UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20529
FORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period ended March 31, 2004
o Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number 000-32955
LSB Corporation
| Massachusetts (State or other jurisdiction of incorporation or organization) |
04-3557612 (I.R.S. Employer Identification Number) |
|
| 30 Massachusetts Avenue, North Andover, MA (Address of principal executive offices) |
01845 (Zip Code) |
(978) 725-7500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days.
| Yes x | No o |
Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
| Yes o | No x |
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
| Class Common Stock, par value $.10 per share |
Outstanding as of April 30, 2004 4,306,442 shares |
LSB CORPORATION AND SUBSIDIARY
INDEX
2
PART 1 – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| March 31, | December 31, | |||||||
| 2004 |
2003 |
|||||||
| (In Thousands, Except Share Data) | ||||||||
ASSETS |
||||||||
Assets: |
||||||||
Cash and due from banks |
$ | 8,591 | $ | 7,872 | ||||
Federal funds sold |
5,018 | 889 | ||||||
Total cash and cash equivalents |
13,609 | 8,761 | ||||||
Investment securities held to maturity (market value of
$192,641 in 2004 and $184,592 in 2003) |
190,290 | 184,286 | ||||||
Investment securities available for sale (amortized cost of
$45,840 in 2004 and $48,571 in 2003) |
46,015 | 48,592 | ||||||
Federal Home Loan Bank stock, at cost |
6,892 | 6,593 | ||||||
Loans, net of allowance for loan losses |
214,372 | 207,283 | ||||||
Bank premises and equipment |
3,048 | 2,875 | ||||||
Accrued interest receivable |
2,964 | 2,552 | ||||||
Deferred income tax asset |
3,458 | 3,519 | ||||||
Other assets |
1,381 | 1,647 | ||||||
Total assets |
$ | 482,029 | $ | 466,108 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Liabilities: |
||||||||
Interest bearing deposits |
$ | 264,736 | $ | 258,430 | ||||
Non-interest bearing deposits |
16,150 | 14,110 | ||||||
Federal Home Loan Bank advances |
98,841 | 78,866 | ||||||
Securities sold under agreements to repurchase |
2,970 | 2,486 | ||||||
Other borrowed funds |
39,000 | 52,000 | ||||||
Advance payments by borrowers for taxes and insurance |
557 | 450 | ||||||
Other liabilities |
4,146 | 4,764 | ||||||
Total liabilities |
426,400 | 411,106 | ||||||
Stockholders’ equity: |
||||||||
Preferred stock, $.10 par value per share: |
||||||||
5,000,000 shares authorized, none issued |
— | — | ||||||
Common stock, $.10 par value per share; |
||||||||
20,000,000 shares authorized; |
||||||||
4,512,442 and 4,454,262 shares issued at March 31, 2004 and
December 31, 2003, respectively, and 4,293,142 and 4,234,962 shares
outstanding at March 31, 2004 and December 31, 2003, respectively |
451 | 445 | ||||||
Additional paid-in capital |
58,644 | 58,350 | ||||||
Accumulated deficit |
(822 | ) | (1,055 | ) | ||||
Treasury stock, at cost (219,300 shares) |
(2,758 | ) | (2,758 | ) | ||||
Accumulated other comprehensive income |
114 | 20 | ||||||
Total stockholders’ equity |
55,629 | 55,002 | ||||||
Total liabilities and stockholders’ equity |
$ | 482,029 | $ | 466,108 | ||||
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
3
LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
| Three months ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| (In Thousands, Except Share Data) | ||||||||
Interest and dividend income: |
||||||||
Loans |
$ | 3,303 | $ | 3,948 | ||||
Investment securities held to maturity |
1,669 | 1,129 | ||||||
Investment securities available for sale |
428 | 493 | ||||||
Federal Home Loan Bank stock |
36 | 51 | ||||||
Other interest and dividend income |
6 | 41 | ||||||
Total interest and dividend income |
5,442 | 5,662 | ||||||
Interest expense: |
||||||||
Deposits |
828 | 1,150 | ||||||
Federal Home Loan Bank advances |
1,052 | 1,203 | ||||||
Securities sold under agreements to repurchase |
3 | 5 | ||||||
Other borrowed funds |
136 | 41 | ||||||
Total interest expense |
2,019 | 2,399 | ||||||
Net interest income |
3,423 | 3,263 | ||||||
Provision for loan losses |
– | – | ||||||
Net interest income after provision for loan losses |
3,423 | 3,263 | ||||||
Non-interest income: |
||||||||
Loan servicing fees |
20 | (130 | ) | |||||
Deposit account fees |
202 | 163 | ||||||
Gains on sales of mortgage loans |
11 | 149 | ||||||
Other income |
89 | 98 | ||||||
Total non-interest income |
322 | 280 | ||||||
Non-interest expense: |
||||||||
Salaries and employee benefits |
1,622 | 1,651 | ||||||
Occupancy and equipment expenses |
197 | 220 | ||||||
Professional expenses |
115 | 201 | ||||||
Data processing expenses |
200 | 181 | ||||||
Other expenses |
354 | 419 | ||||||
Total non-interest expenses |
2,488 | 2,672 | ||||||
Income before income tax expense |
1,257 | 871 | ||||||
Income tax expense |
471 | 321 | ||||||
Net income |
$ | 786 | $ | 550 | ||||
Average shares outstanding |
4,263,637 | 4,214,363 | ||||||
Average diluted shares outstanding |
4,455,979 | 4,357,883 | ||||||
Basic earnings per share |
$ | 0.18 | $ | 0.13 | ||||
Diluted earnings per share |
$ | 0.18 | $ | 0.13 | ||||
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
4
LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common | Paid-In | (Accumulated | Treasury | Comprehensive | Stockholders' | |||||||||||||||||||
| Stock |
Capital |
Deficit) |
Stock |
Income |
Equity |
|||||||||||||||||||
| (In Thousands, Except Share Data) | ||||||||||||||||||||||||
Balance at December 31, 2002 |
$ | 439 | $ | 57,845 | $ | (3,168 | ) | $ | (1,736 | ) | $ | 679 | $ | 54,059 | ||||||||||
Net income |
– | – | 550 | – | – | 550 | ||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||
Unrealized gain on securities
available for sale (tax effect $4) |
– | – | – | – | 12 | 12 | ||||||||||||||||||
Total comprehensive income |
562 | |||||||||||||||||||||||
Exercise of stock options |
3 | 164 | – | – | – | 167 | ||||||||||||||||||
Dividends declared and paid
($0.12 per share) |
– | – | (505 | ) | – | – | (505 | ) | ||||||||||||||||
Purchase of 82,800 shares of Treasury
Stock, at cost |
– | – | – | (1,022 | ) | – | (1,022 | ) | ||||||||||||||||
Balance at March 31, 2003 |
$ | 442 | $ | 58,009 | $ | (3,123 | ) | $ | (2,758 | ) | $ | 691 | $ | 53,261 | ||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common | Paid-In | (Accumulated | Treasury | Comprehensive | Stockholders' | |||||||||||||||||||
| Stock |
Capital |
Deficit) |
Stock |
Income |
Equity |
|||||||||||||||||||
Balance at December 31, 2003 |
$ | 445 | $ | 58,350 | $ | (1,055 | ) | $ | (2,758 | ) | $ | 20 | $ | 55,002 | ||||||||||
Net income |
– | – | 786 | – | – | 786 | ||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||
Unrealized loss on securities
available for sale (tax effect $61) |
– | – | – | – | 94 | $ | 94 | |||||||||||||||||
Total comprehensive income |
880 | |||||||||||||||||||||||
Exercise of stock options |
6 | 294 | – | – | – | 300 | ||||||||||||||||||
Dividends declared and paid
($0.13 per share) |
– | – | (553 | ) | – | – | (553 | ) | ||||||||||||||||
Balance at March 31, 2004 |
$ | 451 | $ | 58,644 | $ | (822 | ) | $ | (2,758 | ) | $ | 114 | $ | 55,629 | ||||||||||
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
5
LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Three months ended | ||||||||
| March 31, |
||||||||
| 2004 |
2003 |
|||||||
| (In Thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 786 | $ | 550 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Gains on sales of mortgage loans |
(11 | ) | (149 | ) | ||||
Net amortization of investment securities |
453 | 348 | ||||||
Depreciation of premises and equipment |
84 | 114 | ||||||
Loans originated for sale |
(1,497 | ) | (5,881 | ) | ||||
Proceeds from sales of mortgage loans |
884 | 6,511 | ||||||
(Increase) decrease in accrued interest receivable |
(412 | ) | 111 | |||||
Decrease in deferred income tax asset |
— | 271 | ||||||
Decrease in other assets |
264 | 371 | ||||||
Increase in advance payments by borrowers |
107 | 70 | ||||||
(Decrease) increase in other liabilities |
(618 | ) | 56 | |||||
Net cash provided by operating activities |
40 | 2,372 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from maturities of investment securities held to maturity |
1,000 | 134,400 | ||||||
Proceeds from maturities of investment securities available for sale |
1,585 | 2,000 | ||||||
Purchases of investment securities held to maturity |
(11,527 | ) | (123,868 | ) | ||||
Purchases of mortgage-backed securities held to maturity |
— | (15,304 | ) | |||||
Purchases of investment securities available for sale |
— | (4,165 | ) | |||||
Purchase of mutual fund available for sale |
— | (1,000 | ) | |||||
Purchases of mortgage-backed securities available for sale |
— | (8,461 | ) | |||||
Purchases of Federal Home Loan Bank stock |
(299 | ) | — | |||||
Principal payments of securities held to maturity |
4,124 | 11,259 | ||||||
Principal payments of securities available for sale |
1,092 | 1,352 | ||||||
(Increase) decrease in loans, net |
(6,465 | ) | 13,939 | |||||
Proceeds from payments on OREO |
3 | 3 | ||||||
Purchases of Bank premises and equipment |
(257 | ) | (13 | ) | ||||
Net cash (used in) provided by investing activities |
(10,744 | ) | 10,142 | |||||
Cash flows from financing activities: |
||||||||
Net increase in deposits |
8,346 | 337 | ||||||
Additions to Federal Home Loan Bank advances |
20,000 | — | ||||||
Payments on Federal Home Loan Bank advances |
(25 | ) | (456 | ) | ||||
Net increase (decrease) in agreements to repurchase securities |
484 | (1,286 | ) | |||||
Net decrease in other borrowed funds |
(13,000 | ) | (1,270 | ) | ||||
Treasury stock purchased |
— | (1,022 | ) | |||||
Dividends paid |
(553 | ) | (505 | ) | ||||
Proceeds from exercise of stock options |
300 | 167 | ||||||
Net cash provided by (used in) financing activities |
15,552 | (4,035 | ) | |||||
Net increase in cash and cash equivalents |
4,848 | 8,479 | ||||||
Cash and cash equivalents, beginning of period |
8,761 | 16,769 | ||||||
Cash and cash equivalents, end of period |
$ | 13,609 | $ | 25,248 | ||||
Cash paid during the period for: |
||||||||
Interest on deposits |
$ | 827 | $ | 1,134 | ||||
Interest on borrowed funds |
1,171 | 1,253 | ||||||
Income taxes |
1,145 | 115 | ||||||
Supplemental Schedule of non-cash activities: |
||||||||
Net change in valuation of investment securities available for sale |
154 | 16 | ||||||
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
6
LSB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
1. BASIS OF PRESENTATION
LSB Corporation (the “Corporation” or the “Company”) is a Massachusetts corporation and the holding company of its wholly-owned subsidiary 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 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 (“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 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 income. Actual results could differ significantly from those estimates and judgments. Material estimates that are particularly susceptible to change relate to the allowance for loan losses, income taxes and mortgage servicing rights.
The interim results of consolidated income are not necessarily indicative of the results for any future interim period or for the entire year. These interim Consolidated Financial Statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the annual Consolidated Financial Statements and accompanying notes included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2003 filed with the Securities and Exchange Commission.
2. STOCK OPTIONS
The Corporation measures compensation cost for stock-based plans using the intrinsic value method. The intrinsic value method measures compensation cost, if any, as the fair market value of the Company’s stock at the grant date over the exercise price. All options granted have an exercise price equivalent to the fair market value at the date of grant and, accordingly, no compensation cost has been recorded. If the fair value based method of accounting for stock options had been used, the Company’s net income and earnings per share would have been reduced to the proforma amounts for the three months ended March 31, and are presented in the table which follows:
| Three months ended |
||||||||
| 3/31/04 |
3/31/03 |
|||||||
| (In Thousands, Except Share Data) | ||||||||
Net income: |
||||||||
As Reported |
$ | 786 | $ | 550 | ||||
Less: Pro forma stock based compensation cost (net of taxes) |
104 | 44 | ||||||
Pro forma |
$ | 682 | $ | 506 | ||||
Basic earnings per share: |
||||||||
As Reported |
$ | 0.18 | $ | 0.13 | ||||
Pro forma |
0.16 | 0.12 | ||||||
Diluted earnings per share: |
||||||||
As Reported |
$ | 0.18 | $ | 0.13 | ||||
Pro forma |
0.15 | 0.12 | ||||||
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 used for grants in 2004; expected volatility of 28.9%, expected average life of 8 years, and risk-free interest rates of 3.4% and expected dividend yield of 3.08%.
7
3. DEFINED BENEFIT PLAN
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 21 years of age 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 date, but also for those expected to be earned in the future. The Company expects to contribute approximately $372 thousand during the Plan Year ending at October 31, 2004.
Net pension cost components for the quarter ended March 31, follow:
| 2004 |
2003 |
|||||||
| (In Thousands) | ||||||||
Service cost |
$ | 104 | $ | 89 | ||||
Interest cost |
106 | 102 | ||||||
Expected return on plan assets |
(121 | ) | (106 | ) | ||||
Amortization of net gains |
— | — | ||||||
Net amortization and deferrals |
(1 | ) | (1 | ) | ||||
Net periodic pension cost |
$ | 88 | $ | 84 | ||||
4. CONTINGENCIES
The Bank was awarded a $4.2 million judgment in 1997. The Bank prevailed on this matter in Appeals Court. The Bank expects to collect this judgment, at least in substantial part, which will have a favorable impact to the Company’s Consolidated Financial Statements. On February 13, 2002, the defendant filed bankruptcy under Chapter 7 (liquidation). Post-judgment interest accrues from the date of the judgment to February 13, 2002 and approximates $1.9 million. However, collectibility of post-judgment interest in addition to the $4.2 million award has not yet been determined.
Bids of approximately $3.3 million for the major assets were approved by the Bankruptcy Court on October 14, 2002. The net amount to be received by the Bank after taxes and bankruptcy expenses is not known at this time. However, it is not likely that the full $4.2 million judgment and post-judgment interest of $1.9 million will be collected.
On February 26, 2004, the Company reported in a press release that the Bankruptcy Trustee filed a motion seeking Bankruptcy Court approval to make an interim distribution to the Bank of approximately $2.6 million. The Bank has agreed to return any of the interim distribution as would be necessary to pay additional taxes imposed on the bankruptcy estate in the event reserves set aside for taxes are insufficient. Subsequent to the press release on February 26, 2004, management became aware of approximately $120 thousand in additional expenses associated with the interim distribution in which the Company would receive approximately $2.4 million after these expenses. The diluted earnings per share impact on the proposed interim distribution are approximately $0.35 per share based on estimated average shares outstanding for the quarter ended March 31, 2004. This impact will be recognized in the Company’s reported financial results when the proposed interim distribution is approved by the Bankruptcy Court.
It is management’s opinion the timing and final amount to be collected can not be determined at this time. Accordingly, no recognition of this matter has been recorded in the Company’s unaudited Consolidated Financial Statements at March 31, 2004.
5. RECENT ACCOUNTING DEVELOPMENTS
In December 2003, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position 03-3 (“SOP 03-3”): “Accounting for Certain Loans or Debt Securities Acquired in a Transfer". SOP 03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality be recognized at their fair value. The excess of contractual cash flows over expected cash flows is not to be recognized as an adjustment of yield, loss accrual, or valuation allowance. Valuation allowances can not be created nor “carried over” in the initial accounting for loans acquired in a transfer. This SOP is effective for loans acquired after December 31, 2004, with early adoption encouraged. The Company does not believe the adoption of SOP 03-3 will have a material impact on the Company’s financial position or results of operations.
8
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The Company has made forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 as amended) in this report that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of operations of the Company and projected or antici