINCIPAL OCCUPATION OF NOMINEES AND CONTINUING DIRECTORS EUGENE A. BELIVEAU, practicing dentist in North Andover, Massachusetts. 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, Business Consultant, Lowell, Massachusetts. MARSHA A. MCDONOUGH, Regional Education Officer, U.S. Department of State, Washington, D.C. PAUL A. MILLER, President and Chief Executive Officer of the Company and the Bank. 5 KATHLEEN BOSHAR REYNOLDS, Sales Manager, Prudential Howe & Doherty, Andover, Massachusetts, a real estate brokerage company. 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 October 2002, and previously was Executive Assistant to the President, Northern Essex Community College, Lawrence/Haverhill, Massachusetts; Kathleen Boshar Reynolds, who has been in her present position since October 2002; was previously Sales Manager DeWolfe Companies, North Andover, MA between July 2000 and October 2002 and before that 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 7 meetings in the fiscal year ended December 31, 2002. Each incumbent director, 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 2002. The Board of Directors of the Company has six standing committees: an Executive Committee, a Nominating Committee, an Audit Committee, a Stock Option Committee, a Compensation Committee and a Community Affairs 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 3 times in 2002. 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 2002. The Audit Committee and the full Board of Directors have adopted a written Audit Committee charter. 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 held no meetings in 2002. 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 2002. 6 The members of the Compensation Committee of the Bank 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 3 times in 2002. 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. 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, 2002 for filing with the Securities and Exchange Commission. Respectfully submitted, Eugene A. Beliveau (Chairman) Byron R. Cleveland, Jr. Robert F. Hatem Richard Hart Harrington 7 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 of the Bank, 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, 2003 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. In connection with the Reorganization, the Company assumed joint contractual responsibility as employer under each of these agreements. See "EXECUTIVE COMPENSATION -- Employment Agreements" (page 11).
NAME POSITION AGE - ---- -------- --- Paul A. Miller............................ Director, President and Chief Executive Officer of 63 the Company and the Bank Jeffrey W. Leeds(1)....................... Executive Vice President and Chief Lending Officer of 63 the Bank, Assistant Treasurer of the Company Timothy L. Felter(2)...................... Executive Vice President, Personal Banking and 42 Investment Officer of the Bank, Assistant Treasurer of the Company John E. Sharland(3)....................... Senior Vice President, Chief Financial Officer and 40 Treasurer of the Company and the Bank Richard J. D'Ambrosio(4).................. Senior Vice President, Support Services Operations of 55 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) 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. (3) 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. (4) 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, 2002, 2001 and 2000 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 $100,000 during the year ended December 31, 2002, for services rendered in all capacities to the Company (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION ---------------------------------- ---------------------------- SECURITIES UNDERLYING NAME AND YEAR ENDED OPTIONS/ ALL OTHER PRINCIPAL POSITION DECEMBER 31, SALARY BONUS SARS(#) COMPENSATION($) - ------------------ ------------ -------- ------- ---------- --------------- Paul A. Miller.............................. 2002 $352,106(1) $68,100 0 $148,722(2)(3) President and 2001 $335,401(1) $65,000 12,000 $144,414(2)(3) Chief Executive Officer 2000 $319,489(1) $62,000 0 $141,234(2)(3) Jeffrey W. Leeds............................ 2002 $176,250 $18,500 0 $ 5,287(3) Executive Vice President 2001 $165,000 $17,000 9,000 $ 4,523(3) and Chief Lending Officer 2000 $155,500 $15,100 0 $ 4,503(3) Robert P. Perreault (retired 1/31/03)....... 2002 $128,750 $ 6,000 0 $ 3,862(3) Executive Vice President 2001 $123,500 $ 6,000 9,000 $ 3,542(3) Residential Lending and Clerk 2000 $119,000 $ 6,000 0 $ 3,535(3) Timothy L. Felter........................... 2002 $128,750 $18,500 0 $ 3,862(3) Executive Vice President 2001 $117,250 $17,000 9,000 $ 3,517(3) Personal Banking, Investment Officer 2000 $108,000 $14,700 0 $ 3,240(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" (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 13). 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. No stock options or stock appreciation rights were granted to any of the Named Executive Officers during fiscal year 2002. 10 The following table sets forth certain information concerning stock options exercised during the fiscal year ended December 31, 2002 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, 2002: 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 0 145,500/6,000 $913,605/$0 Jeffrey W. Leeds............................. 0 0 43,500/4,500 $215,235/$0 Timothy L. Felter............................ 0 0 38,180/4,500 $207,058/$0
- --------------- (1) Based on a closing price of $12.24 per share of the Company's Common Stock on December 31, 2002, less the option exercise price. EMPLOYMENT AGREEMENTS The Company entered into an employment agreement with Paul A. Miller effective on April 21, 1989 that was 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 agreement with Mr. Miller had an initial term of three years. The agreements with Mr. Leeds and Mr. Felter had an initial term of two years. Each of the agreements provides 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. Each of the employment agreements 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 11 the Savings Banks Employees Retirement Association plan described below, and a supplemental plan from a previous employer, 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. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The following report has been adopted by the Compensation Committee of the Bank. 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 2002, there were no stock options granted to any of the Named Executive Officers. 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 2002. 12 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Beliveau, Brawn and Burke served on the Compensation Committee of the Bank during the fiscal year ended December 31, 2002. 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 15). 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, 2003 stock options for the purchase of an aggregate of 574,330 shares of Common Stock at an average purchase price per share of $8.75 were outstanding under the 1986 and 1997 Stock Option Plans. Of these options, 491,830 were exercisable on that date. There were 309,500 stock options outstanding under the 1997 Stock Option Plan included in the 574,330 outstanding options. In 2002, 11,700 options were exercised to purchase 7,155 shares of Common Stock under the 1986 Stock Option Plan and 3,000 options were exercised to purchase 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 13 employee contribution during 2002 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. At October 31, 2002, 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...................................... $ 5,033 $ 7,549 $10,066 $12,582 $60,000...................................... $ 8,733 $13,099 $17,466 $21,832 $80,000...................................... $12,433 $18,649 $24,866 $31,082 $100,000..................................... $16,133 $24,199 $32,266 $40,332 $120,000..................................... $19,833 $29,749 $39,666 $49,582 $125,000..................................... $20,758 $31,137 $41,516 $51,895 $140,000..................................... $23,533 $35,299 $47,066 $58,832 $150,000..................................... $25,383 $38,074 $50,766 $63,457 $175,000..................................... $30,008 $45,012 $60,016 $75,020 $200,000**................................... $34,633 $51,949 $69,266 $86,582
- --------------- * Based on age 65 retirement in 2003 (Plan Year 11/1/02 -- 10/31/03) ** Federal law does not permit defined benefit pension plans to recognize compensation in excess of $200,000 for plan year 2002. (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." (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. Leeds and Mr. Felter are $54,778 and 16 years, and $53,717 and 18 years, and $47,493 and 36 years, respectively. 14 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, 1997. (GRAPH) 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 Bank 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 Bank 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. 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 15 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 two arrangements (the "Participation Arrangements") in loans owned and serviced by entities affiliated with Mr. William P. DeLuca, Jr., a direct and indirect beneficial owner of 9.99% of the outstanding common stock of the Company. In the first Participation Arrangement, the Bank provides automobile floor plan financing to various used car dealerships throughout the United States. At December 31, 2002, the outstanding balance under the participation Arrangement is $8,522,979, or 3.51% of gross loans of the Bank. In the second Participation Arrangement, the Bank has purchased an interest in a pool of automobile leases made to individuals throughout the United States. At December 31, 2002, the outstanding balance under this Participation Arrangement is $10,000,000 or 4.1% of the gross loans of the Bank. The loans made in connection with these Participation Arrangements 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. EQUITY COMPENSATION PLAN INFORMATION The following table sets forth certain information regarding the equity compensation plans of the Company as of December 31, 2002.
WEIGHTED- NUMBER OF AVERAGE SECURITIES TO BE EXERCISE NUMBER OF SECURITIES ISSUED UPON PRICE OF REMAINING AVAILABLE FOR EXERCISE OF OUTSTANDING FUTURE ISSUANCE UNDER OUTSTANDING OPTIONS, EQUITY COMPENSATION PLANS OPTIONS, WARRANTS WARRANTS (EXCLUDING SECURITIES PLAN CATEGORY AND RIGHTS AND RIGHTS REFLECTED IN COLUMN (A)) ------------- ----------------- ----------- ------------------------- (A) (B) (C) Equity compensation plans approved by security holders........................................ 1997 Stock Incentive Plan...................... 311,500 $11.61 105,100 1986 Stock Incentive Plan...................... 274,830 $ 5.37 0 Equity compensation plans not approved by security holders............................... -- -- -- Total............................................ 586,330 $ 8.69 105,100
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information, as of February 28, 2003 regarding the beneficial ownership of Common Stock by: (i) each Director and Nominee for Director of the Company; (ii) each of the Named Executive Officers during the last fiscal year, (other than Mr. Perreault who retired as of January 31, 2003); (iii) all Directors, Nominees for Director and such executive officers as a group; and (iv) each person who, to the knowledge of the Company, beneficially owned more than 5% of the Common 16 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........................................ 8,475(4) * Kathleen I. Boshar........................................ 5,700 * Byron R. Cleveland, Jr.................................... 6,100 * Robert F. Hatem........................................... 9,275 * Paul A. Miller............................................ 164,722** 3.93% Thomas J. Burke........................................... 11,350 * Marsha A. McDonough....................................... 5,300 * Malcolm W. Brawn.......................................... 22,000(5) * Neil H. Cullen............................................ 7,000 * Richard Hart Harrington................................... 5,255 * Jeffrey W. Leeds.......................................... 65,820 1.57% Timothy L. Felter......................................... 50,650** 1.21% All Directors and Named Executive Officers as a Group (12 persons)................................................ 361,647(6)** 8.63% 5% Stockholders First Manhattan Co. ...................................... 373,200(7) 8.60% William P. Deluca Jr. and Lease and Rental Management Corp.................................................... 424,800(8) 9.99% David L. Babson & Company, Inc. .......................... 302,300(9) 7.02%
- --------------- * 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, 14,722 shares, Timothy L. Felter, 8,420 shares; and all Directors and Named Executive Officers as a Group (12 persons), 23,142 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, 2003 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, 145,500 shares; Mr. Leeds, 43,500 shares; Mr. Felter, 28,180 shares; Mr. Burke, 10,000 shares; Messrs. Beliveau and Hatem, 6,000 shares each; Messrs. Cleveland and Harrington, 5,000 shares each; Ms. McDonough, 4,600 shares; Ms. Boshar Reynolds and Messrs. Brawn and Cullen, 4,000 shares each; and all Directors and Named Executive Officers as a group, 265,780 shares. (3) Computed on the basis of 4,188,205 outstanding shares as of February 28, 2003 plus 265,780 shares subject to options exercisable within 60 days of February 28, 2003 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. 17 (6) The stated number of shares owned by the Named Executive Officers and Directors of the Company includes 72,725 shares currently issued and outstanding and 265,780 shares subject to stock options exercisable within 60 days of February 28, 2003. (7) Based solely on Schedule 13G filed with the Securities and Exchange Commission on or about February 12, 2003, First Manhattan Co. reports beneficial ownership of 373,200 shares of Common Stock. First Manhattan Co. reports sole voting power with respect to 17,000 shares and sole dispositive power with respect to 55,000 shares, shared voting power with respect to 318,200 shares and shared dispositive power with respect to 373,200 shares. First Manhattan Co.'s address is 437 Madison Avenue, New York, NY 10022. (8) Based solely on a Form 13G filed with the Securities and Exchange Commission on or about January 21, 2003, Lease and Rental Management Corp. reports beneficial ownership of 405,400 shares of Common Stock of the Company. Based solely on a Form 13G filed with the Securities and Exchange Commission on or about January 21, 2003, Mr. William P. DeLuca Jr. reports beneficial ownership of 424,800 shares of Common Stock of the Company with sole voting power with respect to 10,500 shares and sole dispositive power with respect to 10,500 shares, and shared voting and dispositive power with respect to 414,300 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 February 3, 2003 David L. Babson & Company, Inc. reports beneficial ownership of 302,300 shares of Common Stock of the Company with sole voting power with respect to 296,600 shares, and sole dispositive power with respect to 302,300 shares and shared voting power with respect to 5,700 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. Based solely on its review of the copies of such reports received by the Company with respect to its fiscal year 2002, or written representations from certain reporting persons, the Company believes that during 2002 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 4 upon becoming less than a ten percent stockholder of the Company. PROPOSAL 2 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. 18 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 2002 were $103,000. 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 2002. FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION For fiscal year 2002, 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 2002 is $21,050. This sum includes fees for tax return preparation and tax advisory services for consulting services provided to the Bank and the Company. 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 2003 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 2004 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 December 22, 2003. In addition, the Company's By-Laws provide that 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. 19 EX-21 5 b45673lsexv21.txt SUBSIDIARIES 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 b45673lsexv23w1.txt CONSENT OF KPMG 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 17, 2003, with respect to the consolidated balance sheets of LSB Corporation and subsidiaries as of December 31, 2002 and 2001, 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, 2002, which report is incorporated by reference into the December 31, 2002 annual report on Form 10-K of LSB Corporation. /s/ KPMG LLP --------------------------- KPMG LLP Boston, Massachusetts March 27, 2003 -----END PRIVACY-ENHANCED MESSAGE-----