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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
| þ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2009
| o | 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)
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
| Titles of each Class | Name of each Exchange on which registered | |
| Common Stock, par value $.10 per share | NASDAQ Global Market | |
| (including associated Preferred Stock Purchase Rights) |
Securities Registered Pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
o Yes þ No
Indicate by check mark if the registrant is not required to file pursuant to Section 13 or Section
15(d) of the Act.
o Yes þ No
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate by check mark 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| o Large accelerated filer | o Accelerated filer | o Non-accelerated filer | þ Smaller reporting company | |||
| (Do not check if smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of the voting common equity stock held by non-affiliates* of the
registrant based on the closing sale price of $10.18 per share as of June 30, 2009, was
approximately $42.5 million.
| * | 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. |
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 5, 2010 | |
| Common Stock, par value $.10 per share | 4,506,686 shares |
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part of the Form
10-K (e.g., Part I, Part II, etc.) into which the document is incorporated:
| (1) | Certain information required for Part III of this report is incorporated herein by reference to the registrant’s definitive Proxy Statement for its 2010 Annual Meeting of Stockholders, which the registrant intends to file with the Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2009. |
Table of Contents
PART I
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K 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 Company, projected or anticipated benefits,
or events related to other future developments involving the Company 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.
For example, the amounts of and statements regarding the adequacy of the Company’s provision and
allowance for loan losses, which reflect management’s estimates of the likelihood and magnitude of
future losses in the loan portfolio of the Company’s subsidiary bank, are “forward looking
statements.” Investors should note that many factors, some of which are discussed elsewhere in
this document and in the documents which we incorporate by reference, could affect the future
financial results of the Company and could cause results to differ materially from those expressed
or implied by these forward-looking statements. Those factors include fluctuations in interest
rates, disruptions in credit markets, inflation, changes in the regulatory environment, government
regulations and changes in regional and local economic conditions, including changes in real estate
conditions in the Company’s lending area and changes in loan defaults and charge-off rates, and
changes in the competitive environment in the geographic and business areas in which the Company
conducts its operations. As a result of such risks and uncertainties, the Company’s actual results
may differ materially from those expressed or implied by such forward-looking statements. These
risks and others are described elsewhere in this report, including particularly in Item 1A, “Risk
Factors”. The Company 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.
CAUTION REGARDING NON-GAAP FINANCIAL MEASURES
This Form 10-K also contains certain non-GAAP financial measures in addition to results presented
in accordance with Generally Accepted Accounting Principles (“GAAP”) in both 2009 and 2008 as
indicated. In an effort to provide investors with information regarding the Company’s results, the
Company has disclosed certain non-GAAP information, which management believes provides useful
information to the investor. This information should not be viewed as a substitute for operating
results determined in accordance with GAAP, nor is it necessarily comparable to non-GAAP
information which may be presented by other companies.
ITEM 1. BUSINESS
SUMMARY
LSB Corporation (the “Corporation” or the “Company”) is a one bank-holding company principally
conducting business through its subsidiary, River 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
Global 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.
The Corporation is subject to regulation, supervision and periodic examination by the Board of
Governors of the Federal Reserve
System (“FRB”) and Massachusetts Division of Banks. The Bank is subject to supervision,
regulation, and periodic examination by the Federal Deposit Insurance Corporation (“FDIC”) and the
Massachusetts Division of Banks (the “Division”).
The Bank has three wholly-owned subsidiaries. Shawsheen Security Corporation and Shawsheen
Security Corporation II engage exclusively in buying, selling, dealing in and holding securities
for their own accounts. Spruce Wood Realty Trust holds 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 Company engages in no business activities directly and is entirely dependent on the receipt of
dividends from the Bank to meet the Company’s separate expenses, repay any indebtedness and pay
dividends. Federal and state banking regulations place certain restrictions on dividends paid and
loans or advances made by the Bank to the Company. Without regulatory approval, the total amount
of dividends declared in any calendar year cannot exceed the Bank’s net income for the current
year, plus the Bank’s net income retained for the two previous years. As such, the Bank is
required to seek regulatory approval for the payment of dividends to the Company as of December 31,
2009.
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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 of Boston (“FHLBB”), Federal funds purchased and securities sold under agreements to
repurchase.
MARKET AREA
The Bank’s primary market area is the Merrimack Valley in northeastern Massachusetts and southern
New Hampshire. The Bank has seven banking offices in the communities of Andover, Lawrence, Methuen
(2), and North Andover, Massachusetts and Salem and Derry, New Hampshire.
LENDING ACTIVITIES
The Bank’s loan portfolio consists of commercial real estate, commercial business, construction and
land development, residential real estate, home equity and consumer loans. Competition on both
pricing and underwriting terms has been strong in the Bank’s market area. Gross loans at December
31, 2009 were $536.6 million, an increase of $84.0 million from $452.6 million at December 31,
2008.
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 rates charged on FHLBB advances 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. The Bank has
“Certified Lender” status from the U.S. Small Business Administration (“SBA”), which means that,
subject to various conditions, the SBA guarantees repayment of some portion of the loan amount. The
interest rates on these loans may be fixed or variable. The rates are primarily based on a margin
over the Prime Rate as published in The Wall Street Journal. The margin is determined based
on the creditworthiness of the borrower, security offered and competitive factors.
CONSTRUCTION AND LAND DEVELOPMENT
The Bank originates generally short-term loans for land development, construction of residential
homes built on speculation, construction of homes for homeowners with permanent financing, and
construction of commercial facilities (including retail, manufacturing and office space). These
loans have variable interest rates and 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 permanent financing commitments upon completion, or to businesses that are expanding and
will occupy the completed project.
RESIDENTIAL MORTGAGES
The Bank originates fixed and adjustable rate residential mortgage loans which are underwritten to
be eligible for sale in the secondary market. These loans are secured primarily by owner occupied
1-4 family primary residential properties. Adjustable 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
occasionally 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. During 2009, the Bank retained all of its
originated loans.
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 into the secondary market may 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 through a deposit 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.
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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 interest rates on these products 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 higher 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 offered on certificates of deposit allows the Bank to
adjust its sources of funds while providing a competitive interest rate to its customers. Another
alternative source of deposits utilized by the Bank is brokered certificates of deposit. In
addition to deposit accounts, other sources of funds include advances from the FHLBB, Federal funds
purchased and securities sold under agreements to repurchase.
The Bank is a member of the FHLBB. The Bank is required to own stock of the FHLBB. The Bank’s
FHLBB stock is carried on the Company’s balance sheet at cost, which equals par value. On April 19,
2004, the FHLBB implemented a new capital structure and stock investment requirements for members
to comply with the Gramm-Leach-Bliley Act of 1999. The minimum stock investment requirements are
based in part on the amount of the Bank’s outstanding advances with the FHLBB. The Bank receives
an amount equal to the par value of the FHLBB stock when excess stock is redeemed. In December
2008, the FHLBB placed a moratorium on redemptions of all excess stock. At December 31, 2009, the
Bank held $11.8 million of FHLBB stock.
The Company functions only as a holding company for the Bank, engages in no business activities
directly and is entirely dependent on the receipt of dividends from the Bank to meet its separate
expenses, repay any indebtedness and pay dividends to the Company’s stockholders.
EMPLOYEES
The Company maintains no separate payroll. As of December 31, 2009, the Bank employed 110 total
employees, which was equal to 99.2 employees on a full-time equivalent basis. None of the Bank’s
employees is subject to a collective bargaining agreement or represented by a labor union.
Management considers its relations with employees to be good.
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, local and
national non-bank businesses such as mortgage companies, securities brokerage firms, insurance
companies and mutual funds offer services competitive with those of the Bank. Bank mergers and
legislation permitting interstate and cross-industry expansion have increased, and are expected to
continue to increase, competition in the Bank’s market area. 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 on the Bank’s deposit taking and lending
activities is affected by movements in interest rates, local and national market developments,
economic trends and the Bank’s ability to adjust to change.
SUPERVISION AND REGULATION
As a bank holding company, the Corporation is subject to regulation and supervision by the FRB
pursuant to the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and files with the
FRB an annual report and such additional reports as the FRB may require. The Corporation is also
subject to regulations by the Division. The Corporation’s activities are limited to the
business of banking and activities “closely related” or incidental to banking as determined by the
FRB. The Corporation generally may not directly or indirectly engage in business activities or
acquire more than five percent of any class of voting shares of any company without notice to or
approval of the FRB. The Bank is an FDIC insured state-chartered savings bank subject to the
regulations and supervisory authority of, and periodic examinations by, both the FDIC and the
Division. These examinations test the Bank’s safety and soundness and compliance with various
statutory and regulatory requirements. The Corporation and the Bank are both 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. The Bank is a member of the Massachusetts
Depositors Insurance Fund, an industry-sponsored insurer of deposit balances exceeding FDIC
insurance limits.
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 Corporation and the Bank. Among other things, the regulatory agencies have authority
to restrict or prohibit the payment of dividends on the Bank’s or the Corporation’s capital stock
if such payment would constitute an
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unsafe or unsound banking practice or reduce the Company’s or
the Bank’s capital levels below regulatory minimums. See “Capital Adequacy” in Results of
Operations in Item 7 hereof, in Management’s Discussion and Analysis of Financial Condition and
Results of Operations and Note 9 to the Consolidated Financial Statements for further information.
Without regulatory approval, the total amount of dividends declared in any calendar year cannot
exceed the Bank’s net income for the current year, plus the Bank’s net income retained for the two
previous years. As such, the Bank is required to seek regulatory approval for the payment of
dividends to the Company as of December 31, 2009. 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, the Deposit Insurance Fund (“DIF”) of the
FDIC and non-business borrowers and not for the protection of investors or stockholders of the
Company. 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.
To the extent that information in this report under the heading “Supervision and Regulation”
describes statutory or regulatory provisions, it is qualified in its entirety by reference to the
particular statutory or regulatory provision described. Any changes in applicable laws or
regulations may have a material effect on the business and prospects of the Company.
FEDERAL DEPOSIT INSURANCE PREMIUMS
The Federal Deposit Insurance Reform Act of 2005 (“FDIRA”), among other things, gave the FDIC
greater discretion to identify the relative risks depository institutions present to the DIF and
set risk-based premiums accordingly. The premiums vary depending on the institution’s “risk
category,” which is based on the institution’s capital level and supervisory ratings. FDIC
insurance premiums would have been $258,000 in 2008, however the Company was able to apply credits
of $175,000 resulting in a net expense of $83,000. In December 2008, the FDIC board approved a 7
basis points (“bps”) increase in premiums charged to banks for deposit insurance, boosting the rate
to between 12 cents and 50 cents per $100 of domestic deposits from a range of five cents to 43
cents due to market developments that have significantly depleted the DIF and reduced the ratio of
reserves to insured deposits.
On February 27, 2009, the FDIC issued a final rule, effective April 1, 2009, which changed the way
the FDIC’s assessment system differentiates for risk, made corresponding changes to assessment
rates beginning with the second quarter of 2009, and made certain technical and other changes to
the assessment rules. The FDIC simultaneously issued an interim rule to impose a 20 bps special
assessment (and possible additional special assessments of up to 10 basis points thereafter) to
replenish the DIF. The special assessment was equal to 20 basis points of an institution’s
assessment base on June 30, 2009. Additionally, beginning April 1, 2009, the FDIC increased its
base fees on insured deposits. The combination of the special assessment plus the base fee
increased the Company’s 2009 deposit insurance premiums to approximately $1.3 million, for an
increase of $1.2 million.
The risk-based assessments contained in the final rule may cause the Company’s premiums to increase
further in the future. The final rule provides for the following adjustments to an institution’s assessment rate: (1) a
decrease for long-term unsecured debt, including most senior and subordinated debt and, for small
institutions, a portion of Tier 1 capital; (2) an increase for secured liabilities, including
Federal Home Loan Bank advances, securities sold under repurchase agreements, secured Federal funds
purchased and certain other secured borrowings, if the institution’s ratio of secured liabilities
to domestic deposits is greater than 25%; and (3) for all institutions other than those in Risk
Category I (i.e., banks that are “well capitalized” with few weaknesses), an increase of up to 10
bps in the assessment rate if the institution has brokered deposits in excess of 10% of the
institution’s domestic deposits. As of December 31, 2009, the Bank’s ratio of secured liabilities
to domestic deposits was 53% and its ratio of brokered deposits to domestic deposits was 6%.
The final rule also added an “adjusted brokered deposit ratio,” which measures the extent to which
brokered deposits are funding rapid asset growth. The adjusted brokered deposit ratio will affect
only those established Risk Category I institutions whose total gross assets are more than 40
percent greater than they were four years previously, after adjusting for mergers and acquisitions.
In general, the greater an institution’s asset growth and the greater its percentage of brokered
deposits, the greater will be the increase in its initial base assessment rate. Specifically, if
an institution’s ratio of brokered deposits to domestic deposits exceeds 10 percent and its asset
growth over the previous four years is more than 70 percent, the adjusted brokered deposit ratio
will equal the institution’s ratio of brokered deposits to domestic deposits less the 10 percent
threshold. If an institution’s ratio of brokered deposits to domestic deposits exceeds 10 percent
but its asset growth over the previous four years is between 40 percent and 70 percent, the
adjusted brokered deposit ratio will equal a gradually increasing fraction of the ratio of brokered
deposits to domestic deposits (minus the 10 percent threshold). If an institution’s ratio of
brokered deposits to domestic deposits is 10 percent or less or if the institution’s asset growth
over the previous four years is less than 40 percent, the adjusted brokered deposit ratio will be
zero and will have no effect on the institution’s assessment rate. As of December 31, 2009, River
Bank’s ratio of brokered deposits to domestic deposits was 6%, and its asset growth over the
previous four years was approximately 56%.
On November 12, 2009, the FDIC issued a final rule to require insured depository institutions to
prepay estimated deposit insurance assessments for the 4th quarter of 2009, and for all of 2010,
2011, and 2012 to strengthen the liquidity of the DIF without immediately impacting earnings of
banking institutions. The prepaid assessment was paid on December 30, 2009 along with the payment
of the regular third quarter deposit insurance assessment, and recorded as a prepaid expense
(asset). The total amount of the Bank’s
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prepayment was $3.1 million. Unlike the special
assessments, the prepayment did not immediately affect earnings because the payments will be
amortized into expense each quarter during 2010 through 2012. If any prepaid assessment is not
exhausted after collection of the amount due on June 30, 2013, the excess prepayment will be
returned to the Bank by the FDIC.
BANK HOLDING COMPANY ACT, CHANGE IN CONTROL ACT AND REGULATION Y
Under the BHC Act and Regulation Y of the FRB, no company may acquire “control” of the Company or
the Bank, and no bank holding company may acquire more than five percent of any class of
outstanding voting securities of the Company or the Bank, without prior approval of the FRB. Under
the Change in Bank Control Act of 1978 (the “Control Act”), no person or group of persons acting in
concert may acquire “control” of the Company if they do not provide at least 60 days prior written
notice to the FRB or if the FRB gives written notice of objection to such acquisition. Under
Regulation Y, the FRB has established a rebuttable presumption that direct or indirect ownership or
control of more than 10 percent of any class of the Company’s outstanding voting securities
constitutes “control” of the Company and the Bank for purposes of the Control Act.
GRAMM-LEACH-BLILEY ACT
The Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) enhanced the authority of banks and their
holding companies to engage in non-banking activities. By electing to become a “financial holding
company,” a qualified parent company of a banking institution may engage, directly or through
non-bank subsidiaries, in any activity that is determined by the FRB in consultation with the
United States Department of Treasury (the “Treasury”) to be financial in nature or incidental to
such a financial activity or in any other activity that is complimentary to a financial activity
and does not pose a substantial risk to the safety and soundness of depository institutions or the
financial system generally. Financial activities include all of the activities that have been
determined to be “closely related to banking” and permissible for bank holding companies, plus
insurance agency, securities underwriting and dealing, and insurance underwriting, among other
activities.
A bank holding company may elect to be regulated as a financial holding company if all of its
depository institution subsidiaries are well capitalized, well managed and have at least a
satisfactory rating under the federal Community Reinvestment Act (“CRA”). A bank holding company
that elects financial holding company status remains subject to regulation and oversight by the
FRB. While the Company believes that it presently satisfies all requirements to elect to become a
financial holding company, the Company has no present plan to elect financial holding company
status.
Pursuant to the GLB Act, the Bank may also organize or acquire, subject to approvals of the
Division and the FDIC, “financial subsidiaries” to engage in activities that are financial in
nature or incidental to a financial activity. To form a financial subsidiary, the Bank would be
required to satisfy conditions substantially similar to those that the Company would be required to
satisfy in order to elect to become a financial holding company. While the Company believes that
the Bank would be able to satisfy the requirements to organize or acquire a financial subsidiary,
the Company has no present plan for the Bank to do so.
FEDERAL RESERVE ACT SECTIONS 23A AND 23B AND REGULATION W
Under Sections 23A and 23B of the Federal Reserve Act and Regulation W of the FRB, the Bank may not
enter into any “covered transaction” with the Company or any separate subsidiary of the Company (a
“Reg W Affiliate”) on terms that are less favorable to the Bank than the Bank would in good faith
offer to an unaffiliated party. Any loan from the Bank to a Reg W Affiliate must be fully
collateralized by qualifying assets having a fair value equal to or exceeding the amount of the
loan, depending on the character of the collateral. Covered transactions between the Bank and its
Reg W Affiliates must be consistent with “safe and sound banking practices” and are limited to 10%
and 20% of the Bank’s capital in the case of any one such Affiliate and all such Affiliates,
respectively. The Bank is prohibited from accepting any assets or securities of a Reg W Affiliate
as collateral for a loan, and may not purchase any “low quality asset” from any such affiliate.
FEDERAL RESERVE ACT SECTION 22 AND REGULATION O
Under Section 22 of the Federal Reserve Act and Regulation O of the FRB, the Bank may not make any
loan to directors or executive officers of the Company or the Bank or to the “related interests” of
any such persons except in conformity with specified restrictions and requirements related to the
amounts, terms, purposes, credit quality and pricing of such loans and with the prior approval of
the Bank’s Board of Directors.
HOME OWNERSHIP AND EQUITY PROTECTION ACT AND REGULATION Z
Under the Home Ownership and Equity Protection Act (HOEPA), the FRB has created a new category of
“higher-priced mortgage loan” that will be subject to heightened consumer protections under recent
amendments to Regulation Z of the FRB. Regulation Z defines loans that qualify as “higher-priced
mortgage loans” by reference to a new index published by the Federal Reserve called the “average
prime offer rate” (offer rates for the lowest-risk prime mortgage to be derived from the Freddie
Mac Primary Mortgage Market Survey). A lender making a higher-priced mortgage loan may not extend
credit without regard to the borrower’s ability to repay from sources other than the collateral and
must verify income and assets the lender relies on to determine the borrower’s ability to repay.
The new rules also significantly restrict prepayment penalties that may be charged on higher priced
mortgages and require escrow accounts for property taxes and insurance.
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USA PATRIOT ACT
The USA Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence
communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The
potential impact of the USA Patriot Act on financial institutions of all kinds is significant and
wide ranging. The USA Patriot Act contains sweeping anti-money laundering and financial
transparency laws and imposes various regulations including standards for verifying client
identification at account opening, and rules to promote cooperation among financial institutions,
regulators and law enforcement entities in identifying parties that may be
involved in terrorism or illegal money laundering.
SARBANES-OXLEY ACT OF 2002
The “Sarbanes–Oxley Act of 2002” (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 the 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 disclose 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 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 except by regulated financial institutions in conformity with applicable banking regulations governing insider lending. | ||
| • | 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 extended compliance dates for non-accelerated filers and smaller reporting companies
with respect to management reporting and outside auditors’ attestation regarding the adequacy of
internal controls over financial reporting (Section 404 of the Sarbanes-Oxley Act). The Company is
considered a smaller reporting company filer with the SEC and, under current law, began to comply
with the management reporting component of Section 404 for its year ended December 31, 2007, while
the outside auditors’ attestation component of Section 404 is currently scheduled to be required
for the year ending December 31, 2010.
TROUBLED ASSET RELIEF PROGRAM AND EMERGENCY ECONOMIC STABILIZATION ACT
The Emergency Economic Stabilization Act of 2008 (“EESA”) provides authority to the Treasury to
restore liquidity and stability to the United States financial system. The EESA authorizes the
Treasury to establish a Troubled Asset Relief Program (“TARP”) and, pursuant to TARP, the Treasury
established the Capital Purchase Program (“CPP”) to purchase senior preferred stock from eligible
financial institutions under standardized terms. Eligible institutions could apply to receive an
equity investment from the Treasury in an amount equal to between 1% and 3% of each institution’s
risk-weighted assets. The American Recovery and Reinvestment Act of 2009 (“ARRA”) amends certain
provisions of EESA, further regulates executive compensation for certain recipients of CPP funds
and includes a provision that, subject to consultation with the appropriate Federal banking agency,
directs the Treasury to permit financial institutions from whom the Treasury purchased preferred
stock to redeem such preferred stock without regard to whether such financial institution has
replaced such funds and not subject to any waiting period.
As disclosed elsewhere in this Annual Report on Form 10-K, on December 12, 2008, the Company issued
and sold (i) 15,000 shares of senior cumulative perpetual preferred stock, Series B, (“Senior
Preferred”), with a liquidation preference of $1,000 per share and (ii) ten-year warrants to
purchase up to 209,497 shares of the Company’s common stock at an exercise price of $10.74 per
share, to the Treasury as part of CPP, for an aggregate purchase price of $15,000,000. On November
18, 2009, the Company redeemed the Treasury’s Senior Preferred stock investment in the amount of
$15.0 million and on December 16, 2009, the Company repurchased the warrant for 209,497 shares of
common stock in the amount of $560,000. As a result of these actions, the Company is completely
separated from the TARP program and is no longer subject to EESA restrictions regarding dividends,
stock repurchases or executive compensation.
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MASSACHUSETTS BANK REGULATION
As a Massachusetts-chartered savings bank, the Bank is subject to supervision, regulation and
examination by the Massachusetts Division of Banks (the “Division”) and to various Massachusetts
statutes and regulations which govern, among other things, investment powers, lending and
deposit-taking activities, borrowings, maintenance of surplus and reserve accounts, distribution of
earnings, and payment of dividends. In addition, the Bank is subject to Massachusetts consumer
protection laws and regulations. The Division’s approval is required for a Massachusetts bank to
establish or close branches, merge with other banks, and undertake certain other activities.
Regulatory Enforcement Authority. Any Massachusetts bank that does not operate in accordance with
the regulations, policies and directives of the Commissioner may be subject to sanctions for
non-compliance. The Commissioner may under certain circumstances suspend or remove officers or
directors who have violated the law, conducted a bank’s business in a manner which is unsafe,
unsound or contrary to the depositors’ interests, or been negligent in the performance of their
duties. In addition, upon finding that a bank has engaged in an unfair or deceptive act or
practice, the Commissioner may issue an order to cease and desist and impose a fine on the bank.
Finally, Massachusetts consumer protection statutes applicable to a bank permit private individual
and class action law suits and provide for the rescission of consumer transactions, including
loans, and the recovery of statutory and punitive damages and attorneys’ fees in the case of
certain violations.
A Massachusetts predatory lending law restricts certain home mortgage lending practices. The law
applies to banks that make so-called “high cost mortgage loans” and, among other provisions,
requires credit counseling for borrowers, requires that banks have a “reasonable belief” that
borrowers are able to make required payments out of current income, and limits the financing of
points and fees.
Massachusetts law prohibits all mortgage lenders, including savings banks, from knowingly making a
home mortgage loan in Massachusetts for the purpose of re-financing an existing home mortgage loan
closed within the preceding five years, or re-financing any other debt of the borrower regardless
of when it was incurred, unless the refinancing is “in the borrower’s interest.” The Commissioner
has issued regulations further clarifying the factors to be considered by a lender in determining
whether a refinancing is in the borrower’s interest and the procedures a bank must follow to
demonstrate its compliance with the law.
Massachusetts enacted legislation effective in 2005 that revised and recodified a wide range of
Massachusetts banking laws. Among other things, the law revised Massachusetts’ branching and
lending laws, eliminating rigid restrictions on lending, but requiring Massachusetts banks to enact
comprehensive loan policies that carefully describe loan programs and the loan-to-value ratios,
amortization requirements, and other elements of those programs.
Parity Regulation. Massachusetts regulations allow Massachusetts banks to exercise additional or
more flexible parallel powers granted to national banks, federal savings banks and out of-state
state-chartered banks with branches in Massachusetts which are otherwise not permitted under state
law. Specifically, these regulations permit a Massachusetts-chartered bank that is either
“adequately capitalized” or “well capitalized,” is not in “troubled condition,” and has received as
least a “satisfactory” CRA rating during its most recent regulatory examination to establish
temporary branch offices, make certain investments in corporate affiliates and subsidiaries, engage
in lease financing transactions, engage in finder and certain electronic banking activities, invest
in community development and public welfare projects, and provide tax planning and preparation,
payroll and financial planning services, among others. The applicable procedures and requirements
vary according to the nature of the activity to be engaged in and the capitalization of the bank.
As of the date of this report, the Bank was “well capitalized,” had received a CRA rating of
“satisfactory” and was not in “troubled condition” and was therefore eligible to engage in certain
of the above-referenced activities, subject to the applicable procedures and requirements of
Massachusetts regulation.
In January 2005, the U.S. District Court for the District of Massachusetts ruled that the GLB Act
preempts four provisions of Massachusetts law regulating the way banks sell insurance as agent or
broker. The preempted rules are the so-called “referral prohibition,” the “referral fee
prohibition,” the “waiting period restriction” and the “separation restriction.” The “referral
prohibition” allows bank employees to refer customers to the bank’s insurance agency only if the
customer first inquires about insurance, and as a result prohibits a bank teller from initiating a
discussion about insurance with a customer. The “referral fee prohibition” forbids banks from
paying additional compensation to unlicensed bank employees including tellers who make referrals to
the bank’s insurance agency. The “waiting period restriction” allows banks to solicit the sale of
insurance from loan applicants only after the loan application has been approved and only after the
commitment letter has been issued in the case of a mortgage loan. Finally, the “separation
restriction” generally requires banks to keep insurance activities physically separated from a
bank’s loan and deposit activities, although regulations now permit tellers who refer customers to
licensed insurance producers to receive a one-time, nominal fee of a fixed dollar amount for each
referral.
Massachusetts Depositors Insurance Fund. All Massachusetts-chartered savings banks, including the
Bank, are required to be members of the Massachusetts Depositors Insurance Fund, Inc. (“Mass DIF”),
a corporation that insures savings bank deposits that are not otherwise covered by federal deposit
insurance. The Mass DIF is authorized to charge savings banks an annual assessment of up to 1/16th
of 1% of a savings bank’s deposits.
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SECURITIES AND EXCHANGE COMMISSION FILINGS ON COMPANY’S WEB SITE
Under Section 13 of the Securities Exchange Act of 1934, the Company files various reports with the
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), Forms 3, 4
& 5 (Statements of Beneficial Ownership), Forms S-3, S-8 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, at which all forms filed electronically may be accessed. The Company’s
website: www.riverbk.com has a section for SEC filings available free of charge and provides a link
under www.riverbk.com/home/about/stockholder.com. Information contained on our website and the SEC
website is not incorporated by reference into this Form 10-K. We have included our web address and
the SEC website address only as inactive textual references and do not intend them to be active
links to our website or the SEC website.
ITEM 1A. RISK FACTORS
Changes in interest rates could adversely impact the Company’s financial condition and results
of operations. The Company’s ability to make a profit, like that of most financial institutions,
substantially depends upon its net interest income, which is the difference between the interest
income earned on interest earning assets, such as loans and investment securities, and the interest
expense paid on interest-bearing liabilities, such as deposits and borrowings. However, certain
assets and liabilities may react differently to changes in market interest rates. Further, interest
rates on some types of assets and liabilities may fluctuate prior to changes in broader market
interest rates, while rates on other types of assets may lag behind. Additionally, some assets such
as adjustable-rate mortgages have features and rate caps which restrict changes in their interest
rates.
Factors such as inflation, recession, unemployment, fluctuations in the money supply, global
disorder such as that experienced as a result of the terrorist activity on September 11, 2001,
instability in domestic and foreign financial markets, and other factors beyond the Company’s
control may affect interest rates. Changes in market interest rates will also affect the level of
voluntary prepayments on loans and the receipt of payments on mortgage-backed securities, resulting
in the receipt of proceeds that may have to be reinvested at a lower rate than the loan or
mortgage-backed security being prepaid. Although the Company pursues an asset-liability management
strategy designed to control its risk from changes in market interest rates, changes in interest
rates can still have a material adverse effect on the Company’s business, financial condition,
results of operations and cash flows. For
example, if rates paid on deposits and borrowings reprice more quickly than the assets in a rising
interest rate environment, the Company would experience a compression of its net interest spread
and net interest margin. Alternatively, in a declining interest rate environment, if assets
reprice more quickly than its liabilities, net interest margin compression would occur.
If the Company has higher loan losses than it has provided for, its earnings could materially
decrease. The Company’s loan customers may not repay loans according to their terms, and the
collateral securing the payment of loans may be insufficient to assure repayment. The Company may
therefore experience significant credit losses that could have a material adverse effect on its
operating results. The Company makes various assumptions and judgments about the collectibility of
its loan portfolio, including the creditworthiness of borrowers and the value of the real estate
and other assets serving as collateral for the repayment of loans. In determining the size of the
allowance for loan losses, the Company relies on its experience and its evaluation of economic
conditions. If one or more of the assumptions prove to be incorrect, its current allowance for loan
losses may not be sufficient to cover losses inherent in its loan portfolio and adjustment may be
necessary to allow for different economic conditions or adverse developments in its loan portfolio.
Consequently, a problem with one or more loans could require the Company to significantly increase
the level of its provision for loan losses. In addition, federal and state regulators periodically
review the Company’s allowance for loan losses and may require it to increase its provision for
loan losses or recognize further loan charge-offs. Material additions to the allowance would
materially reduce the Company’s net income and could adversely affect its financial condition.
Moreover, when a loan is placed on non-accrual status, all interest previously accrued but not
collected is reversed against current period interest income.
A significant amount of the Company’s loans are concentrated in northeastern Massachusetts and
southern New Hampshire, and adverse conditions in this area could negatively impact its operations.
Substantially all of the loans the Company originates are secured by properties located in or are
made to businesses which operate in northeastern Massachusetts or southern New Hampshire. The
current concentration of the Company’s loan origination activities in northeastern Massachusetts
and southern New Hampshire, in the event of adverse economic conditions, downward pressure on
housing prices, political or business developments or natural hazards adversely affecting
northeastern Massachusetts or southern New Hampshire and the ability of property owners and
businesses in that area to make payments of principal and interest on the underlying loans, could
cause the Company to experience higher rates of loss and delinquency on its loans than if its loans
were more geographically diversified. Additionally, a decline in real estate values generally, or
in northeastern Massachusetts and southern New Hampshire specifically, could cause some of our real
estate loans to become inadequately collateralized, which would expose the Company to a greater
risk of loss. Additionally, a decline in real estate values could result in a decline in the
origination of such loans. Such higher rates of loss and delinquency and declines in real
estate values could have a material adverse effect on the Company’s results of operations or
financial condition.
The Company operates in a highly regulated environment and may be adversely impacted by changes in
law and regulations. The Company is subject to extensive regulation, supervision and examination.
See Supervision and Regulation in Item 1 hereof, Business. Due to the current economic climate, we
may face increased regulation of our industry. Compliance with such regulation may increase our
costs and limit our ability to pursue business opportunities. Any change in the laws or
regulations or failure by the Company to comply with applicable laws and regulations, or change in
regulators’ supervisory policies or examination
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procedures, whether by the Division, the FDIC, the
FRB, other state or federal regulators, the United States Congress, or the Massachusetts
legislature could have a material adverse effect on the Company’s business, financial condition,
results of operations, and cash flows.
The Company’s FDIC premiums have materially increased and could continue to do so because market
developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of
reserves to insured deposits. Additional increases could materially affect the Company’s earnings.
On February 27, 2009, the FDIC passed an interim rule that allowed it to charge banks a special
assessment of 20 bps on insured deposits to replenish the deposit insurance fund. This special
assessment was collected in the third quarter of 2009. Additionally, beginning April 1, 2009, the
FDIC increased its base fees on insured deposits, the combination of which increased the Company’s
2009 deposit insurance premiums by $1.2 million. See “Federal Deposit Insurance Premiums” in
Supervision and Regulation in Item I hereof, Business, for more information on the FDIC insurance
premiums. There can be no assurance that the Company’s FDIC premiums will not increase further
and, if so, that its earnings would not materially decrease as a result.
The impact of further contemplated legislative and regulatory changes cannot be predicted at this
time. The Obama Administration and Congress are actively considering a broad restructuring of the
regulatory landscape for financial institutions. Congress continues to actively consider a number
of legislative proposals that would affect the banking and financial services industries.
According to House Financial Services Committee Chairman Barney Frank, the Committee is crafting a
series of measures that will produce a comprehensive response to recent regulatory and market
failures by, among other things, regulating derivatives and ensuring proper mortgage lending. One
legislative proposal would consolidate the consumer protection responsibilities currently handled
by the federal banking agencies and the Federal Trade Commission into a single new agency and would
combine into a single agency the regulatory and supervisory functions of the federal banking
agencies. Congress is also considering a comprehensive systemic risk and regulatory restructuring
bill that may impose new mortgage reform and anti-predatory lending measures, and expand the
deposit insurance assessment base. The House of Representatives and the Senate are considering
different versions of regulatory reform proposals which, if approved by both bodies of Congress,
would have to be reconciled before a bill could become law. The Company cannot predict at this
time whether any of these legislative proposals will be enacted, and if so, what impact, if any, it
would have on the Company’s financial condition, operating results or business.
The Company has strong competition within its market area which may limit the Company’s growth and
profitability. The Company faces significant competition both in attracting deposits and in the
origination of loans. See Competition in Item 1 hereof, Business. Commercial banks, credit unions,
savings banks and savings and loan associations operating in our primary market area have
historically provided most of our competition for deposits. Mutual funds and internet-only bank
providers contribute additional competition in the quest for deposits. Competition for the
origination of real estate and other loans comes from other commercial, savings and cooperative
banks, thrift institutions, insurance companies, finance companies, other institutional lenders and
mortgage companies.
The success of the Company is dependent on retaining certain key personnel or attracting and
retaining additional, qualified personnel. The Company’s performance is largely dependent on the
talents and efforts of highly skilled individuals. The Company relies on key personnel, including
its executive officers, to manage and operate its business, including major revenue-generating
functions such as loan and deposit generation. The loss of key staff may adversely affect the
Company’s ability to maintain and manage these functions effectively, which could negatively affect
the Company’s revenues. In addition, loss of key personnel could result in increased recruiting and
hiring expenses, which could cause a decrease in the Company’s net income. The Company’s continued
ability to compete effectively depends on its ability to attract new employees and to retain and
motivate its existing employees.
The Company continues to encounter technological change, and may have fewer resources than many of
its larger competitors to continue to invest in technological improvements. The financial services
industry is undergoing rapid technological changes, with frequent introductions of new
technology-driven products and services. The effective use of technology increases efficiency and
enables financial institutions to serve their customers better and to reduce costs. The Company’s
success will depend, in part, upon its ability to address the needs of its customers by using
technology to provide products and services that will satisfy customer demands for convenience, as
well as to create additional efficiencies in its operations. Many of the Company’s larger
competitors have substantially greater resources to invest in technological improvements. The
Company may not be able to effectively implement new technology-driven products and services or be
successful in marketing these products and services to its customers.
The Company relies on dividends from the Bank for substantially all of its revenue. The Company is
a separate and distinct legal entity from the Bank. It receives substantially all of its revenue
from dividends paid by the Bank. These dividends are the principal source of funds used to pay
dividends on the Company’s common stock. Various federal and state laws and regulations limit the
amount of dividends that the Bank may pay to the Company. Without regulatory approval, the total
amount of dividends declared in any calendar year cannot exceed the Bank’s net income for the
current year, plus the Bank’s net income retained for the two previous years. As such, the Bank is
required to seek regulatory approval for the payment of dividends to the Company as of December 31,
2009. If the Bank is unable to pay dividends to the Company, then the Company will be unable to
pay its obligations or pay dividends on the Company’s common stock. The inability to receive
dividends from the Bank could have a material adverse effect on the
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Company’s business, financial
condition and results of operations.
Market fluctuations and changes in interest rates have had, and may continue to have, significant
and negative effects on the Company’s investment portfolio and stockholders’ equity. The Company’s
results of operations depend in part on the performance of its invested assets. The Company had an
investment portfolio with a fair value of $230.5 million at December 31, 2009, that is subject to:
| • | market value risk, which is the risk that invested assets will decrease in value due to a change in the prevailing market yields on our investments, an unfavorable change in the liquidity of an investment or an unfavorable change in the financial prospects or a downgrade in the credit rating of the issuer of an investment or one or more other factors; | ||
| • | reinvestment risk, which is the risk that interest rates will decline, an investment will be redeemed and the Company will not be able to reinvest the proceeds in a comparable investment that provides a yield equal to or greater than the investment which was redeemed; and | ||
| • | liquidity risk, which is the risk that the Company may have to sell assets at an undesirable time and/or price to provide funds for its business. |
If the Company’s investment portfolio were impaired by market or issuer-specific conditions to a
substantial degree, its liquidity, financial position and operating results could be materially
adversely affected.
Management may assess a decline in fair value as being temporary when in fact it is
other-than-temporary and, consequently, not charge the impairment to the Company’s earnings, which
could have a significant impact on its future operating results.
The carrying values of investment securities available for sale are derived from market prices
supplied by the Company’s investment custodian or, when no price is provided by the custodian, from
a third party valuation. Fair value is based on quoted market prices. Unrealized investment gains
and losses on such securities, to the extent that there is no “other-than-temporary impairment” of
value, are credited or charged, net of any tax effect, to a separate component of stockholders’
equity, known as “net accumulated other comprehensive income (loss),” until realized.
If a security is deemed other-than-temporarily impaired, management would adjust the security’s
cost basis to fair value through a realized loss on the income statement. After a security has
been written down for an other-than-temporary impairment, the new cost basis is used thereafter to
determine the amount of any unrealized holding gains and losses which are credited or charged, net
of any tax effect, to net accumulated other comprehensive income (loss), until realized.
Management considers available evidence in evaluating whether unrealized losses on individual
securities are other-than-temporary. This evaluation often involves estimating the outcome of
future events and judgment is required in determining whether factors exist that indicate that an
impairment loss has been incurred at the date of the financial statements. These factors are both
subjective and objective and include knowledge and experience about past and current events and
assumptions about future events. Management’s knowledge about past and current events regarding a
security and its issuer may be incomplete, or its assumptions about future events regarding a
security and its issue may prove to be incorrect. Accordingly, there is a risk that management may
assess a decline in fair value as being temporary when in fact it is other-than-temporary, or
subsequent events occur that cause management to conclude that a decline in fair value is other
than temporary, resulting in an impairment charge that could have a significant impact on the
Company’s future operating results and financial condition.
If the Company’s investment in the Federal Home Loan Bank of Boston becomes impaired, its earnings
and stockholders’ equity could decrease. The Company is required to own common stock of the FHLBB
to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds
under the FHLBB’s advance program. The aggregate cost and fair value of the FHLBB common stock as
of December 31, 2009 was $11.8 million based on its cost. FHLBB common stock is not a marketable
security. For the years ended December 31, 2009 and 2008, the FHLBB reported net losses, primarily
attributable to
the other-than-temporary impairment of certain private-label mortgage-backed securities. Further,
the FHLBB suspended dividends beginning in the quarter ended December 31, 2008 and has disclosed
that, based on current information, dividend payments in 2010 are unlikely and a freeze was enacted
on any stock redemptions, all in an effort to bolster regulatory capital. Further, the twelve
Federal Home Loan Banks are jointly and severally liable for each other’s debt, which means that
the FHLBB’s financial condition, and indirectly the value of FHLBB common stock, could be adversely
affected by losses, capital weaknesses or other financial problems at one or more of other regional
Federal Home Loan Banks. These and other developments could put into question whether the
fair value of FHLBB stock owned by the Company was less than its carrying value. Consequently, the
Company believes that there is a risk that its investment in FHLBB common stock could be deemed
impaired at some time in the future, and if this occurs, it would cause its earnings and
stockholders’ equity to decrease by the amount of the impairment charge.
When the Company becomes subject to the full SEC requirements under Section 404 of the
Sarbanes-Oxley Act of 2002, it will likely incur significant costs in connection with providing
outside auditors’ attestation reports on management’s internal control assertions. Section 404
requires that the Company prepare a management report on its internal control over financial
reporting and obtain an attestation on that report from its auditors in connection with its most
recent consolidated financial statements
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included with its annual report. Under current SEC
regulations, as a “smaller reporting company” under the federal securities laws, the Company became
subject to the management reporting component for its fiscal year ended December 31, 2007 and is
currently scheduled to become subject to the outside auditors’ attestation component of Section 404
of the Sarbanes-Oxley Act of 2002 for its fiscal year ending December 31, 2010. Many SEC reporting
companies have incurred significant costs in connection with getting the outside auditors
attestation. The Company will likely incur significant costs in connection with obtaining the
outside auditors’ attestation report of the Company’s internal control reports. If the Company
does incur such costs, the costs could have an adverse effect on the Company’s results of
operations.
When the Company becomes subject to the full SEC requirements under Section 404 of the
Sarbanes-Oxley Act of 2002, if its internal control reports disclose significant deficiencies or
material weaknesses, its stockholders and lenders could lose confidence in its financial reporting,
which would likely harm the trading price of its stock, its access to additional capital, and its
liquidity. During the past several years, various SEC reporting companies, when providing internal
control reports, disclosed significant deficiencies or material weaknesses in their internal
control over financial reporting. If the Company’s internal control reports disclose material
weaknesses, the Company’s stockholders could lose confidence in its financial reporting, which
would likely harm the trading price of its stock, its access to additional capital, and its
liquidity.
The tightening of available liquidity could limit the Company’s ability to replace deposits and
fund loan demand, which could adversely affect its earnings and capital levels. A tightening of
the credit market and the inability to obtain adequate money to replace deposits and fund continued
loan growth may negatively affect asset growth and, therefore earnings capability, and capital
levels. In addition to any deposit growth, maturity of investment securities and loan payments, we
rely on certain wholesale funding sources and uncommitted FHLBB advances to fund loans and replace
deposits. In the event of a further downturn in the economy, these additional funding sources could
be negatively affected which could limit the funds available to the Company. FHLBB has publicly
disclosed that, over time, current market trends may have a negative impact on FHLBB’s own
liquidity. Further, the twelve Federal Home Loan Banks are jointly and severally liable for each
other’s debt, which means that the FHLBB’s liquidity could be adversely affected by losses, capital
weaknesses or other financial problems at one or more of other regional Federal Home Loan Banks.
The Company’s liquidity position would be significantly constrained if we were unable to access
funds from the FHLBB or other funding sources.
If regulatory capital levels were to decline from “well capitalized” to “adequately capitalized,”
the Company’s expenses and sources of funding could be adversely affected. As of December 31,
2009, both the Company’s and the Bank’s regulatory capital levels were above the thresholds
necessary to qualify as “well capitalized.” If in the future the regulatory capital levels were to
decline from “well capitalized” to “adequately capitalized” the Company’s expenses and sources of
funding could be adversely affected. Among other things, under the FDIC’s risk-based assessment
system for determining deposit insurance premiums, an institution’s capital classification affects
the initial base assessment rate used to determine the deposit insurance premiums the institution
must pay. Under the FDIC rules, institutions that are “adequately capitalized” are not eligible
for the FDIC’s lowest base assessment rates. In addition, if the Bank is not classified as “well
capitalized,” it may not accept, renew or roll over any brokered deposit without an FDIC waiver or
offer deposit rates with an effective yield that exceeds by more than 75 basis points the
prevailing effective yields on insured deposits of comparable maturity in the relevant market area.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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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.
The following table sets forth certain information about the Bank’s offices as of December 31,
2009:
| Lease | ||||||||||||||||||||
| Year | Current | |||||||||||||||||||
| Acquired | Square | Owned/ | Term | Renewal | ||||||||||||||||
| Or Leased | Feet | Leased | Expires | Options | ||||||||||||||||
| CORPORATE OFFICES AND MAIN BANKING OFFICE | ||||||||||||||||||||
30 Massachusetts Ave. |
1992 | 45,315 | Owned | — | — | |||||||||||||||
No. Andover, MA 01845 |
||||||||||||||||||||
| BRANCH BANKING OFFICES | ||||||||||||||||||||
Massachusetts |
||||||||||||||||||||
342 North Main Street |
1995 | (1) | 2,449 | Leased | 2015 | One (5 yrs.) | ||||||||||||||
Andover, MA 01810 |
||||||||||||||||||||
10 South Broadway |
2009 | (2) | 2,170 | Owned | — | — | ||||||||||||||
Lawrence, MA 01843 |
||||||||||||||||||||
20 Jackson Street |
1968 | (3) | 2,369 | Leased | 2011 | — | ||||||||||||||
Methuen, MA 01844 |
||||||||||||||||||||
148 Lowell Street |
1979 | 5,234 | Owned | — | — | |||||||||||||||
Methuen, MA 01844 |
||||||||||||||||||||
New Hampshire |
||||||||||||||||||||
51 Crystal Ave. |
2007 | (4) | 2,600 | Leased | 2027 | Four (5 yrs.) | ||||||||||||||
Derry, NH 03038 |
||||||||||||||||||||
401-403 Main Street, Ste. 105 |
2004 | 2,500 | Leased | 2014 | Two (5 yrs.) | |||||||||||||||
Salem, NH 03079 |
||||||||||||||||||||
| (1) | The Bank has occupied the branch since 1979 and performed a sale-leaseback transaction in 1995. | |
| (2) | Prior to establishing this location in 2009 and opening a full service branch in January 2010, the Bank occupied a branch office at 300 Essex Street as a tenant for twelve years. | |
| (3) | The Bank has executed a lease agreement and received all regulatory approvals in 2009 and will re-locate its 20 Jackson Street branch in the summer of 2010. | |
| (4) | The Bank opened a full service branch at this location in January 2009. |
ITEM 3. LEGAL PROCEEDINGS
The Bank and the Company are, from time to time, involved as either a plaintiff or defendant in
various legal actions which are ordinary routine litigation incident to its business. None of
these actions are believed to be material, either individually or collectively, to the results of
operations and financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
13
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The Company’s stock trades on the Nasdaq Global Market under the symbol “LSBX”. Sales prices of
the stock are reported in the Wall Street Journal as “LSBCorp”. On February 28, 2010, the
closing price of LSB Corporation common stock was $11.72.
The following table sets forth for the fiscal periods indicated certain information with respect to
the sales prices of the Company’s common stock.
| Common Stock Prices | Cash | |||||||||||
| Fiscal Year | High | Low | Dividends | |||||||||
2009 |
||||||||||||
Fourth Quarter |
$ | 11.74 | $ | 9.40 | $ | 0.05 | ||||||
Third Quarter |
12.20 | 9.81 | 0.05 | |||||||||
Second Quarter |
10.67 | 8.12 | 0.05 | |||||||||
First Quarter |
9.04 | 7.11 | 0.15 | |||||||||
2008 |
||||||||||||
Fourth Quarter |
$ | 12.99 | $ | 7.25 | $ | 0.15 | ||||||
Third Quarter |
17.50 | 9.05 | 0.15 | |||||||||
Second Quarter |
16.68 | 14.86 | 0.14 | |||||||||
First Quarter |
16.95 | 15.50 | 0.14 | |||||||||
On March 5, 2010, there were approximately 765 holders of common stock. This number does not
reflect the number of persons or entities who hold their stock in nominee or “street” name through
various brokerage firms.
The Company anticipates that it will continue to pay dividends during 2010. In determining whether
to declare or pay any dividends, whether regular or special, the Board of Directors will take into
account the Company’s financial condition and results of operations, tax considerations, capital
requirements, industry standards and economic conditions. The regulatory restrictions that affect
the payment of dividends by the Bank to the Company discussed below will also be considered. The
Company cannot guarantee that it will not reduce or eliminate dividends in the future.
Dividends from the Company will depend, primarily, upon receipt of dividends from the Bank because
the Company has no significant source of income other than dividends from the Bank. Massachusetts
banking law and FDIC regulations limit distributions from the Bank to the Company. For example,
the Bank could not pay dividends if it were not in compliance with applicable regulatory capital
requirements. Without regulatory approval, the total amount of dividends declared in any calendar
year cannot exceed the Bank’s net income for the current year, plus the Bank’s net income retained
for the two previous years. As such, the Bank is required to seek regulatory approval for the
payment of dividends to the Company as of December 31, 2009. In addition, the Company is subject to
the Federal Reserve Board’s policy that dividends should be paid only out of current earnings and
only if the prospective rate of earnings retention by the Company appears consistent with its
capital needs, asset quality and overall financial condition. See “Supervision and Regulation” in
Item 1 hereof, Business, for further information.
Information on equity compensation plans required by Item 5 is incorporated by reference herein
from the section in the Company’s Proxy Statement entitled “Equity Compensation Plan Information.”
During the year ended December 31, 2009, there were no shares of stock repurchased under the
Company’s previously announced stock buyback program. The following information pertains to any
purchase made by or on behalf of LSB Corporation or any “affiliated purchaser,” as defined in
204.10b-18(a)(3) under the Securities Exchange Act of 1934, of shares of LSB Corporation common
stock during the indicated periods. On April 26, 2007, the Company announced a common stock
repurchase program to repurchase up to 230,000 shares. The Company has no deadline on the duration
of the repurchase program. Under the common stock repurchase program, the Company repurchased
154,976 shares, or approximately 3% of the Company’s outstanding common stock, at an average cost
of $16.12 per share, between April 26, 2007 and June 30, 2008. As a result of the other-than
temporary impairment charges recorded during 2008, the Company suspended its stock repurchase
program. The Company also was not permitted to reinstate the repurchase program while the
Treasury’s $15 million preferred stock investment was outstanding. There were no stock repurchases
during 2009 after the repurchase in November 2009 of the preferred stock from the Treasury, nor has
the Company announced its intention to resume its stock repurchase program. See Note 9 to
the Consolidated Financial Statements for further information.
14
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As disclosed elsewhere in this Annual Report on Form 10-K, on December 12, 2008, the Company issued
and sold (i) 15,000 shares of Senior Preferred, with a liquidation preference of $1,000 per share
and (ii) ten-year warrants to purchase up to 209,497 shares of the Company’s common stock at an
exercise price of $10.74 per share, to the Treasury as part of CPP, for an aggregate purchase price
of $15,000,000. The sale of Senior Preferred and warrants to the Treasury was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The Company did
not engage in general solicitation or advertising with regard to the issuance and sale of such
securities and did not offer securities to the public in connection with the issuance and sale of
Senior Preferred and warrants to the Treasury. On November 18, 2009, the Company redeemed the
Treasury’s Senior Preferred stock investment in the amount of $15.0 million and on December 16,
2009, the Company repurchased the warrant for 209,497 shares of common stock in the amount of
$560,000. See “Troubled Asset Relief Program and Emergency Economic Stabilization Act” in
Supervision and Regulation in Item 1 hereof, Business, and Note 9 to the Consolidated Financial
Statements for more information.
15
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
| December 31, | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
(Dollars in Thousands, Except Per Share Data) |
||||||||||||||||||||
Balance
Sheet Data: |
||||||||||||||||||||
Total assets |
$ | 816,598 | $ | 761,324 | $ | 621,651 | $ | 542,965 | $ | 521,800 | ||||||||||
Loans, gross |
536,619 | 452,621 | 358,113 | 288,163 | 234,611 | |||||||||||||||
Allowance for loan losses |
7,168 | 5,885 | 4,810 | 4,309 | 4,126 | |||||||||||||||
Federal funds sold |
6,597 | 6,469 | 56 | 11,871 | 198 | |||||||||||||||
Investment securities |
230,533 | 264,561 | 230,596 | 218,682 | 260,046 | |||||||||||||||
Deposits |
492,794 | 408,663 | 322,083 | 295,662 | 303,087 | |||||||||||||||
Borrowed funds |
259,082 | 276,490 | 235,351 | 184,782 | 153,380 | |||||||||||||||
Stockholders’ equity |
60,520 | 72,142 | 60,298 | 58,531 | 59,922 | |||||||||||||||
| Year Ended December 31, | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Operating
Data: |
||||||||||||||||||||
Interest income |
$ | 40,842 | $ | 38,755 | $ | 35,008 | $ | 28,956 | $ | 25,558 | ||||||||||
Interest expense |
21,267 | 21,880 | 19,681 | 15,160 | 11,638 | |||||||||||||||
Net interest income |
19,575 | 16,875 | 15,327 | 13,796 | 13,920 | |||||||||||||||
Provision (credit) for loan losses |
1,640 | 1,285 | 645 | 160 | — | |||||||||||||||
Impairment write-downs on securities |
— | (10,105 | ) | — | — | — | ||||||||||||||
Gains (losses) on sales of investment securities |
1,832 | — | — | (2,417 | ) | — | ||||||||||||||
Gains on pension plan termination |
— | — | 762 | 602 | — | |||||||||||||||
Prepayment penalty on FHLB advances |
(127 | ) | — | — | — | — | ||||||||||||||
Other non-interest income |
2,091 | 2,116 | 1,922 | 1,410 | 1,555 | |||||||||||||||
Lawsuit judgment collected |
— | — | — | — | 2,233 | |||||||||||||||
Salaries and employee benefits expense |
7,083 | 6,706 | 6,836 | 7,399 | 6,899 | |||||||||||||||
Other non-interest expense |
6,944 | 5,170 | 4,721 | 5,621 | 4,245 | |||||||||||||||
Income (loss) before income taxes |
7,704 | (4,275 | ) | 5,809 | 211 | 6,564 | ||||||||||||||
Income tax expense (benefit) |
2,667 | (1,552 | ) | 2,091 | 85 | 2,407 | ||||||||||||||
Net income (loss) before preferred stock
dividends and accretion |
5,037 | (2,723 | ) | 3,718 | 126 | 4,157 | ||||||||||||||
Preferred stock dividends and accretion |
(1,245 | ) | (4 | ) | — | — | — | |||||||||||||
Net income (loss) attributable to
common shareholders |
$ | 3,792 | $ | (2,727 | ) | 3,718 | 126 | 4,157 | ||||||||||||
Basic earnings (loss) per share |
$ | 0.85 | $ | (0.61 | ) | $ | 0.81 | $ | 0.03 | $ | 0.94 | |||||||||
Diluted earnings (loss) per share |
$ | 0.85 | $ | (0.61 | ) | $ | 0.81 | $ | 0.03 | $ | 0.92 | |||||||||
| At or for the Year Ended December 31, | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Other
Data: |
||||||||||||||||||||
Efficiency ratio |
64.74 | % | 62.54 | % | 67.00 | % | 85.66 | % | 72.19 | % | ||||||||||
Interest rate spread |
2.23 | 2.14 | 2.19 | 2.22 | 2.34 | |||||||||||||||
Net interest margin on average earning
assets |
2.56 | 2.50 | 2.72 | 2.68 | 2.66 | |||||||||||||||
Return (loss) on average assets [net income (loss)/
average assets] |
0.64 | (0.39 | ) | 0.64 | 0.02 | 0.77 | ||||||||||||||
Return (loss) on average equity [net income (loss)/
average stockholders’ equity] |
6.97 | (4.63 | ) | 6.35 | 0.22 | 7.14 | ||||||||||||||
Dividend payout ratio (dividends declared per
share divided by diluted earnings per share) |
35.29 | n/m | 69.14 | n/m | 60.87 | |||||||||||||||
Average stockholders’ equity to average
assets ratio |
9.15 | 8.41 | 10.10 | 10.80 | 10.81 | |||||||||||||||
Cash dividends declared and paid per
common share |
$ | 0.30 | $ | 0.58 | $ | 0.56 | $ | 0.56 | $ | 0.56 | ||||||||||
Book value per share with CPP |
13.43 | 16.14 | 13.35 | 12.74 | 13.42 | |||||||||||||||
Book value per share excluding CPP |
13.43 | 12.78 | 13.35 | 12.74 | 13.42 | |||||||||||||||
Tangible book value per share with CPP
[excludes accumulated other
comprehensive income/(loss)] |
12.57 | 15.40 | 13.26 | 13.05 | 13.58 | |||||||||||||||
Tangible book value per share excluding CPP |
12.57 | 12.04 | 13.26 | 13.05 | 13.58 | |||||||||||||||
Market value per share at year end |
9.71 | 7.31 | 16.00 | 16.57 | 17.35 | |||||||||||||||
| n/m = | not meaningful |
16
Table of Contents
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION |
FORWARD-LOOKING STATEMENTS AND FACTORS WHICH MAY AFFECT FUTURE RESULTS
Certain statements in this Management’s Discussion and Analysis are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 and are made based upon, among other things, the Company’s current
assumptions, expectations and beliefs concerning future developments and their potential effect on
the Company. Additional information regarding the treatment of forward-looking statements is
included at the beginning of Part I above.
OVERVIEW
The past two years have been an extraordinary time the banking industry. Margin issues, credit
issues and liquidity, as well as securities impairment, posed serious challenges for the industry.
In the midst of these challenges, the Company has been successful in growing local deposits and
increasing total loans.
The Company’s financial results are dependent on the following areas of the income statement: net
interest income, provision for loan losses, non-interest income, non-interest expense and provision
for income taxes. Net interest income is the primary earnings of the Company and the main focus of
management. Net interest income is the difference between interest earned on loans and investment
securities and interest paid on deposits and borrowings. Deposits and borrowings have short
durations and the cost of these funds do not rise and fall in tandem with earnings on loans and
investment securities. There are many risks involved in managing net interest income including but
not limited to credit risk, interest rate risk and duration risk. These risks have a direct impact
on the level of net interest income. The Company manages these risks through credit review by an
outside firm and regular meetings of its Asset and Liability Management Committee (“ALCO”). The
credit review process reviews loans for underwriting and grading of loan quality while ALCO reviews
liquidity, interest rate risk and capital resources. Loan quality has a direct impact on the amount
of provisions for loan losses the Company reports.
Non-interest income includes net gains or losses on investment securities and various fees.
Customers’ loan and deposit accounts generate various amounts of fee income depending on the
product selected. The Company receives fee income from servicing loans that were sold in previous
periods. Non-interest income is primarily impacted by the volume of customers’ transactions, which
could change in response to changes in interest rates, pricing and competition.
Non-interest expenses include salaries and employee benefits, occupancy and equipment,
professional, data processing and other expenses of the Company, which generally are directly
related to business volume and are managed by a budget process. FDIC insurance premiums would have
been $258,000 in 2008, however, the Company was able to apply credits of $175,000 for a net expense
of $83,000. In December, 2008, the FDIC board approved a 7 basis points (bps) increase in premiums
charged to banks for deposit insurance, boosting the rate to between 12 cents and 50 cents per $100
of domestic deposits from a range of five cents to 43 cents due to market developments that have
significantly depleted the DIF and reduced the ratio of reserves to insured deposits. In February
2009, the FDIC enacted a special assessment of 20 bps on insured deposits to replenish the deposit
insurance fund. This special assessment was collected in the third quarter of 2009. Additionally,
beginning April 1, 2009, the FDIC increased its base fees on insured deposits, the combination of
which increased the Company’s 2009 deposit premiums approximately $1.2 million. See “Federal
Deposit Insurance Premiums” in Supervision and Regulation in Item 1 hereof, Business, for more
information on the FDIC premiums.
Provisions for income taxes are directly related to earnings of the Company. Changes in the
statutory tax rates and the earnings of the Company, the Bank and its subsidiaries, as well as the
mix of earnings among the different entities would affect the amount of income tax expense reported
and the overall effective income tax rate recorded.
For the past several years, short-term market interest rates (which are used as a general guide in
pricing deposits) have decreased while longer-term market interest rates (which are used to
benchmark the pricing on loans) have not changed by similar amounts. While the Bank has had
success in changing the mix of its earning assets into higher yielding commercial real estate and
construction loans and away from lower yielding investment securities, it is still challenged in
generating deposit balances, and in particular, lower costing core deposit accounts. This
compression is felt throughout the banking industry, but the Company is particularly vulnerable
since a relatively large portion of its earning assets are funded by wholesale borrowings. The
Company is committed to maintaining its current strategy of improving the overall yield of the
assets while carefully managing its cost of funds to the best of its abilities.
Lastly, there are areas of the Consolidated Financial Statements where significant estimates or
assumptions are used, including the provision and allowance for loan losses, the provision for
income taxes, and the evaluation of investment securities for other-than-temporary impairment.
Management regularly monitors the application of the Company’s Critical Accounting Policies in
relation to the nature and impact of these estimates and assumptions on earnings. The Critical
Accounting Policies are discussed below.
17
Table of Contents
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those policies that involve significant judgments and
uncertainties, and could potentially result in materially different results under different
assumptions and conditions. The preparation of the financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis,
management evaluates its estimates, including those related to the allowance for loan losses,
income taxes and impairment of securities. Actual results could differ from the amount derived
from managements’ estimates and assumptions using different conditions. The Company’s critical
accounting policies are as follows:
ALLOWANCE FOR LOAN LOSSES
The allowance balance reflects management’s assessment of estimated credit losses inherent in the
loan portfolio 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 and by negative (credit)
provisions to the allowance. For a further discussion of the Company’s methodology of assessing the
adequacy of the allowance for loan losses, see “Allowance For Loan Losses” in Financial Condition
in Item 7 hereof, Management’s Discussion and Analysis of Financial Condition and Results of
Operations and Note 1 to the Consolidated Financial Statements.
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.
For example, 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.
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 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 “Income Taxes” in Results of Operations in Item 7 hereof,
Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes 1 &
8 to the Consolidated Financial Statements.
INVESTMENT SECURITIES
The evaluation of the impairment of the securities portfolio requires a process that considers both
the historical and current financial performance and environment of the security, credit worthiness
of the issuer, and potential recovery measures of each impaired investment. Management
periodically reviews all impaired securities to identify those for which impairment may be
other-than-temporary. Impaired securities are monitored and evaluated based upon the above
considerations, and if the decline in fair value is judged to be other-than-temporary, the cost
basis is written down to the current fair value and the amount of the credit-related write-down is
included in the results of operations while non-credit related impairment is recognized in other
comprehensive income. For a further discussion on investment securities, see “Investment
Securities,” in Financial Condition in Item 7 hereof, Management’s Discussion and Analysis of
Financial Condition and Results of Operation and Notes 1 & 2 to the Consolidated Financial
Statements.
FINANCIAL CONDITION
OVERVIEW
Total assets increased to $816.6 million at December 31, 2009, up from $761.3 million at December
31, 2008. The increase in asset size is mainly attributable to strong loan growth since year end
2008 of $84.0 million, an increase of $3.1 million in prepaid FDIC insurance, an increase in cash
and due from banks totaling $1.8 million, and an increase in premises and equipment amounting to
$1.7 million. The funding of the asset growth was derived from an increase in deposits of $84.1
million since 2008, coupled with the reduction of investment securities portfolio of $34.0 million
due to maturities and regular amortization of collateralized mortgage obligations and
mortgage-backed securities totaling $79.3 million and sales of investment securities available for
sale of $31.6 million.
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-sponsored enterprise obligations, mortgage-backed securities, other investment
securities, and short-term investments comprise the Company’s earning assets. Total earning assets
averaged $765.5 million in 2009, an increase of $89.9 million or 13.3% from 2008.
18
Table of Contents
One of the Company’s primary objectives continues to be the origination of loans that are soundly
underwritten and collateralized. The Company’s average loan portfolios increased $92.9 million in
2009 to $496.9 million.
The Company increases the investment portfolio through funds obtained from depositors, the FHLBB,
repurchase agreements and other borrowings when it is profitable to do so. The average balance of
investment securities, including U.S. Treasury and government-sponsored enterprise obligations,
mortgage-backed securities, other bonds and equity securities, and short-term investments amounted
to $268.6 million in 2009 as compared to $271.6 million in 2008. These securities represent 34.0%
of the Company’s total average assets at December 31, 2009 versus 38.9% of total average assets at
December 31, 2008. The Company has reduced its reliance on the investment portfolio during this
period of low interest rates
INVESTMENT SECURITIES
The investment portfolio totaled $230.5 million and $264.6 million, respectively, at December 31,
2009 and 2008, reflecting a decrease of $34.0 million or 12.9% in 2009. The change in 2009
resulted from a decrease in mortgage-backed securities totaling $46.7 million partially offset by
an increase of $17.8 million in government-sponsored enterprise obligations. The Company has
another $11.8 million in Federal Home Loan Bank of Boston stock that is considered a restricted
stock investment and is carried at cost that is excluded from the table below. For more
information on investment securities, see Notes 2 and 3 to the Consolidated Financial Statements.
The fair value and percentage distribution of investment securities available for sale at December
31, follow:
| 2009 | 2008 | |||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
(Dollars in Thousands) |
||||||||||||||||
U. S. Treasury obligations |
$ | 5,794 | 2.5 | % | $ | 6,004 | 2.3 | % | ||||||||
Government-sponsored enterprise
obligations |
33,518 | 14.5 | 15,722 | 5.9 | ||||||||||||
Mortgage-backed securities |
140,529 | 61.1 | 187,206 | 70.8 | ||||||||||||
Collateralized mortgage obligations |
45,159 | 19.6 | 47,059 | 17.8 | ||||||||||||
Corporate obligations |
2,378 | 1.0 | 5,683 | 2.1 | ||||||||||||
Mutual funds |
966 | 0.4 | 958 | 0.4 | ||||||||||||
Equity securities |
2,189 | 0.9 | 1,929 | 0.7 | ||||||||||||
Total |
$ | 230,533 | 100.0 | % | $ | 264,561 | 100.0 | % | ||||||||
There were no securities held to maturity during 2009 and 2008.
The maturities and weighted average yields of investment securities available for sale at December
31, 2009, follow:
| Within | Weighted | One to | Weighted | Five | Weighted | Over | Weighted | |||||||||||||||||||||||||||||||||
| One | Average | Five | Average | to Ten | Average | Ten | Average | Average | ||||||||||||||||||||||||||||||||
| Year | Yield | Years | Yield | Years | Yield | Years | Yield | Total | Yield | |||||||||||||||||||||||||||||||
(Dollars in Thousands) |
||||||||||||||||||||||||||||||||||||||||
U. S. Treasury bonds and
government-sponsored
enterprise obligations |
$ | 500 | 0.54 | % | $ | 38,812 | 2.28 | % | $ | — | — | % | $ | — | — | % | $ | 39,312 | 2.26 | % | ||||||||||||||||||||
Mortgage-backed
securities |
849 | 3.85 | % | 8,489 | 4.27 | % | 20,054 | 4.03 | % | 111,137 | 5.56 | % | 140,529 | 5.25 | % | |||||||||||||||||||||||||
Collateralized mortgage
obligations |
— | — | % | 83 | 8.00 | % | 9,090 | 3.77 | % | 35,986 | 3.82 | % | 45,159 | 3.82 | % | |||||||||||||||||||||||||
Corporate obligations |
2,378 | 5.66 | % | — | — | % | — | — | % | — | — | % | 2,378 | 5.66 | % | |||||||||||||||||||||||||
Total |
$ | 3,727 | 4.56 | % | $ | 47,384 | 2.65 | % | $ | 29,144 | 3.95 | % | $ | 147,123 | 5.13 | % | $ | 227,378 | 4.45 | % | ||||||||||||||||||||
LOANS
Total loans at December 31, 2009 and 2008 amounted to $536.6 million and $452.6 million,
respectively, reflecting an increase of $84.0 million or 18.6% in 2009. Corporate loans increased
$59.0 million or 18.5% during 2009. Commercial real estate loans increased $76.1 million or 36.9%
and commercial and construction loans decreased $1.8 million or 5.2% and $15.4 million or 19.7%,
respectively. Retail loans increased $25.0 million or 18.7%. Residential real estate loans and
home equity loans increased $22.2
19
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million or 20.3% and $3.0 million or 12.6%, respectively, while
consumer loans decreased $174,000 or 20.9%. The Company believes that the increase in the
portfolios was primarily due to customers taking advantage of the low interest rate environment as
well as disruption of conduit lenders and withdrawal of lending by large, multi-national banks.
These creditworthy opportunities have allowed the corporate loans, in particular, to grow over the
past several years. For more information on loans, see “Interest Rate Sensitivity” in Item 7A
hereof, Quantitative and Qualitative Disclosures About Market Risk, and Note 4 to the Consolidated
Financial Statements.
The components of the loan portfolio at December 31, follow:
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
| Balance | Percent | Balance | Percent | Balance | Percent | Balance | Percent | Balance | Percent | |||||||||||||||||||||||||||||||
(Dollars in Thousands) |
||||||||||||||||||||||||||||||||||||||||
Residential
real estate loans: |
||||||||||||||||||||||||||||||||||||||||
Fixed rate |
$ | 98,497 | 18.4 | % | $ | 68,040 | 15.0 | % | $ | 49,513 | 13.8 | % | $ | 39,076 | 13.5 | % | $ | 34,028 | 14.5 | % | ||||||||||||||||||||
Adjustable rate |
32,944 | 6.1 | 41,236 | 9.1 | 30,230 | 8.4 | 30,800 | 10.7 | 28,159 | 12.0 | ||||||||||||||||||||||||||||||
Loans held for sale |
— | — | — | — | — | — | — | — | 472 | 0.2 | ||||||||||||||||||||||||||||||
| 131,441 | 24.5 | 109,276 | 24.1 | 79,743 | 22.2 | 69,876 | 24.2 | 62,659 | 26.7 | |||||||||||||||||||||||||||||||
Home equity loans: |
||||||||||||||||||||||||||||||||||||||||
Fixed rate |
9,577 | 1.8 | 12,398 | 2.7 | 13,821 | 3.9 | 11,170 | 3.9 | 3,592 | 1.5 | ||||||||||||||||||||||||||||||
Adjustable rate |
17,426 | 3.2 | 11,574 | 2.6 | 9,225 | 2.6 | 9,169 | 3.2 | 6,820 | 2.9 | ||||||||||||||||||||||||||||||
| 27,003 | 5.0 | 23,972 | 5.3 | 23,046 | 6.5 | 20,339 | 7.1 | 10,412 | 4.4 | |||||||||||||||||||||||||||||||
Consumer loans |
657 | 0.1 | 831 | 0.2 | 1,007 | 0.3 | 975 | 0.3 | 468 | 0.2 | ||||||||||||||||||||||||||||||
Total retail loans |
159,101 | 29.6 | 134,079 | 29.6 | 103,796 | 29.0 | 91,190 | 31.6 | 73,539 | 31.3 | ||||||||||||||||||||||||||||||
Construction and
land development |
62,772 | 11.7 | 78,169 | 17.3 | 58,770 | 16.4 | 45,681 | 15.9 | 25,923 | 11.0 | ||||||||||||||||||||||||||||||
Commercial real
estate loans: |
||||||||||||||||||||||||||||||||||||||||
Fixed rate |
69,971 | 13.0 | 50,925 | 11.3 | 29,270 | 8.2 | 17,434 | 6.1 | 14,793 | 6.3 | ||||||||||||||||||||||||||||||
Adjustable rate |
212,745 | 39.7 | 155,652 | 34.3 | 137,813 | 38.5 | 122,988 | 42.6 | 111,038 | 47.4 | ||||||||||||||||||||||||||||||
| 282,716 | 52.7 | 206,577 | 45.6 | 167,083 | 46.7 | 140,422 | 48.7 | 125,831 | 53.7 | |||||||||||||||||||||||||||||||
Commercial business |
32,030 | 6.0 | 33,796 | 7.5 | 28,464 | 7.9 | 10,870 | 3.8 | 9,318 | 4.0 | ||||||||||||||||||||||||||||||
Total corporate loans |
377,518 | 70.4 | 318,542 | 70.4 | 254,317 | 71.0 | 196,973 | 68.4 | 161,072 | 68.7 | ||||||||||||||||||||||||||||||
Total loans |
536,619 | 100.0 | % | 452,621 | 100.0 | % | 358,113 | 100.0 | % | 288,163 | 100.0 | % | 234,611 | 100.0 | % | |||||||||||||||||||||||||
Allowance for loan losses |
7,168 | 5,885 | 4,810 | 4,309 | 4,126 | |||||||||||||||||||||||||||||||||||
Loans, net |
$ | 529,451 | $ | 446,736 | $ | 353,303 | $ | 283,854 | $ | 230,485 | ||||||||||||||||||||||||||||||
The maturity distribution for construction and commercial loans at December 31, 2009, follows:
| Due After | ||||||||||||||||
| Due Within | One Through | Due After | ||||||||||||||
| One Year | Five Years | Five Years | Total | |||||||||||||
(In Thousands) |
||||||||||||||||
Construction |
$ | 40,740 | $ | 15,451 | $ | 6,581 | $ | 62,772 | ||||||||
Commercial |
21,081 | 5,163 | 5,786 | 32,030 | ||||||||||||
Total |
$ | 61,821 | $ | 20,614 | $ | 12,367 | $ | 94,802 | ||||||||
Of construction loans and commercial loans maturing more than one year after December 31, 2009,
$6.4 million have fixed rates and $26.6 million have floating or variable rates.
At December 31, 2009, the Bank had commercial loan balances participated out to various banks
amounting to $10.6 million, compared to $11.1 million at December 31, 2008. Balances participated
out to other institutions are not carried as assets on the Company’s financial statements. Loans
originated by other banks in which the Bank is the participating institution are carried at the
Bank’s pro rata share of ownership and amounted to $10.6 million and $11.4 million, respectively,
at December 31, 2009 and December 31, 2008. The Bank performs an independent credit analysis of
each commitment prior to participation in the loan.
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 estimated credit losses
inherent in the Bank’s loan portfolio 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
20
Table of Contents
loan losses. Collateral value on a loan-by-loan basis, trends in the nature and volume of the loan
portfolio, trends in 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 Company believes that the allowance for loan losses
reflects all information available at the end of each year. The Company considers the year end
2009 level of the allowance for loan losses to be appropriate and adequate. The allowance as a
percentage of total loans was 1.34% at December 31, 2009 and 1.30% at December 31, 2008. The
corporate loan portfolio experienced moderate but increasing delinquencies throughout 2009 in
conjunction with declines in the overall jobless rate experienced during the same period. The
nonaccrual loans represent owner-occupied commercial real estate as well as construction of retail
commercial space. The increased levels of delinquent loans combined with the levels of loan
charge-offs experienced in 2009 along with an increase in specific reserve allocations on impaired
loans supported the reasonableness of the allowance coverage rise to 1.34% as of December 31, 2009.
See Note 1 to the Consolidated Financial Statements for a discussion of the accounting policy
related to the allowance for loan losses.
Impaired loans are corporate loans and individually significant residential mortgage loans for
which it is probable that the Company will not be able to collect all amounts due according to the
contractual terms of the loan agreement. In addition, all loans considered trouble debt
restructures (TDR’s) are initially classified as impaired. 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 evaluated individually for impairment.
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 loan. When
foreclosure is probable, impairment is based on the fair value of the collateral which can be a
combination of the loan’s original appraisal or, in certain instances, an updated appraisal is used
to determine an appropriate fair value.
The level of loan growth during 2009 experienced in the commercial real estate category, combined
with the increase in the levels of loan charge-offs and specific reserve allocations on impaired
loans all resulted in a provision for loan losses of $1.6 million in the year 2009 compared to a
provision in 2008 in the amount of $1.3 million. The Company had net charge-offs of $357,000 in
2009 compared to $210,000 in 2008.
The following table summarizes changes in the allowance for loan losses for the years ended December 31:
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(Dollars in Thousands) |
||||||||||||||||||||
Balance at beginning of year |
$ | 5,885 | $ | 4,810 | $ | 4,309 | $ | 4,126 | $ | 4,140 | ||||||||||
Charge-offs by loan type: |
||||||||||||||||||||
Residential mortgage |
— | — | — | — | — | |||||||||||||||
Commercial |
(43 | ) | (80 | ) | — | — | — | |||||||||||||
Commercial real estate |
(315 | ) | (111 | ) | (121 | ) | — | — | ||||||||||||
Construction and land development |
— | (20 | ) | — | — | — | ||||||||||||||
Consumer |
(2 | ) | (3 | ) | (36 | ) | (30 | ) | (25 | ) | ||||||||||
Total charge-offs |
(360 | ) | (214 | ) | (157 | ) | (30 | ) | (25 | ) | ||||||||||
Recoveries by loan type: |
||||||||||||||||||||
Residential mortgage |
— | — | — | — | — | |||||||||||||||
Commercial |
— | — | — | — | — | |||||||||||||||
Commercial real estate |
2 | 3 | 3 | 32 | 2 | |||||||||||||||
Construction and land development |
— | — | — | — | — | |||||||||||||||
Consumer |
1 | 1 | 10 | 21 | 9 | |||||||||||||||
Total recoveries |
3 | 4 | 13 | 53 | 11 | |||||||||||||||
Net (charge-offs) recoveries |
(357 | ) | (210 | ) | (144 | ) | 23 | (14 | ) | |||||||||||
Provision (credit) for loan losses |
1,640 | 1,285 | 645 | 160 | — | |||||||||||||||
Ending balance |
$ | 7,168 | $ | 5,885 | $ | 4,810 | $ | 4,309 | $ | 4,126 | ||||||||||
Ratio of net (charge-offs) recoveries to average loans
outstanding during the period |
(0.07 | )% | (0.05 | )% | (0.04 | )% | 0.01 | % | (0.01 | )% | ||||||||||
Allowance as a % of total loans |
1.34 | % | 1.30 | % | 1.34 | % | 1.50 | % | 1.76 | % | ||||||||||
21
Table of Contents
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.
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
| (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 and land development,
commercial and commercial real estate |
$ | 6,450 | 70.4 | % | $ | 5,392 | 70.4 | % | $ | 4,338 | 71.0 | % | $ | 3,606 | 68.4 | % | $ | 3,530 | 68.7 | % | ||||||||||||||||||||
Residential mortgage and home equity |
508 | 29.5 | 444 | 29.4 | 353 | 28.7 | 297 | 31.3 | 290 | 31.1 | ||||||||||||||||||||||||||||||
Consumer |
36 | 0.1 | 43 | 0.2 | 36 | 0.3 | 39 | 0.3 | 21 | 0.2 | ||||||||||||||||||||||||||||||
Unallocated |
174 | N/A | 6 | N/A | 83 | N/A | 367 | N/A | 285 | N/A | ||||||||||||||||||||||||||||||
| $ | 7,168 | 100.0 | % | $ | 5,885 | 100.0 | % | $ | 4,810 | 100.0 | % | $ | 4,309 | 100.0 | % | $ | 4,126 | 100.0 | % | |||||||||||||||||||||
In determining the adequacy of the allowance for loan losses, the Company aggregates estimated
credit losses 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.
Construction, commercial, commercial real estate and individually significant residential real
estate loans are reviewed individually for impairment and are evaluated for collectibility and an
allocation is made based on an assessment of the net realizable value of any collateral if the
collateral is dependent, or by present value of its expected cash flows. The Company categorizes
non-impaired loans into different pools of risk. Each risk level allocation factor has been
determined based upon the Company’s estimate of expected loss for loans with similar credit
characteristics based upon historical loss experience, together with the Company’s assessment of
economic 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 unless they qualify as TDR’s and an allocation
factor is assessed based upon the Company’s historical loss experience together with an assessment
of future economic trends, conditions and other relevant factors that may have an impact on
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.
In 2009, due to the continued uncertainties in the economy, the unallocated portion of the reserve
in the table reflected above increased over the level unallocated in 2008.
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 and adequate to cover the
estimated credit losses inherent in the Company’s loan portfolio.
POTENTIAL PROBLEM LOANS
The Company has a loan review and grading system. During the loan review process, deteriorating
conditions of certain loans are identified in which erosion of the borrower’s ability to comply
with the original terms of the loan agreement could potentially result in the future 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. There were no potential problem loans
identified at December 31, 2009 or December 31, 2008 other than those already classified as
non-performing or impaired as of those dates. Subsequent to year-end 2009, the Bank modified the
interest rate on a residential construction project as the development experienced a slowdown in
sales activity during the winter months. This $3.2 million loan received interest relief for 10
months to ease the cash flow burden and fully expects to sell its remaining units.
22
Table of Contents
RISK ASSETS
Risk assets consist of non-performing loans and OREO. The components of risk assets at December 31,
follow:
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(Dollars in Thousands) |
||||||||||||||||||||
Risk assets: |
||||||||||||||||||||
Non-performing loans: |
||||||||||||||||||||
Residential real estate |
$ | 1,211 | $ | 276 | $ | 281 | $ | 37 | $ | 32 | ||||||||||
Construction and land development |
2,527 | 350 | — | — | — | |||||||||||||||
Commercial real estate |
1,528 | 1,951 | 1,242 | 1,020 | — | |||||||||||||||
Commercial business |
683 | — | — | — | — | |||||||||||||||
Equity |
54 | 29 | — | — | — | |||||||||||||||
Total non-performing loans |
6,003 | 2,606 | 1,523 | 1,057 | 32 | |||||||||||||||
Other real estate owned: |
||||||||||||||||||||
Land |
— | 120 | — | — | — | |||||||||||||||
OREO valuation allowance |
— | — | — | — | — | |||||||||||||||
Total other real estate owned |
— | 120 | — | — | — | |||||||||||||||
Total risk assets |
$ | 6,003 | $ | 2,726 | $ | 1,523 | $ | 1,057 | $ | 32 | ||||||||||
Restructured loans |
$ | 2,634 | $ | 820 | $ | 90 | $ | — | $ | — | ||||||||||
Risk assets as a percent of total loans and OREO |
1.1 | % | 0.6 | % | 0.4 | % | 0.4 | % | 0.0 | % | ||||||||||
Risk assets as a percent of total assets |
0.7 | % | 0.4 | % | 0.2 | % | 0.2 | % | 0.0 | % | ||||||||||
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. All loans 90 days
or more past due are on non-accrual for the periods presented. Impaired loans at December 31, 2009
and 2008 were $7.3 million and $3.1 million, respectively.
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, FHLBB 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 accounts, money market
accounts, and certificates of deposit. Another source of funds is brokered certificates of
deposit.
In 2009 total average interest bearing liabilities increased $76.0 million or 12.5% from $607.1
million in 2008. Average total interest bearing deposits of $420.4 million comprised 61.5% of
interest bearing liabilities in 2009 while in 2008 such deposits totaling $335.7 million comprised
55.3% of interest bearing liabilities.
Changing interest rates can affect the mix and level of various deposit categories. The lower
average interest rate paid on certificates of deposit and money market accounts had an impact on
the overall interest rate paid on deposits and caused a decrease of 65 basis points in 2009 from
the prior year as the average rates paid on these accounts declined from 2008. The average balance
of money market accounts increased by $4.5 million to $85.6 million in 2009 from the prior year.
The average balance of NOW accounts increased by $915,000 to $18.8 million in 2009 from the prior
year. Savings accounts increased by $32.0 million to $74.0 million in 2009 from 2008. The average
balance of certificates of deposit increased by $47.3 million to $242.1 million in 2009 from 2008.
Average borrowed funds in 2009 and 2008 were $262.7 million and $271.4 million, respectively,
including advances from the FHLBB and other borrowed funds. The decrease of $8.6 million in 2009
resulted from a decrease in borrowings due to maturities and prepayments of higher rate FHLB
borrowings.
23
Table of Contents
DEPOSITS
Total deposits increased $84.1 million or 20.6% during 2009 to $492.8 million at December 31, 2009
from $408.7 million at December 31, 2008. Savings accounts had the largest increase of $34.4
million or 61.1% from the prior year. Also increasing were money market accounts, certificates of
deposit, demand deposits and NOW accounts by $30.0 million or 39.2%, $9.4 million or 4.1%, $6.8
million or 24.8% and $3.5 million or 20.3%, respectively. For more information, see Note 6 to the
Consolidated Financial Statements.
BORROWED FUNDS
Total borrowed funds decreased $17.4 million or 6.3% during 2009 to $259.1 million at December 31,
2009, from $276.5 million at December 31, 2008. Long-term FHLBB advances totaled $206.0 million in
2009 versus $219.2 million in 2008, a decrease of $13.3 million due to maturities and prepayments
of $23.2 million partially offset by new advances of $9.9 million. Long-term wholesale repurchase
agreements totaled $40.0 million in both 2009 and 2008. Subordinated debt totaled $6.0 million in
2009 and zero in 2008.
Short-term borrowed funds are generally comprised of FHLBB Ideal Way advances totaling zero in both
2009 and 2008, FHLBB short-term advances which totaled zero at December 31, 2009, compared to $11.0
million in 2008, and customer repurchase agreements which totaled $7.1 million and $6.3 million,
respectively, in 2009 and 2008. See Note 7 to the Consolidated Financial Statements for further
information on the long-term and short-term borrowings.
RESULTS OF OPERATIONS
OVERVIEW
The Company’s net income attributable to common shareholders for the twelve months ended December
31, 2009 totaled $3.8 million, or $0.85 per diluted common share, versus a net loss of $(2.7)
million, or $(0.61) per diluted common share, for the same period in 2008. Excluding the impact of
the non-cash impairment charge and related tax benefits on the investments in Fannie Mae and
Freddie Mac incurred in 2008, normalized net income for the twelve months ended December 31, 2008,
would have been $3.8 million.
For the year ended December 31, 2008, non-cash impairment charges reduced earnings by $10.1 million
on a pre-tax basis, or $(2.25) per diluted share. On October 3, 2008, the Emergency Economic
Stabilization Act (“EESA”) was enacted with a provision permitting banks to recognize losses
related to Fannie Mae and Freddie Mac preferred stock as ordinary losses. Accordingly, the Company
recognized tax benefits in the fourth quarter of 2008 of $3.5 million, or $0.79 per diluted share,
related to the Company’s other-than-temporary non-cash impairment charges and on an after-tax
basis, these non-cash impairment charges reduced 2008 earnings by a total of $6.6 million, or
$(1.46) per diluted share.
Reconciliation Table — Non-GAAP Financial Information
| For the twelve months ended December 31, | 2009 | 2008 | ||||||
(Dollars in thousands, except share data) |
||||||||
Net income (loss) attributable to common shareholders per GAAP |
$ | 3,792 | $ | (2,727 | ) | |||
Add: Impairment of investments, net of tax |
— | 6,567 | ||||||
Normalized net income attributable to common shareholders (non-GAAP) |
$ | 3,792 | $ | 3,840 | ||||
Diluted normalized earnings per common share |
$ | 0.85 | $ | 0.86 | ||||
Return on average assets, normalized |
0.64 | % | 0.55 | % | ||||
Return on average equity, normalized |
6.97 | % | 6.54 | % | ||||
The Company chose to provide investors with the preceding non-GAAP information regarding the
Company’s results because the losses on Fannie Mae and Freddie Mac stock in 2008 result from events
that the Company believes are either unique or extremely unlikely to recur. Management believes
this information is useful to the investor in evaluating the Company’s results because of the
circumstances relating to this one-time event and the magnitude of the event. This information
should not be viewed as a substitute for operating results determined in accordance with GAAP, nor
is it necessarily comparable to non-GAAP information which may be presented by other companies.
The Company’s net interest income, which is the difference between interest earned on assets and
interest paid on liabilities, totaled $19.6 million in 2009 and $16.9 million in 2008. The
increase in 2009 versus 2008 was attributed to higher average volumes of loans and investment
securities. These increases to net interest income were negatively impacted by higher average
deposit volumes.
The Bank recorded a provision for loan losses of $1.6 million and $1.3 million in 2009 and 2008,
respectively. The increases in the provision were made due to the continued and sustained
corporate and retail loan growth during these years accompanied by a $3.3
24
Table of Contents
million increase in
non-performing loans over 2008 levels. Annual net loan charge-offs as a percentage of average
loans totaled 7 basis points for 2009 as compared to 5 basis points for 2008.
Non-interest income amounted to $3.8 million in 2009 versus non-interest loss of $8.0 million in
2008. Excluding the impairment of investments, non-interest income increased by $1.7 million in
2009 to $3.8 million and $2.1 million in 2009 and 2008. Net gains on securities totaled $1.8
million and $0 for the years ended December 31, 2009 and 2008, respectively.
Non-interest expense totaled $14.0 million in 2009 and $11.9 million in 2008. The increase in 2009
was the result of expenses relating primarily to FDIC deposit insurance and other expenses
including loan workouts and a debit card fraud.
The Company recognized income tax expense of $2.7 million in 2009 while incurring an income tax
benefit of $1.6 million in 2008. The effective tax rate was 34.6% in 2009 and 36.3% in 2008.
The Company recorded dividends and accretion on its preferred stock of $1.2 million in 2009 versus
$4,000 in 2008.
25
Table of Contents
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 loans include non-performing loans.
| 2009 | 2008 | |||||||||||||||||||||||
| Average | Average | |||||||||||||||||||||||
| Average | Interest | Average | Interest | |||||||||||||||||||||
| Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
| (Dollars in Thousands) |
||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||
Loans: |
||||||||||||||||||||||||
Residential real estate |
$ | 124,285 | $ | 6,793 | 5.47 | % | $ | 96,228 | $ | 5,403 | 5.61 | % | ||||||||||||
Home equity |
25,152 | 1,010 | 4.02 | 22,987 | 1,198 | 5.21 | ||||||||||||||||||
Consumer |
699 | 47 | 6.72 | 976 | 65 | 6.66 | ||||||||||||||||||
Total retail loans |
150,136 | 7,850 | 5.23 | 120,191 | 6,666 | 5.55 | ||||||||||||||||||
Construction and land |
69,654 | 3,906 | 5.61 | 66,546 | 4,175 | 6.27 | ||||||||||||||||||
Commercial real estate |
246,274 | 15,760 | 6.40 | 189,318 | 12,859 | 6.79 | ||||||||||||||||||
Commercial |
30,793 | 1,493 | 4.85 | 27,895 | 1,705 | 6.11 | ||||||||||||||||||
Total corporate loans |
346,721 | 21,159 | 6.10 | 283,759 | 18,739 | 6.60 | ||||||||||||||||||
Total loans |
496,857 | 29,009 | 5.84 | 403,950 | 25,405 | 6.29 | ||||||||||||||||||
Investment securities: |
||||||||||||||||||||||||
U.S. Treasury and government-
sponsored enterprise obligations |
25,252 | 706 | 2.80 | 23,448 | 915 | 3.90 | ||||||||||||||||||
Other bonds and equity securities |
18,937 | 444 | 2.34 | 25,901 | 1,383 | 5.34 | ||||||||||||||||||
CMO’s and mortgage-backed
securities |
209,772 | 10,651 | 5.08 | 210,565 | 10,857 | 5.16 | ||||||||||||||||||
Short-term investments |
14,645 | 32 | 0.22 | 11,696 | 195 | 1.67 | ||||||||||||||||||
Total investment securities |
268,606 | 11,833 | 4.41 | 271,610 | 13,350 | 4.92 | ||||||||||||||||||
Total interest earning assets |
765,463 | 40,842 | 5.34 | % | 675,560 | 38,755 | 5.74 | % | ||||||||||||||||
Allowance for loan losses |
(6,360 | ) | (5,172 | ) | ||||||||||||||||||||
Other assets |
30,920 | 28,115 | ||||||||||||||||||||||
Total assets |
$ | 790,023 | $ | 698,503 | ||||||||||||||||||||
Liabilities and Stockholders’ Equity |
||||||||||||||||||||||||
Deposits: |
||||||||||||||||||||||||
Regular savings accounts |
$ | 74,012 | $ | 927 | 1.25 | % | $ | 41,994 | $ | 575 | 1.37 | % | ||||||||||||
NOW accounts |
18,782 | 44 | 0.23 | 17,867 | 35 | 0.20 | ||||||||||||||||||
Money market accounts |
85,560 | 1,230 | 1.44 | 81,085 | 1,908 | 2.35 | ||||||||||||||||||
Certificates of deposit |
242,053 | 7,967 | 3.29 | 194,800 | 7,780 | 3.99 | ||||||||||||||||||
Total interest bearing deposits |
420,407 | 10,168 | 2.42 | 335,746 | 10,298 | 3.07 | ||||||||||||||||||
Borrowed funds |
262,732 | 11,099 | 4.22 | 271,357 | 11,582 | 4.27 | ||||||||||||||||||
Total interest bearing liabilities |
683,139 | 21,267 | 3.11 | % | 607,103 | 21,880 | 3.60 | % | ||||||||||||||||
Non-interest bearing deposits |
31,598 | 29,071 | ||||||||||||||||||||||
Other liabilities |
3,037 | 3,579 | ||||||||||||||||||||||
Total liabilities |
717,774 | 639,753 | ||||||||||||||||||||||
Stockholders’ equity |
72,249 | 58,750 | ||||||||||||||||||||||
Total liabilities and
stockholders’ equity |
$ | 790,023 | $ | 698,503 | ||||||||||||||||||||
Net interest rate spread |
2.23 | % | 2.14 | % | ||||||||||||||||||||
Net interest income |
$ | 19,575 | $ | 16,875 | ||||||||||||||||||||
Net interest margin on average earning assets |
2.56 | % | 2.50 | % | ||||||||||||||||||||
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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 attributable to (i) changes in volume (change in
average balance multiplied by prior year rate) and (ii) changes in interest rate (change in rate
multiplied by prior year average balance).
| 2009 vs. 2008 | ||||||||||||
| Change due to | Total | |||||||||||
| Volume | Rate | Change | ||||||||||
| (In Thousands) | ||||||||||||
Interest income: |
||||||||||||
Loans: |
||||||||||||
Residential real estate |
$ | 1,537 | $ | (147 | ) | $ | 1,390 | |||||
Equity |
105 | (293 | ) | (188 | ) | |||||||
Consumer |
(19 | ) | 1 | (18 | ) | |||||||
Total retail loans |
1,623 | (439 | ) | 1,184 | ||||||||
Construction and land |
189 | (458 | ) | (269 | ) | |||||||
Commercial real estate |
3,681 | (780 | ) | 2,901 | ||||||||
Commercial |
165 | (377 | ) | (212 | ) | |||||||
Total corporate loans |
4,035 | (1,615 | ) | 2,420 | ||||||||
Total interest on loans |
5,658 | (2,054 | ) | 3,604 | ||||||||
Investment securities: |
||||||||||||
U.S. Treasury and government-sponsored
enterprise obligations |
66 | (275 | ) | (209 | ) | |||||||
Other bonds and equity securities |
(304 | ) | (635 | ) | (939 | ) | ||||||
Mortgage-backed securities |
(41 | ) | (165 | ) | (206 | ) | ||||||
Short-term investments |
40 | (203 | ) | (163 | ) | |||||||
Total investments |
(239 | ) | (1,278 | ) | (1,517 | ) | ||||||
Total interest income |
5,419 | (3,332 | ) | 2,087 | ||||||||
Interest expense: |
||||||||||||
Deposits: |
||||||||||||
Regular savings accounts |
405 | (53 | ) | 352 | ||||||||
NOW and Super NOW accounts |
2 | 7 | 9 | |||||||||
Money market accounts |
100 | (778 | ) | (678 | ) | |||||||
Certificates of deposit |
1,695 | (1,508 | ) | 187 | ||||||||
Total interest bearing deposits |
2,202 | (2,332 | ) | (130 | ) | |||||||
Borrowed funds |
(315 | ) | (168 | ) | (483 | ) | ||||||
Total interest expense |
1,887 | (2,500 | ) | (613 | ) | |||||||
Net interest income |
$ | 3,532 | $ | (832 | ) | $ | 2,700 | |||||
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 increased from $16.9 million in 2008
to $19.6 million in 2009.
During most of 2009, the Company operated in a falling rate environment which resulted in lower
yields on assets and a declining cost of funds. The average yield on earning assets in 2009
decreased 40 basis points from 5.74% in 2008 to 5.34% in 2009. The average rate paid on interest
bearing liabilities decreased 49 basis points during 2009 from 3.60% in 2008, compared to 3.11% in
2009. As a result of the foregoing, the net interest rate spread in 2009 was 2.23%, a 9 basis
point increase from 2.14% in 2008. The Company’s net-interest margin increased to 2.56% in 2009
compared to 2.50% in 2008.
Interest income rose $2.1 million or 5.4% during 2009 from $38.8 million to $40.8 million in 2008
and 2009, respectively, primarily due to an increase in average loan volumes, which was partially
offset by a decrease in loan rates.
Average loan interest rates decreased 45 basis points or 7.2% from 6.29% in 2008 to 5.84% in 2009
reducing interest income by $2.1 million mainly a result of corporate loan rates decreasing income
by $1.6 million. Average loan balances rose $92.9 million or 23.0% from $404.0 million to $496.9
million in 2008 and 2009, respectively, increasing interest income by $5.7 million mainly a result
of corporate loan volume increasing interest income $4.0 million.
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Average investment securities interest rates decreased 51 basis points from 4.92% in 2008 to 4.41%
in 2009 reducing interest income by $1.3 million, primarily due to other bonds and equities and
U.S. Treasury and government-sponsored enterprise obligations decreasing interest income by
$635,000 and $275,000, respectively. Average investment securities balances decreased $3.0 million
or 1.1% from $271.6 million in 2008 to $268.6 million in 2009, which reduced interest income by
$239,000, and was primarily the result of other bonds and equities which decreased interest income
by $304,000 partially offset by U.S. Treasury and government-sponsored enterprise obligations which
increased interest income by $66,000.
Interest expense declined $613,000, or 2.8%, during 2009 from $21.9 million in 2008 to $21.3
million in 2009, primarily due to a decrease in the average interest rates paid on deposits
partially offset by an increase in average deposit balances.
Average deposit interest rates decreased 65 basis points, or 21.2%, from 3.07% to 2.42% in 2008 and
2009, respectively, reducing interest expense by $2.3 million. The decrease to interest expense
was mainly attributable to declines in certificates of deposit reducing interest expense by $1.5
million and money market accounts reducing interest expense by $778,000. Average interest-bearing
deposit balances increased by $84.7 million, or 25.2% from $335.7 million to $420.4 million in 2008
and 2009, respectively, contributing $2.2 million to interest expense. The increase was mainly
attributable to certificates of deposit of $1.7 million.
Average borrowed funds interest rates declined 5 basis points, or 1.2%, from 4.27% to 4.22% in 2008
and 2009, respectively, reducing interest expense by $168,000. Average borrowed funds balances
declined $8.6 million or 3.2% from $271.4 million to $262.7 million in 2008 and 2009, respectively,
reducing interest expense by $315,000.
PROVISION FOR LOAN LOSSES
The Company made a provision for loan losses in 2009 and 2008 in the amount of $1.6 million and
$1.3 million, respectively. The level of loan growth experienced, primarily in the corporate loan
categories, during 2009 and 2008, the level of delinquent loans and risk assets as well as the
level of loan charge-offs and an increase in specific reserve allocations in 2009 all resulted in
the increase to the provisions for loan losses in 2009 over the level incurred in 2008.
NON-INTEREST INCOME (LOSS)
The Company’s non-interest income totaled $3.8 million for 2009 as compared to a non-interest loss
of $8.0 million for 2008. The increase in 2009 was primarily the result of the lack of
other-than-temporary impairment write-downs which amounted to $10.1 million incurred in 2008.
Deposit account fees decreased $103,000 or 9.9% to $940,000 in 2009 from $1.0 million in 2008. The
decrease in 2009 was due mainly to a decrease in overdraft fees of $41,000 and a decrease in NOW
account fees of $39,000. Loan servicing fees increased $26,000 or 17.0% during 2009 to $179,000 in
2009 from $153,000 in 2008. The increase in 2009 was mainly attributable to an increase in loan
documentation fees due to increased refinance activity of $32,000 partially offset by a decrease in
servicing fees on loans previously sold of $11,000.
Impairment of investments totaled zero in 2009 versus $10.1 million in 2008. The other-than
temporary impairment write-downs of investments in Fannie Mae and Freddie Mac preferred stock
occurred due to the decrease in value which was adversely affected by events surrounding the
September 2008 appointment of a conservator of Fannie Mae and Freddie Mac.
Gains on sales of investments amounted to $1.8 million versus zero for 2009 and 2008, respectively.
Prepayment penalties on FHLB advances resulting from the prepayment of $7.0 million in higher rate
FHLB advances totaled $127,000 and zero 2009 and 2008, respectively. Income on bank owned life
insurance increased $38,000 or 8.6% to $479,000 during 2009 compared to $441,000 in 2008 due to an
increase in the cash surrender value. Other income increased $14,000 or 2.9% to $493,000 from
$479,000 for the years ended 2009 and 2008, respectively. The increase in 2009 resulted from an
increase in ATM and debit card fees of $21,000 partially offset by a decrease in official check
cash item fees of $7,000.
NON-INTEREST EXPENSE
Non-interest expense increased $2.2 million or 18.1% to $14.0 million in 2009, from $11.9 million
in 2008. The increase in 2009 was mainly the result of an increase of $1.2 million in FDIC deposit
insurance premiums to $1.3 million in 2009 versus $83,000 in 2008. Included in the $1.3 million in
2009 was a special FDIC deposit assessment of $370,000.
Salaries and employee benefits expense increased $377,000 or 5.6% and totaled $7.1 million in 2009
and $6.7 million in 2008. The increase in 2009 was mainly attributable to an increase in salaries
of $327,000 due to the new branch opening and merit increases along with an increase of $75,000 in
medical insurance, partially offset by an increase in salary deferrals due to the growth in the
loan portfolios of $65,000. There were 99 full-time equivalent employees at December 31, 2009, an
increase of 5 from 94 full time equivalent employees at December 31, 2008.
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Occupancy and equipment expenses increased $141,000 or 10.6% to $1.5 million in 2009, compared to
$1.3 million in 2008 due to the opening of the new branch location in Derry, New Hampshire, and
construction and opening of the new Lawrence branch location. Data processing expenses declined to
$926,000 compared to $938,000 in 2008. Data processing expenses include the Company’s service
contract for on-line deposit accounting, loan accounting and item processing services. During
2009, service bureau charges declined $32,000 and computer software and license fees declined
$14,000 partially offset by an increase of $27,000 in maintenance costs. Professional expenses
remained stable at $577,000 and $580,000, in 2009 and 2008, respectively. Marketing expense
increased $25,000 or 5.3% to $497,000 from $472,000 in 2009 and 2008, respectively, due to
advertising and promotions relating to the new branches. Other real estate owned expense declined
to $10,000 in 2009 versus $139,000 in 2008 due to the sale of the remaining OREO property. Other
expenses increased $582,000 or 35.7% to $2.2 million in 2009 compared to $1.6 million in 2008. The
increase is mainly attributable to an increase of $256,000 in loan workout expenses, debit card
fraud expenses of $70,000 coupled with increased operating costs such as printing, telephone and
office supplies for the new Derry, New Hampshire branch.
INCOME TAXES
The Company incurred income tax expense of $2.7 million in 2009 as compared to an income tax
benefit of $1.6 million in 2008 due primarily to the significant earnings improvement in 2009. The
effective income tax rates for the years ended December 31, 2009 and 2008 amounted to 34.6%, and
36.3%, respectively.
Permanent differences such as officers’ life insurance, tax-exempt income, and the dividends
received deduction can have an impact on the effective income tax rate as it relates to pre-tax
income. See Note 8 to the Consolidated Financial Statements for further information regarding
income taxes.
On July 3, 2008, the state of Massachusetts enacted a law that reduced the tax rate on net income
applicable to financial institutions. The rate drops from the current rate of 10.5% to 10% for tax
years beginning on January 1, 2010, 9.5% for tax years beginning on or after January 1, 2011, and
9% for tax years beginning on or after January 1, 2012 and thereafter. Based on these changes in
the third quarter of 2008, the Company incurred an $177,000 charge to adjust deferred income tax
expense and the net value of the Company’s deferred tax asset.
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 only source of funds to
meet its expenses, repay indebtedness, and pay dividends to stockholders is the receipt of
dividends from the Bank. 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, Treasury and government-sponsored enterprise obligations. At
December 31, 2009, the Bank’s investment securities and mortgage-backed securities available for
sale totaled $230.5 million and are available to meet the Bank’s liquidity needs.
Loan maturities and amortization as well as deposit growth provide for a constant flow of funds.
Based on Management’s monitoring of deposit trends and its current pricing strategy for deposits,
management believes the Company will retain a large portion of its existing deposit base.
Continued deposit growth during 2010 will depend on several factors, including the interest rate
environment and competitor pricing. The Company also considers the use of brokered certificates of
deposit as an additional source of deposits and evaluates them in conjunction with its own retail
certificates of deposit.
The Bank has a collateralized line of credit of $3.0 million with the FHLBB. At December 31, 2009,
the entire $3.0 million was available. In addition, the Bank established a collateralized line of
credit with the Federal Reserve Bank discount window for $11.6 million which was available in its
entirety at December 31, 2009.
At December 31, 2009, the Bank had $206.0 million of outstanding borrowings from FHLBB, and the
ability to borrow an additional $71.5 million. FHLBB has publicly disclosed that, over time,
current market trends may have a negative impact on FHLBB’s own liquidity. See Item 1A. Risk
Factors for further information.
The liquidity position of the Company is managed by the Asset/Liability Management Committee
(“ALCO”). The duties of ALCO include periodically reviewing 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, 2009, management believes that the Bank has adequate liquidity to meet
current and future liquidity demands.
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At December 31, 2009, the Company’s stockholders’ equity totaled $60.5 million, a decrease of $11.6
million when compared to $72.1 million at December 31, 2008. The decrease was primarily due to the
redemption of the preferred stock and repurchase of the warrants in connection with the U.S.
Treasury’s Capital Purchase Plan in 2009. Partially offsetting this capital outlay of $15.6
million is the increase in net income of $7.8 million coupled with an increase in the net
unrealized gain on investment securities available for sale of $2.0 million, net of tax. During
the year ended December 31, 2009, payments of cash dividends to common and preferred stockholders
totaled $1.3 million and $700,000, respectively.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company enters into contractual obligations and commitments in the normal course of business.
The Company has contractual obligations such as payments on FHLBB 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 and letters of credit. These
commitments have various expiration dates.
The following tables summarize the expiration dates of the Bank’s contractual obligations and
funding commitments, respectively, at December 31, 2009.
| Payments Due – By Period | ||||||||||||||||||||
| Less than | One to | Three to | After | |||||||||||||||||
| Contractual obligations | Total | One Year | Three Years | Five Years | Five Years | |||||||||||||||
| (In Thousands) | ||||||||||||||||||||
FHLBB long- term
advances |
$ | 205,971 | $ | 31,000 | $ | 48,000 | $ | 32,900 | $ | 94,071 | ||||||||||
Wholesale repurchase
agreements |
40,000 | — | 25,000 | 15,000 | — | |||||||||||||||
Subordinated debt |
6,000 | — | 1,200 | 2,400 | 2,400 | |||||||||||||||
Short-term borrowings |
7,111 | 7,111 | — | — | — | |||||||||||||||
Operating lease obligations |
4,499 | 346 | 606 | 583 | 2,964 | |||||||||||||||
Data processing vendor |
1,644 | 750 | 894 | — | — | |||||||||||||||
Employee benefit
payments (1) |
1,414 | 118 | 235 | 235 | 826 | |||||||||||||||
Total contractual cash
obligations |
$ | 266,639 | $ | 39,325 | $ | 75,935 | $ | 51,118 | $ | 100,261 | ||||||||||
| (1) | The amounts shown reflect expected employee benefits paid by the Company under its supplemental executive retirement agreements through December 31, 2021. |
| Amount of Commitment Expiring – By Period | ||||||||||||||||||||
| Less than | One to | Three to | After | |||||||||||||||||
| Commitments | Total | One Year | Three Years | Five Years | Five Years | |||||||||||||||
| (In Thousands) | ||||||||||||||||||||
Loan originations |
$ | 21,706 | $ | 21,706 | $ | — | $ | — | $ | — | ||||||||||
Lines of credit |
80,221 | 36,685 | 8,212 | 880 | 34,444 | |||||||||||||||
Letters of credit |
1,588 | 1,588 | — | — | — | |||||||||||||||
Total commitments |
$ | 103,515 | $ | 59,979 | $ | 8,212 | $ | 880 | $ | 34,444 | ||||||||||
OFF-BALANCE SHEET ARRANGEMENTS
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’s
off-balance sheet arrangements are discussed in Note 13 to the Consolidated Financial Statements,
which is incorporated herein by reference.
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, 2009 and
2008, the Company’s and the Bank’s leverage and risk-based capital ratios exceeded the required
levels for the category of “well-capitalized” institutions as defined by their respective
regulatory agencies.
The Company and the Bank may not declare or pay cash dividends on their outstanding common stock if
the effect thereof would
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reduce their respective stockholders’ equity below applicable capital requirements or otherwise
violate regulatory requirements. See Note 9 to the Consolidated Financial Statements for further
information regarding capital adequacy.
The Company repurchased none and 64,620 shares of its common stock during 2009 and 2008,
respectively. The Company’s book value per share was $13.43 at December 31, 2009. The book value
per share decreased from $16.14 at December 31, 2008 due mainly to the redemption of $15.0 million
in cumulative perpetual preferred stock, Series B, to the Treasury, the payment of dividends to
common shareholders of $1.3 million, dividends to preferred shareholders of $700,000 and the
repurchase of the warrants issued with preferred stock of $560,000, partially offset by net income
of $5.0 million, an increase in the fair value of investment securities available for sale (net of
taxes) in the amount of $556,000, the exercise of stock options of $266,000, stock awards of
$121,000 and a tax benefit of $2,000 associated with stock transactions.
RECENT ACCOUNTING DEVELOPMENTS
In June 2009, the FASB amended its guidance surrounding the accounting for transfers and servicing
of financial assets and extinguishments of liabilities and will not require more information about
transfers of financial assets, including securitization transactions, where entities have
continuing exposure to the risks related to transferred financial assets. This guidance eliminates
the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. The Company adopted this new guidance on
January 1, 2010 as required. Management does not believe this guidance will have a material impact
on the Company’s Consolidated Financial Statements.
In June 2009, the FASB amended its guidance on the consolidation of variable interest entities and
changed how a reporting entity determines when an entity that is insufficiently capitalized or is
not controlled through voting (or similar rights) should be consolidated. The determination of
whether a reporting entity is required to consolidate another entity is based on, among other
things, the other entity’s purpose and design and the reporting entity’s ability to direct the
activities of the other entity that most significantly impact the other entity’s economic
performance. The Company will adopt this new guidance on January 1, 2010, as required. Management
does not believe this guidance will have a material impact on the Company’s Consolidated Financial
Statements.
In September 2009, the FASB amended its guidance on fair value measurements and disclosures
relating to investments in certain entities that calculate net asset value per share (or its
equivalent). This guidance permits a reporting entity to measure the fair value of certain
investments on the basis of the net asset value per share of the investment (or its equivalent).
This guidance also requires new disclosures, by major category of investments, about the attributes
of investments within the scope of this guidance. The Company will adopt this new guidance on
January 1, 2010, as required. Management does not believe this guidance will have a material
impact on the Company’s Consolidated Financial Statements.
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 impact of inflation on asset
quality and 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, refer to the information provided under the headings “Investment Securities”, “Loans”,
and “Interest Rate Sensitivity” respectively for an understanding of the Company’s approach to
changing prices and inflation trends, 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.
| ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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 mitigate its exposure to interest rate risk. As of
December 31, 2009, the Company had interest rate sensitive assets which repriced or matured within
one year of $308.8 million and interest rate sensitive liabilities which repriced or matured within
one year of $390.2 million. As of December 31, 2008, the Company had interest rate sensitive
assets which matured or repriced within one year of $404.1 million and interest rate sensitive
liabilities which repriced or matured within one year of $247.1 million.
INTEREST RATE SENSITIVITY
The Company actively manages its interest rate sensitivity position. The objectives of interest
rate risk management are to mitigate exposure of net interest income to risks associated with
interest rate movements and to achieve a stable and rising flow of net interest
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income. The 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.
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 200 basis points (bp) or down 200
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 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. The net interest income simulation model
for 2008 and 2009 applies a 100 bp decline due to the extremely low interest environment. As of
December 31, 2008, the income simulation model reflects negative exposure to net interest income in
a declining interest rate environment from flat rates to down 100 bp, which would result from
assets repaying faster than the long-term borrowings from the FHLBB. Margins would narrow as
deposits and borrowings are typically slower to reprice downward in response to lower interest
rates than interest earning assets which can reprice immediately. 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, 2009
and 2008, respectively:
Net Interest Income Simulation Model Results:
| Interest Rate Shock | ||||||||||||
| Down | Up | |||||||||||
| 2009 | Flat Rates | 100 bp | 200 bp | |||||||||
| (In Thousands) | ||||||||||||
Year One |
$ | 22,936 | $ | 22,614 | $ | 22,798 | ||||||
Year Two |
23,231 | 21,821 | 23,688 | |||||||||
Total net interest income for 2 year period |
$ | 46,167 | $ | 44,435 | $ | 46,486 | ||||||
| Interest Rate Shock | ||||||||||||
| Down | Up | |||||||||||
| 2008 | Flat Rates | 100 bp | 200 bp | |||||||||
| (In Thousands) | ||||||||||||
Year One |
$ | 16,861 | $ | 16,480 | $ | 17,866 | ||||||
Year Two |
17,861 | 16,769 | 20,038 | |||||||||
Total net interest income for 2 year period |
$ | 34,722 | $ | 33,249 | $ | 37,904 | ||||||
Another 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. The Company’s
one-year cumulative GAP to total assets changed from negative 0.21% at December 31, 2008, to
negative 9.97% at December 31, 2009.
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| ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
| Page | ||||
| 34 | ||||
| 35 | ||||
| 36 | ||||
| 37 | ||||
| 38 | ||||
| 39 | ||||
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
LSB Corporation:
LSB Corporation:
We have audited the accompanying consolidated balance sheets of LSB Corporation and subsidiary (the
“Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations,
changes in stockholders’ equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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 subsidiary as of December 31, 2009
and 2008, and the results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of America.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
March 11, 2010
March 11, 2010
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Consolidated Balance Sheets
| December 31, | 2009 | 2008 | ||||||
| (In Thousands, Except Share Data) | ||||||||
Assets: |
||||||||
Cash and due from banks |
$ | 8,615 | $ | 6,859 | ||||
Federal funds sold |
6,597 | 6,469 | ||||||
Total cash and cash equivalents |
15,212 | 13,328 | ||||||
Investment securities available for sale, at fair value,
amortized cost of $224,130 in 2009 and $259,057 in 2008 (notes 2 and 7) |
230,533 | 264,561 | ||||||
Federal Home Loan Bank stock, at cost (note 3) |
11,825 | 11,825 | ||||||
Loans, net of allowance for loan losses of $7,168 in 2009
and $5,885 in 2008 (notes 4 and 7) |
529,451 | 446,736 | ||||||
Premises and equipment, net (note 5) |
7,209 | 5,528 | ||||||
Accrued interest receivable |
2,727 | 2,720 | ||||||
Deferred income tax asset, net (note 8) |
4,315 | 4,447 | ||||||
Bank-owned life insurance |
11,120 | 10,641 | ||||||
Other real estate owned |
— | 120 | ||||||
Prepaid FDIC insurance |
3,069 | — | ||||||
Other assets |
1,137 | 1,418 | ||||||
Total assets |
$ | 816,598 | $ | 761,324 | ||||
Liabilities and Stockholders’ Equity: |
||||||||
Liabilities: |
||||||||
Interest bearing core deposits (note 6) |
$ | 218,021 | $ | 150,093 | ||||
Non-interest bearing core deposits (note 6) |
34,368 | 27,546 | ||||||
Term deposits (note 6) |
240,405 | 231,024 | ||||||
Total deposits |
492,794 | 408,663 | ||||||
Long-term borrowed funds (note 7) |
245,971 | 259,228 | ||||||
Short-term borrowed funds (note 7) |
7,111 | 17,262 | ||||||
Subordinated debt (note 7) |
6,000 | — | ||||||
Other liabilities |
4,202 | 4,029 | ||||||
Total liabilities |
756,078 | 689,182 | ||||||
Commitments and contingencies (notes 5, 12 and 13) |
||||||||
Stockholders’ equity (notes 9 and 11): |
||||||||
Preferred stock, Series A, $.10 par value; 5,000,000
shares authorized, none issued |
— | — | ||||||
Cumulative perpetual preferred stock, Series B, $1,000 par value
(liquidation preference $1,000 per share), none issued in 2009,
15,000 shares authorized and issued in 2008 |
— | 14,455 | ||||||
Common stock, $.10 par value; 20,000,000
shares authorized; 4,506,686 and 4,470,941 shares issued
and outstanding in 2009 and 2008, respectively |
451 | 447 | ||||||
Additional paid-in capital |
60,004 | 60,179 | ||||||
Accumulated deficit |
(3,802 | ) | (6,250 | ) | ||||
Accumulated other comprehensive income, net of tax |
3,867 | 3,311 | ||||||
Total stockholders’ equity |
60,520 | 72,142 | ||||||
Total liabilities and stockholders’ equity |
$ | 816,598 | $ | 761,324 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Operations
| Year Ended December 31, | 2009 | 2008 | ||||||
| (In Thousands, Except Share Data) | ||||||||
Interest and dividend income: |
||||||||
Loans |
$ | 29,009 | $ | 25,405 | ||||
Investment securities available for sale (note 2) |
11,801 | 12,727 | ||||||
Federal Home Loan Bank stock (note 3) |
— | 428 | ||||||
Other interest income |
32 | 195 | ||||||
Total interest and dividend income |
40,842 | 38,755 | ||||||
Interest expense: |
||||||||
Deposits (note 6) |
10,168 | 10,298 | ||||||
Long-term borrowed funds |
10,946 | 11,396 | ||||||
Short-term borrowed funds |
51 | 186 | ||||||
Subordinated debt |
102 | — | ||||||
Total interest expense |
21,267 | 21,880 | ||||||
Net interest income |
19,575 | 16,875 | ||||||
Provision for loan losses (note 4) |
1,640 | 1,285 | ||||||
Net interest income after provision for loan losses |
17,935 | 15,590 | ||||||
Non-interest income (loss): |
||||||||
Deposit account fees |
940 | 1,043 | ||||||
Loan servicing fees, net |
179 | 153 | ||||||
Impairment write-downs on equity securities (note 2) |
— | (10,105 | ) | |||||
Gain on sales of securities (note 2) |
1,832 | — | ||||||
Prepayment penalty on FHLB advances (note 7) |
(127 | ) | — | |||||
Income on bank-owned life insurance |
479 | 441 | ||||||
Other income |
493 | 479 | ||||||
Total non-interest income (loss) |
3,796 | (7,989 | ) | |||||
Non-interest expense: |
||||||||
Salaries and employee benefits (notes 10 and 11) |
7,083 | 6,706 | ||||||
Occupancy and equipment (note 5) |
1,471 | 1,330 | ||||||
Data processing |
926 | 938 | ||||||
Professional |
577 | 580 | ||||||
Marketing |
497 | 472 | ||||||
FDIC deposit insurance |
1,253 | 83 | ||||||
Other real estate owned |
10 | 139 | ||||||
Other |
2,210 | 1,628 | ||||||
Total non-interest expense |
14,027 | 11,876 | ||||||
Income (loss) before income tax expense |
7,704 | (4,275 | ) | |||||
Income tax expense (benefit) (note 8) |
2,667 | (1,552 | ) | |||||
Net income (loss) before preferred stock dividends and accretion |
5,037 | (2,723 | ) | |||||
Preferred stock dividends and accretion |
(1,245 | ) | (4 | ) | ||||
Net income (loss) attributable to common shareholders |
$ | 3,792 | $ | (2,727 | ) | |||
Average basic common shares outstanding |
4,484,920 | 4,468,484 | ||||||
Common stock equivalents |
1,124 | 16,066 | ||||||
Average diluted common shares outstanding |
4,486,044 | 4,484,550 | ||||||
Basic earnings (loss) per common share |
$ | 0.85 | $ | (0.61 | ) | |||
Diluted earnings (loss) per common share |
$ | 0.85 | $ | (0.61 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Changes in
Stockholders’ Equity
Years Ended December 31, 2009 and 2008
Years Ended December 31, 2009 and 2008
| Accumulated | ||||||||||||||||||||||||
| Other | Total | |||||||||||||||||||||||
| Additional | Compre- | Stock- | ||||||||||||||||||||||
| Preferred | Common | Paid-in | Accumulated | hensive | holders’ | |||||||||||||||||||
| Stock | Stock | Capital | Deficit | Income | Equity | |||||||||||||||||||
| (In Thousands, Except Share Data) | ||||||||||||||||||||||||
Balance at December 31, 2007 |
$ | — | $ | 452 | $ | 60,382 | $ | (934 | ) | $ | 398 | $ | 60,298 | |||||||||||
Net loss |
— | — | — | (2,723 | ) | — | (2,723 | ) | ||||||||||||||||
Other comprehensive income -
Unrealized gain on securities
available for sale (tax effect $1,880) |
— | — | — | — | 2,913 | 2,913 | ||||||||||||||||||
Total comprehensive income |
190 | |||||||||||||||||||||||
Stock-based compensation |
— | — | 156 | — | — | 156 | ||||||||||||||||||
Issuance of preferred stock,
net of discount of $549 |
14,451 | — | — | — | — | 14,451 | ||||||||||||||||||
Accretion of discount on preferred stock |
4 | — | — | (4 | ) | — | — | |||||||||||||||||
Fair value of warrants issued with preferred
stock |
— | — | 549 | — | — | 549 | ||||||||||||||||||
Exercise of stock options and tax benefits
(9,500 shares) |
— | 1 | 120 | — | — | 121 | ||||||||||||||||||
Common stock repurchased (64,620 shares) |
— | (6 | ) | (1,028 | ) | — | — | (1,034 | ) | |||||||||||||||
Common dividends declared and
paid ($0.58 per share) |
— | — | — | (2,589 | ) | — | (2,589 | ) | ||||||||||||||||
Balance at December 31, 2008 |
14,455 | 447 | 60,179 | (6,250 | ) | 3,311 | 72,142 | |||||||||||||||||
Net income |
— | — | — | 5,037 | — | 5,037 | ||||||||||||||||||
Other comprehensive income -
Unrealized gain on securities
available for sale (tax effect $343) |
— | — | — | — | 556 | 556 | ||||||||||||||||||
Total comprehensive income |
— | — | — | — | — | 5,593 | ||||||||||||||||||
Stock-based compensation |
— | — | 121 | — | — | 121 | ||||||||||||||||||
Exercise of stock options and tax benefits
(28,995 shares) |
— | 4 | 264 | — | — | 268 | ||||||||||||||||||
Common dividends declared and paid
($0.30 per share) |
— | — | — | (1,344 | ) | — | (1,344 | ) | ||||||||||||||||
Preferred dividends declared and paid |
— | — | — | (700 | ) | — | (700 | ) | ||||||||||||||||
Accretion of discount on preferred stock |
545 | — | — | (545 | ) | — | — | |||||||||||||||||
Redemption of preferred stock |
(15,000 | ) | — | — | — | — | (15,000 | ) | ||||||||||||||||
Repurchase of warrants issued with
preferred stock |
— | — | (560 | ) | — | — | (560 | ) | ||||||||||||||||
Balance at December 31, 2009 |
$ | — | $ | 451 | $ | 60,004 | $ | (3,802 | ) | $ | 3,867 | $ | 60,520 | |||||||||||
Disclosure of reclassification amount
for securities available for sale:
| Years Ended December 31, | 2009 | 2008 | ||||||
| (In Thousands) | ||||||||
Gross unrealized (losses) gains
arising during the year |
$ | 2,731 | $ | (5,312 | ) | |||
Tax effect |
(977 | ) | 1,656 | |||||
Unrealized holding (losses) gains, net of tax |
1,754 | (3,656 | ) | |||||
Reclassification adjustment for (gains)
losses included in income |
(1,832 | ) | 10,105 | |||||
Tax effect |
634 | (3,536 | ) | |||||
Unrealized gains on securities,
net of reclassification amount |
$ | 556 | $ | 2,913 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
Consolidated Statements
of Cash Flows
of Cash Flows
| Year Ended December 31, | 2009 | 2008 | ||||||
| (In Thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 5,037 | $ | (2,723 | ) | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for loan losses |
1,640 | 1,285 | ||||||
Impairment write-downs on securities |
— | 10,105 | ||||||
Net losses on sales of other real estate owned |
— | 72 | ||||||
Gains on sales of investments |
(1,832 | ) | — | |||||
Net accretion of investment securities |
(624 | ) | (496 | ) | ||||
Depreciation and amortization of premises and equipment |
619 | 605 | ||||||
Increase in accrued interest receivable |
(7 | ) | (267 | ) | ||||
Deferred income tax benefit |
(211 | ) | (3,842 | ) | ||||
Stock-based compensation |
121 | 156 | ||||||
Income on Bank-owned life insurance |
(479 | ) | (441 | ) | ||||
Increase in other assets and prepaid FDIC insurance |
(2,788 | ) | (129 | ) | ||||
Increase in other liabilities |
16 | 138 | ||||||
Net cash provided by operating activities |
1,492 | 4,463 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from maturities of investment securities available for sale |
27,367 | 15,741 | ||||||
Proceeds from sales of investment securities available for sale |
31,642 | — | ||||||
Purchases of investment securities available for sale |
(100,891 | ) | (97,235 | ) | ||||
Purchases of FHLBB stock |
— | (1,640 | ) | |||||
Principal payments on investment securities available for sale |
79,265 | 42,713 | ||||||
Loan originations, net of principal payments |
(77,518 | ) | (96,668 | ) | ||||
Loans purchased |
(6,837 | ) | — | |||||
Proceeds from sales of other real estate owned |
120 | 1,758 | ||||||
Purchases of premises and equipment |
(2,300 | ) | (2,543 | ) | ||||
Net cash used in investing activities |
(49,152 | ) | (137,874 | ) | ||||
Cash flows from financing activities: |
||||||||
Net increase in deposits |
84,131 | 86,580 | ||||||
Additions to long-term borrowed funds |
9,900 | 63,000 | ||||||
Payments on long-term borrowed funds |
(23,157 | ) | (31,150 | ) | ||||
Net (decrease) increase in short-term borrowed funds |
(10,151 | ) | 9,289 | |||||
Net increase in subordinated debt ` |
6,000 | — | ||||||
Net increase (decrease) in mortgagors’ escrow accounts |
157 | (28 | ) | |||||
Proceeds from issuance of preferred stock and warrants |
— | 15,000 | ||||||
Redemption of preferred stock |
(15,000 | ) | — | |||||
Repurchase of warrants issued with preferred stock |
(560 | ) | — | |||||
Dividends paid to preferred stockholder |
(700 | ) | — | |||||
Dividends paid to common stockholders |
(1,344 | ) | (2,589 | ) | ||||
Proceeds from exercise of stock options |
266 | 117 | ||||||
Tax benefits from exercise of stock options |
2 | 4 | ||||||
Common stock repurchased |
— | (1,034 | ) | |||||
Net cash provided by financing activities |
49,544 | 139,189 | ||||||
Net increase in cash and cash equivalents |
1,884 | 5,778 | ||||||
Cash and cash equivalents, beginning of year |
13,328 | 7,550 | ||||||
Cash and cash equivalents, end of year |
$ | 15,212 | $ | 13,328 | ||||
Cash paid during the year for: |
||||||||
Interest on deposits |
$ | 10,177 | $ | 10,276 | ||||
Interest on borrowed funds |
11,210 | 11,511 | ||||||
Income taxes |
2,722 | 2,405 | ||||||
Supplemental non-cash investing activities: |
||||||||
Transfers to other real estate owned |
— | 1,950 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2009 and 2008
Years Ended December 31, 2009 and 2008
(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 its wholly-owned subsidiary River 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 the
Massachusetts Division of Banks (the “Division”), while the Bank is subject to the regulations of,
and periodic examination by, the Federal Deposit Insurance Corporation (“FDIC”) and the Division.
The Bank’s deposits are insured by the Bank Insurance Fund of the FDIC up to $250,000 per account
for non-retirement accounts with maturities through December 31, 2013 and up to $100,000
thereafter, and up to $250,000 for certain retirement accounts, as defined by the FDIC. For
balances in excess of the FDIC deposit insurance limits, coverage is provided by the Massachusetts
Depositors Insurance Fund, Inc. (“Mass DIF”).
The Consolidated Financial Statements include the accounts of LSB Corporation, River Bank, and its
wholly-owned subsidiaries, Shawsheen Security Corporation, Shawsheen Security Corporation II and
Spruce Wood Realty Trust. All inter-company balances and transactions have been eliminated in
consolidation. The Company has one reportable operating segment. Certain amounts in prior periods
have been reclassified to conform to the current presentation.
LSB Corporation’s Consolidated Financial Statements have been prepared in conformity with U.S.
generally accepted accounting principles. 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
impairment of investment securities.
FAIR VALUE HEIRARCHY. The Company groups its assets and liabilities measured at fair value in
three levels, based on the markets in which the assets and liabilities are traded and the
reliability of the assumptions used to determine fair value.
Level 1 — Valuation is based on quoted prices in active markets for identical assets or
liabilities. Level 1 assets and liabilities include debt and equity securities that are traded in
an active exchange market. Valuations are obtained from readily available pricing sources for
market transactions involving identical assets or liabilities.
Level 2 — Valuation is based on observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities; quoted prices in markets that are not active; or other inputs
that are observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities.
Level 3 — Valuation is based on unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or liabilities. Level 3 assets
and liabilities include financial instruments whose value is determined using unobservable inputs
to pricing models, discounted cash flow methodologies, or similar techniques, as well as
instruments for which the determination of fair value requires significant management judgment or
estimation. This category generally includes certain private equity investments, certain impaired
loans, and other real estate owned.
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 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 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 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. Dividend income on equity securities is recorded when dividends are declared.
Premiums and discounts on debt securities are amortized or accreted into income by use of the
interest method over the terms of the securities. Gains and losses on the sale of securities are
recognized on the trade date using the specific identification basis.
Each reporting period, the Company evaluates all securities with a decline in fair value below the
amortized cost of the investment to determine whether or not the impairment is deemed to be
other-than-temporary (“OTTI”). Marketable equity securities are evaluated for OTTI based on the
severity and duration of the impairment and, if deemed to be other-than-temporary, the declines in
fair value are reflected in earnings as realized losses. For debt securities, OTTI is required to
be recognized (1) if the Company intends to sell the security; (2) if it is “more likely than not”
that the Company will be required to sell the security before recovery of its amortized
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cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire
amortized cost basis. For all impaired debt securities that the Company intends to sell, or more
likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI
through earnings. Credit-related OTTI for all other impaired debt securities is recognized through
earnings. Non-credit related OTTI for such debt securities is recognized in other comprehensive
income, net of applicable taxes.
FEDERAL HOME LOAN BANK STOCK. Federal Home Loan Bank of Boston (“FHLBB”) stock has no quoted
market value and is carried at cost, based on the redemption provisions of the FHLBB. Management
reviews for impairment based on the ultimate recoverability of the cost basis in the FHLBB stock.
As of December 31, 2009, no impairment has been recognized.
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 acquisition costs, are
deferred and recognized over the contractual life of the loan as an adjustment of the loan’s yield
using the interest method. Amortization of loan fees is discontinued once a loan is placed on
non-accrual status. When loans are sold or paid-off, the unamortized portion of net fees and costs
is credited to income.
TRANSFER 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 recognition as a 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 general allowance, specific allowances for impaired loans and an
unallocated allowance.
The general allowance is calculated by applying loss factors to pools of outstanding non-impaired
loans. In the case of corporate loans, changes in risk grades affect the amount of the general
allowance. Loss factors are based on the Bank’s historical loss experience, as well as other
qualitative factors and consider regulatory guidance.
Specific allowances are established in cases where management has identified significant conditions
related to an impaired loan such that management believes it probable that a loss has been incurred
in excess of the amount determined by the general allowance.
The unallocated allowance recognizes the model and estimation risk associated with the general 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 general 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, including the FDIC and the Massachusetts Division of
Banks, 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 corporate loans and individually significant residential mortgage loans for
which it is probable that the Company will not be able to collect all amounts due according to the
contractual terms of the loan agreement. The Company periodically may agree to modify the
contractual terms of loans. When a loan is modified and a concession is made to a borrower
experiencing financial difficulty, the modification is considered a troubled debt restructuring
(“TDR”). All TDRs are initially classified as impaired. 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
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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 loan. When foreclosure is probable, impairment is based on the fair value of
the collateral. Larger groups of smaller balance homogenous loans are collectively evaluated for
impairment.
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
expected terms of the leases, if shorter.
BANK-OWNED LIFE INSURANCE. Bank-owned life insurance policies are reflected on the consolidated
balance sheet at cash surrender value. Changes in cash surrender value are reflected in other
non-interest income and are not subject to income taxes.
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 initially recorded at the fair value of the property or collateral less
selling costs. Subsequent to foreclosure, valuations are periodically performed by management and
the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue
and expenses from operations and changes in the valuation allowance are included in other real
estate owned expense.
SHARE-BASED COMPENSATION PLANS. The Company measures and recognizes compensation
expense for its awards on a straight-line basis over the requisite service period for the entire
award (straight-line attribution method), ensuring that the amount of compensation cost recognized
at any date at least equals the portion of the grant-date fair value of the award that is vested at
that time. Reductions in compensation expense associated with forfeited options are estimated at
the grant date and this forfeiture rate is adjusted quarterly based on actual forfeiture
experience. The Company uses the Black-Scholes option-pricing model to determine the fair value of
stock options granted.
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. A valuation
allowance is established against deferred tax assets when, based upon the available evidence
including historical and projected taxable income, it is more likely than not that some or all of
the deferred tax assets will not be realized. The Company does not have any uncertain tax
positions at December 31, 2009 which require accrual or disclosure.
Income tax benefits related to stock compensation in excess of grant date fair value less any
proceeds on exercise are recognized as an increase to additional paid-in capital upon vesting or
exercising and delivery of the stock. Any income tax effects related to stock compensation that
are less than grant date fair value less any proceeds on exercise would be recognized as a
reduction of additional paid-in capital to the extent of previously recognized income tax benefits
and then through income tax expense for the remaining amount.
EARNINGS PER SHARE. Basic EPS is calculated based on the weighted average
number of common shares outstanding during each period. If rights to dividends on unvested
options/awards are non-forfeitable, these unvested options/awards are considered outstanding in the
computation of basic earnings per share. Diluted earnings per share reflects additional common
shares that would have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance. Potential common
shares that may be issued by the Company relate to outstanding stock options and restricted stock
awards and are determined using the treasury stock method. Stock options and restricted stock that
would have an anti-dilutive effect on earnings per share are excluded from this calculation. For
the years ended December 31, 2009 and 2008, 192,400 and 198,400 shares, respectively, were
anti-dilutive.
COMPREHENSIVE INCOME. Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in assets and liabilities are
reported as a separate component of the equity section of the balance sheet, such items, along with
net income, are components of comprehensive income.
RECENT ACCOUNTING DEVELOPMENTS. In June 2009, the FASB amended its guidance surrounding the
accounting for transfers and servicing of financial assets and extinguishments of liabilities and
will not require more information about transfers of financial assets, including securitization
transactions, where entities have continuing exposure to the risks related to transferred financial
assets. This guidance eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional disclosures. The Company
adopted this new guidance effective January 1, 2010 as required. Management does not believe this
guidance will have a material impact on the Company’s Consolidated Financial Statements.
In June 2009, the FASB amended its guidance on the consolidation of variable interest entities and
changed how a reporting entity determines when an entity that is insufficiently capitalized or is
not controlled through voting (or similar rights) should be
41
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consolidated. The determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity’s purpose and design and the reporting
entity’s ability to direct the activities of the other entity that most significantly impact the
other entity’s economic performance. The Company will adopt this new guidance on January 1, 2010,
as required. Management does not believe this guidance will have a material impact on the
Company’s Consolidated Financial Statements.
In September 2009, the FASB amended its guidance on fair value measurements and disclosures
relating to investments in certain entities that calculate net asset value per share (or its
equivalent). This guidance permits a reporting entity to measure the fair value of certain
investments on the basis of the net asset value per share of the investment (or its equivalent).
This guidance also requires new disclosures, by major category of investments, about the attributes
of investments within the scope of this guidance. The Company will adopt this new guidance on
January 1, 2010, as required. Management does not believe this guidance will have a material
impact on the Company’s Consolidated Financial Statements.
(2) INVESTMENT SECURITIES
The amortized cost and fair value of investment securities available for sale at December 31, with
unrealized gains and losses, follows:
| 2009 | 2008 | |||||||||||||||||||||||||||||||
| Amortized | Unrealized | Fair | Amortized | Unrealized | Fair | |||||||||||||||||||||||||||
| Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | |||||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||||||
Debt securities: |
||||||||||||||||||||||||||||||||
U.S. Treasury obligations |
$ | 5,557 | $ | 237 | $ | — | $ | 5,794 | $ | 5,578 | $ | 426 | $ | — | $ | 6,004 | ||||||||||||||||
Government-sponsored
enterprise obligations (1) |
33,379 | 188 | (49 | ) | 33,518 | 15,485 | 240 | (3 | ) | 15,722 | ||||||||||||||||||||||
Residential mortgage-backed: |
||||||||||||||||||||||||||||||||
U.S. government guaranteed |
16,037 | 483 | — | 16,520 | 10,886 | 345 | (3 | ) | 11,228 | |||||||||||||||||||||||
Government-sponsored
enterprises |
118,537 | 5,543 | (71 | ) | 124,009 | 170,481 | 5,574 | (77 | ) | 175,978 | ||||||||||||||||||||||
Residential collateralized
mortgage obligations: |
||||||||||||||||||||||||||||||||
U.S. government guaranteed |
21,965 | 94 | (80 | ) | 21,979 | 3,102 | 24 | — | 3,126 | |||||||||||||||||||||||
Government-sponsored
enterprises |
21,283 | 389 | — | 21,672 | 41,617 | 355 | (45 | ) | 41,927 | |||||||||||||||||||||||
Private-label |
1,415 | 93 | — | 1,508 | 2,006 | — | — | 2,006 | ||||||||||||||||||||||||
Corporate obligations |
2,489 | — | (111 | ) | 2,378 | 6,433 | — | (750 | ) | 5,683 | ||||||||||||||||||||||
Total debt securities |
220,662 | 7,027 | (311 | ) | 227,378 | 255,588 | 6,964 | (878 | ) | 261,674 | ||||||||||||||||||||||
Equity securities: |
||||||||||||||||||||||||||||||||
Mutual funds |
1,000 | — | (34 | ) | 966 | 1,000 | — | (42 | ) | 958 | ||||||||||||||||||||||
Equity securities |
2,468 | — | (279 | ) | 2,189 | 2,469 | — | (540 | ) | 1,929 | ||||||||||||||||||||||
Total equity securities |
3,468 | — | (313 | ) | 3,155 | 3,469 | — | (582 | ) | 2,887 | ||||||||||||||||||||||
Total investment securities |
$ | 224,130 | $ | 7,027 | $ | (624 | ) | $ | 230,533 | $ | 259,057 | $ | 6,964 | $ | (1,460 | ) | $ | 264,561 | ||||||||||||||
| (1) | Government-sponsored enterprise obligations include investment securities issued by government sponsored enterprises (“GSEs”) such as Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal Home Loan Bank (“FHLB”). These investment securities do not represent obligations of the U.S. Government and are not backed by the full faith and credit of the Treasury. |
Interest and dividend income on investment securities available for sale for the years ended 2009
and 2008 totaled $11.8 million and $12.7 million, respectively, including dividend income on equity
securities available for sale of $197,000 in 2009 and $605,000 in 2008.
For the years ended December 31, 2009 and 2008, proceeds from sales of securities available for
sale totaled $31.6 million and $0, respectively. Gross realized gains amounted to $1.8 million and
$0, respectively, while gross realized losses amounted to $2,000 and $0. The tax expenses
applicable to these net realized gains amounted to $634,000 and $0, respectively.
The impairment write-downs on securities in 2008 related to preferred stock holdings issued by FNMA
and FHLMC, which have a net carrying value of $0 as of December 31, 2009 and 2008.
42
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Securities pledged for borrowing arrangements at December 31, follow:
| Government- | Residential | Residential | ||||||||||||||
| Sponsored | Mortgage- | Collateralized | ||||||||||||||
| U.S. Treasury | Enterprise | Backed | Mortgage | |||||||||||||
| Obligations | Obligations | Securities | Obligations | |||||||||||||
| (In Thousands) | ||||||||||||||||
2009: |
||||||||||||||||
Wholesale repurchase agreements: |
||||||||||||||||
Amortized cost |
$ | — | $ | 2,992 | $ | 41,830 | $ | — | ||||||||
Fair value |
— | 2,999 | 44,009 | — | ||||||||||||
Customer repurchase agreements: |
||||||||||||||||
Amortized cost |
— | 6,494 | — | — | ||||||||||||
Fair value |
— | 6,621 | — | — | ||||||||||||
FHLBB advances: |
||||||||||||||||
Amortized cost |
5,058 | 15,891 | 77,700 | 38,230 | ||||||||||||
Fair value |
5,294 | 15,912 | 81,089 | 38,627 | ||||||||||||
FRB discount window: |
||||||||||||||||
Amortized cost |
499 | — | 11,258 | — | ||||||||||||
Fair value |
500 | — | 11,668 | — | ||||||||||||
2008: |
||||||||||||||||
Wholesale repurchase agreements: |
||||||||||||||||
Amortized cost |
$ | — | $ | — | $ | 47,219 | $ | — | ||||||||
Fair value |
— | — | 48,835 | — | ||||||||||||
Customer repurchase agreements: |
||||||||||||||||
Amortized cost |
— | 5,986 | — | — | ||||||||||||
Fair value |
— | 6,136 | — | — | ||||||||||||
FHLBB advances: |
||||||||||||||||
Amortized cost |
5,074 | 9,499 | 119,589 | 46,707 | ||||||||||||
Fair value |
5,494 | 9,586 | 123,544 | 47,040 | ||||||||||||
Impaired securities.
The following table shows the gross unrealized losses and fair value of the Company’s investments
with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by
investment category and length of time that individual securities have been in a continuous
unrealized loss position, at December 31, 2009 and 2008:
| Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| 2009 | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||
Debt securities: |
||||||||||||||||||||||||
Government-sponsored
enterprise obligations |
$ | 15,949 | $ | (49 | ) | $ | — | $ | — | $ | 15,949 | $ | (49 | ) | ||||||||||
Residential mortgage-
backed securities |
11,368 | (61 | ) | 1,463 | (10 | ) | 12,831 | (71 | ) | |||||||||||||||
Residential collateralized
mortgage obligations |
12,453 | (79 | ) | 16 | (1 | ) | 12,469 | (80 | ) | |||||||||||||||
Corporate obligations |
— | — | 2,378 | (111 | ) | 2,378 | (111 | ) | ||||||||||||||||
Total debt securities |
39,770 | (189 | ) | 3,857 | (122 | ) | 43,627 | (311 | ) | |||||||||||||||
Equity securities: |
||||||||||||||||||||||||
Mutual funds |
— | — | 966 | (34 | ) | 966 | (34 | ) | ||||||||||||||||
Equity securities |
— | — | 1,760 | (279 | ) | 1,760 | (279 | ) | ||||||||||||||||
Total equity securities |
— | — | 2,726 | (313 | ) | 2,726 | (313 | ) | ||||||||||||||||
Total temporarily impaired
securities |
$ | 39,770 | $ | (189 | ) | $ | 6,583 | $ | (435 | ) | $ | 46,353 | $ | (624 | ) | |||||||||
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| Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| 2008 | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||
Debt securities: |
||||||||||||||||||||||||
Government-sponsored
enterprise obligations |
$ | 2,500 | $ | (3 | ) | $ | — | $ | — | $ | 2,500 | $ | (3 | ) | ||||||||||
Residential mortgage-
backed securities |
303 | (1 | ) | 6,864 | (79 | ) | 7,167 | (80 | ) | |||||||||||||||
Residential collateralized
mortgage obligations |
2,006 | (1 | ) | 7,085 | (44 | ) | 9,091 | (45 | ) | |||||||||||||||
Corporate obligations |
1,800 | (677 | ) | 3,883 | (73 | ) | 5,683 | (750 | ) | |||||||||||||||
Total debt securities |
6,609 | (682 | ) | 17,832 | (196 | ) | 24,441 | (878 | ) | |||||||||||||||
Equity securities: |
||||||||||||||||||||||||
Mutual funds |
— | — | 958 | (42 | ) | 958 | (42 | ) | ||||||||||||||||
Equity securities |
1,500 | (540 | ) | — | — | 1,500 | (540 | ) | ||||||||||||||||
Total equity securities |
1,500 | (540 | ) | 958 | (42 | ) | 2,458 | (582 | ) | |||||||||||||||
Total temporarily impaired
securities |
$ | 8,109 | $ | (1,222 | ) | $ | 18,790 | $ | (238 | ) | $ | 26,899 | $ | (1,460 | ) | |||||||||
U. S. Treasury and government-sponsored enterprise obligations. The unrealized losses on the
Company’s investment in U.S. Government and Government-sponsored enterprise obligations were caused
by interest rate increases. These investments are guaranteed by the U.S. Government or an
enterprise thereof. Accordingly, it is expected that the securities would not be settled at a
price less than the par value of the investment. Because the decline in market value is
attributable to changes in interest rates and not to credit quality, and because the Company does
not intend to sell the investments until a recovery of fair value, which may be maturity, and it is
more likely than not that the Company will not be required to sell the investments, the Company
does not consider these investments to be other-than-temporarily impaired at December 31, 2009.
Residential mortgage-backed securities and residential collateralized mortgage obligations. The
unrealized losses on the Company’s investment in these securities were caused by interest rate
increases. The contractual cash flows of these investments are guaranteed by U.S. government
agencies and government-sponsored enterprises. Accordingly, it is expected that the securities
would not be settled at a price less than the amortized cost of the Company’s investment. Because
the decline in market value is attributable to changes in interest rates and not credit quality and
because the Company does not intend to sell the investments and it is more likely than not that the
Company will not be required to sell the investments before recovery of their amortized cost basis,
which may be maturity, the Company does not consider these investments to be other-than-temporarily
impaired at December 31, 2009.
Corporate obligations. The Company’s unrealized losses on investments in corporate bonds relate to
an investment in a company within the financial services sector. The unrealized losses are
primarily caused by recent decreases in profitability and near-term profit forecasts by industry
analysts and recent downgrades by several industry analysts. The contractual maturity of this
investment is November 1, 2010. Although the Company’s credit rating has decreased from A to BBB
(S&P), the Company currently does not believe it is probable that it will be unable to collect all
amounts due according to the contractual terms of the investment. Due to the short term until
maturity, the Company does not consider this investment to be other-than-temporarily impaired at
December 31, 2009.
Equity securities and mutual funds. The unrealized losses on equity securities and mutual funds
are a result of specific conditions and circumstances that are unique to each company represented
in the portfolio. Management monitors its holdings for impairment by reviewing the financial
condition of the issuer, company specific events, industry developments, and general economic
conditions. In evaluating the severity and duration of impairment, management also reviews
corporate financial reports, press releases and other publicly available information. Based upon
this evaluation and the Company’s ability and intent to hold its remaining equity securities and
mutual fund investments for a reasonable period of time sufficient for a forecasted recovery of
fair value, the Company does not consider these two investments to be other-than-temporarily
impaired at December 31, 2009.
The following table is a summary of the contractual maturities of investment securities available
for sale at December 31, 2009. These amounts exclude mutual funds and equity securities, which
have no contractual maturities. Mortgage-backed securities and collateralized mortgage
obligations are shown at their final contractual maturity date but are expected to have shorter
average lives.
44
Table of Contents
| Amortized | Fair | |||||||
| December 31, 2009 | Cost | Value | ||||||
| (In Thousands) | ||||||||
Debt securities: |
||||||||
Within 1 year |
$ | 3,825 | $ | 3,727 | ||||
After 1 year through 5 years |
46,866 | 47,384 | ||||||
After 5 years through 10 years |
28,685 | 29,144 | ||||||
After 10 years |
141,286 | 147,123 | ||||||
Total debt securities |
$ | 220,662 | $ | 227,378 | ||||
(3) FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the Federal Home Loan Bank of Boston (“FHLBB”). As part of the Bank’s
borrowing arrangement with the FHLBB, the Bank is required to invest in FHLBB stock in an amount
determined on the basis of the amount of the Bank’s residential mortgage loans and its borrowings
from the FHLBB. At both December 31, 2009 and 2008, the Bank held $11.8 million in FHLBB stock.
This stock, which is restricted, is redeemable at par and earns dividends declared at the
discretion of the FHLBB, which announced in February 2009, the suspension of dividends for the
first quarter of 2009 and beyond. In December 2008, the FHLBB announced its moratorium on the
repurchase of all excess stock.
(4) LOANS
The components of the loan portfolio at December 31, follow:
| 2009 | 2008 | |||||||
| (In Thousands) | ||||||||
Residential real estate |
$ | 131,441 | $ | 109,276 | ||||
Home equity |
27,003 | 23,972 | ||||||
Consumer |
657 | 831 | ||||||
Retail loans |
159,101 | 134,079 | ||||||
Construction and land development |
62,772 | 78,169 | ||||||
Commercial real estate |
282,716 | 206,577 | ||||||
Commercial business |
32,030 | 33,796 | ||||||
Corporate loans |
377,518 | 318,542 | ||||||
Total loans |
536,619 | 452,621 | ||||||
Allowance for loan losses |
(7,168 | ) | (5,885 | ) | ||||
Net loans |
$ | 529,451 | $ | 446,736 | ||||
The amounts above include net deferred loan origination costs totaling $260,000 and $204,000 at
December 31, 2009 and 2008, respectively.
Mortgage loans serviced by the Company for others amounted to $18.3 million and $23.4 million at
December 31, 2009 and 2008, respectively, and are not included above.
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 years ended December 31, follows:
| 2009 | 2008 | |||||||
| (In Thousands) | ||||||||
Balance at beginning of year |
$ | 2,822 | $ | 2,112 | ||||
New loans granted |
315 | 1,145 | ||||||
Retirement/reduction of directors and officers |
(25 | ) | (249 | ) | ||||
Repayment of principal |
(553 | ) | (186 | ) | ||||
Balance at end of year |
$ | 2,559 | $ | 2,822 | ||||
A portion of the Bank’s residential mortgage portfolio, certain commercial real estate loans, home
equity lines and loans are used as collateral for the Bank’s FHLBB advances. See Note 7 for
further information.
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Table of Contents
The activity in the allowance for loan losses for the years ended December 31, follows:
| 2009 | 2008 | |||||||
| (In Thousands) | ||||||||
Balance at beginning of year |
$ | 5,885 | $ | 4,810 | ||||
Total charge-offs |
(360 | ) | (214 | ) | ||||
Total recoveries |
3 | 4 | ||||||
Net charge-offs |
(357 | ) | (210 | ) | ||||
Provision for loan losses |
1,640 | 1,285 | ||||||
Balance at end of year |
$ | 7,168 | $ | 5,885 | ||||
Non-accrual loans totaled $6.0 million and $2.6 million at December 31, 2009 and 2008,
respectively. There were no loans 90 days or more past due and still accruing interest.
Information related to impaired loans at or for the years ended December 31, follows:
| 2009 | 2008 | |||||||
| (In Thousands) | ||||||||
Total impaired loans |
$ | 7,300 | $ | 3,121 | ||||
Impaired loans with reserve |
3,196 | — | ||||||
Impaired loan reserve |
415 | — | ||||||
Impaired loans without reserve |
4,104 | 3,121 | ||||||
Impaired loans average balance |
4,111 | 611 | ||||||
Interest income in accordance with original loan terms |
99 | 38 | ||||||
Interest income recognized |
48 | — | ||||||
No additional funds are committed to be advanced in connection with impaired loans.
(5) PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, follow:
| Estimated | ||||||||||||
| Useful Lives | 2009 | 2008 | ||||||||||
| (In Thousands) | ||||||||||||
Premises |
10 – 39 years | $ | 5,221 | $ | 5,143 | |||||||
Equipment |
3 – 10 years | 2,645 | 5,642 | |||||||||
Leasehold improvements |
3 – 20 years | 2,077 | 1,047 | |||||||||
| 9,943 | 11,832 | |||||||||||
Less accumulated depreciation and amortization |
(2,734 | ) | (6,304 | ) | ||||||||
| $ | 7,209 | $ | 5,528 | |||||||||
Depreciation and amortization of premises and equipment totaled $619,000 and $605,000,
respectively, for the years ended December 31, 2009 and 2008.
Rent expense for leased premises for the years ended December 31, 2009 and 2008 amounted to
$280,000 and $263,000, respectively. The Company enters into operating leases in which office space
is rented to other businesses at the corporate headquarters. Rental income for the years ended
December 31, 2009 and 2008 amounted to $239,000 and $231,000, respectively.
A summary of future minimum rental expense and income under non-cancelable operating leases at
December 31, 2009 follows:
| Minimum | Minimum | |||||||
| Rental | Rental | |||||||
| Expense | Income | |||||||
| (In Thousands) | ||||||||
2010 |
$ | 346 | $ | 203 | ||||
2011 |
309 | 173 | ||||||
2012 |
297 | 48 | ||||||
2013 |
297 | 1 | ||||||
2014 |
286 | — | ||||||
Thereafter |
2,964 | — | ||||||
| $ | 4,499 | $ | 425 | |||||
The leases contain options to extend for periods of five to twenty years. The cost of such rentals
is not included above.
46
Table of Contents
(6) DEPOSITS
The following table shows the components of deposits at December 31, 2009 and 2008 and the range of
interest rates paid as of December 31, 2009.
| Rates as of | ||||||||||||
| December 31, | ||||||||||||
| 2009 | 2009 | 2008 | ||||||||||
| (Dollars in Thousands) | ||||||||||||
NOW acccounts |
0.10–0.50 | % | $ | 20,739 | $ | 17,239 | ||||||
Savings accounts |
0.25–1.44 | % | 90,642 | 56,251 | ||||||||
Money market accounts |
0.50–1.49 | % | 106,640 | 76,603 | ||||||||
Total interest bearing core deposits |
218,021 | 150,093 | ||||||||||
Non-interest bearing demand deposit accounts |
34,368 | 27,546 | ||||||||||
Total core deposits |
252,389 | 177,639 | ||||||||||
Certificates of deposit |
0.70–2.96 | % | 202,707 | 196,629 | ||||||||
Retirement certificates of deposit |
0.70–2.96 | % | 37,698 | 34,395 | ||||||||
Total term deposits |
240,405 | 231,024 | ||||||||||
Total deposits |
$ | 492,794 | $ | 408,663 | ||||||||
Interest forfeitures resulting from early withdrawals from certificates of deposits are credited to
interest expense and amounted to $21,000 and $36,000 for the years ended December 31, 2009 and
2008, respectively.
The amount and weighted average interest rate on certificates of deposit, including retirement
accounts, by periods to maturity at December 31, 2009 are summarized as follows:
| Equal to | Weighted | |||||||||||||||
| Less | and greater | Average | ||||||||||||||
| than | than | Interest | ||||||||||||||
| $100,000 | $100,000 | Total | Rate | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
Three months or less |
$ | 38,675 | $ | 43,509 | $ | 82,184 | 3.15 | % | ||||||||
From three to six months |
21,884 | 11,841 | 33,725 | 2.20 | ||||||||||||
From six to twelve months |
25,283 | 24,258 | 49,541 | 2.93 | ||||||||||||
From one to two years |
14,799 | 32,728 | 47,527 | 3.05 | ||||||||||||
From two to three years |
3,421 | 5,504 | 8,925 | 2.87 | ||||||||||||
Three years and thereafter |
8,355 | 10,148 | 18,503 | 3.57 | ||||||||||||
| $ | 112,417 | $ | 127,988 | $ | 240,405 | 2.97 | % | |||||||||
Brokered deposits totaled $29.3 million and $32.8 million at December 31, 2009 and 2008,
respectively, at a rate of 4.32% and 4.43%, respectively, and are included in certificates of
deposit.
(7) BORROWED FUNDS AND SUBORDINATED DEBT
The components of long-term borrowed funds at December 31, follow:
| 2009 | 2008 | |||||||||||||||
| Weighted Average | Weighted Average | |||||||||||||||
| Amount | Interest Rate | Amount | Interest Rate | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
FHLBB long-term advances |
$ | 205,971 | 4.12 | % | $ | 219,228 | 4.27 | % | ||||||||
Wholesale repurchase agreements |
40,000 | 4.36 | % | 40,000 | 4.36 | % | ||||||||||
| $ | 245,971 | 4.16 | % | $ | 259,228 | 4.28 | % | |||||||||
The FHLBB permits member institutions to borrow funds for various purposes. The FHLBB requires
member banks to maintain qualified collateral for its advances. Collateral is comprised of the
Bank’s residential mortgage portfolio, certain commercial real estate loans, home equity lines and
loans and the portion of the investment portfolio that meets FHLBB qualifying collateral
requirements and has been designated as such (see Notes 2 and 4).
47
Table of Contents
Long-term FHLBB advances outstanding at December 31, follow:
| 2009 | 2008 | |||||||||||||||
| Weighted Average |
Weighted Average |
|||||||||||||||
| Maturity | Amount | Interest Rate | Amount | Interest Rate | ||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
2009 |
$ | — | — | % | $ | 10,000 | 5.14 | % | ||||||||
2010 |
31,000 | 5.10 | 44,000 | 5.04 | ||||||||||||
2011 |
33,000 | 3.27 | 33,000 | 3.27 | ||||||||||||
2012 |
15,000 | 5.18 | 15,000 | 5.18 | ||||||||||||
2013 |
14,000 | 3.20 | 8,000 | 3.28 | ||||||||||||
2014 |
18,900 | 4.18 | 15,000 | 4.50 | ||||||||||||
Thereafter |
94,071 | 4.06 | 94,228 | 4.06 | ||||||||||||
| $ | 205,971 | 4.12 | % | $ | 219,228 | 4.27 | % | |||||||||
The FHLBB has the right to call, or to cause the Bank to prepay, certain obligations without
prepayment penalties. This right may cause actual maturities to differ from the contractual
maturities summarized above. As of December 31, 2009, the Company had callable advances totaling
$165.0 million and amortizing advances totaling $3.1 million. Of the $165.0 million in callable
advances, $20.0 million matures in March 2010, with an average interest rate of 6.03% and $145.0
million remains outstanding with a weighted average rate of 3.94%. There were no adjustable rate
advances in 2009 or 2008. In December 2009, the Company prepaid $7.0 million in long-term advances
and paid a penalty of $127,000. Another $6.0 million advance was modified in the fourth quarter
into a lower cost, long-term advance that matures in 2013.
At both December 31, 2009 and 2008, the Bank had wholesale repurchase agreements totaling $40.0
million. Of the $40.0 million, $25.0 million at 4.83% and $15.0 million at 3.58% mature in 2012
and 2013, respectively, and have a weighted average rate of 4.36%. These agreements are treated as
secured, long-term borrowings while 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 obligations of the Treasury and government-sponsored enterprise
obligations and is held by third-party custodians (see note 2).
In October 2009, the Bank entered into a subordinated debt agreement for $6.0 million on an
unsecured basis with a final maturity in October 2016. The subordinated debt agreement calls for a
fixed interest rate of 8.5% and equal annual principal payments of $1.2 million commencing on the
third anniversary of the agreement. The entire amount of the subordinated debt was included as
part of the Bank’s Tier 2 capital for regulatory purposes as of December 31, 2009.
The components of short-term borrowed funds at December 31, follow:
| 2009 | 2008 | |||||||||||||||
| Weighted Average | Weighted Average | |||||||||||||||
| Amount | Interest Rate | Amount | Interest Rate | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
FHLBB short-term borrowings |
$ | — | — | % | 11,000 | 2.08 | % | |||||||||
Federal Reserve Bank discount window |
— | — | — | — | ||||||||||||
Customer repurchase agreements |
7,111 | 0.25 | 6,262 | 0.50 | ||||||||||||
| $ | 7,111 | 0.25 | % | $ | 17,262 | 1.51 | % | |||||||||
Customer repurchase agreements are obligations to repurchase securities sold which are reflected as
a liability in the consolidated balance sheets. The dollar amount of the securities underlying the
agreements remain in the asset accounts. The securities pledged are registered in the Bank’s name;
however, the securities are held by the designated trustee of the broker (see note 2). Upon
maturity of the agreements, the identical securities pledged as collateral are returned to the
Bank.
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Information relating to short-term borrowed funds for the years ended December 31, follows:
| 2009 | 2008 | |||||||||||||||
| Customer | Short-Term | Customer | Short-Term | |||||||||||||
| Repurchase | FHLBB | Repurchase | FHLBB | |||||||||||||
| Agreements | Advances | Agreements | Advances | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
Outstanding at December 31 |
$ | 7,111 | $ | — | $ | 6,262 | $ | 11,000 | ||||||||
Average balance outstanding during the year |
5,943 | 2,419 | 5,107 | 5,352 | ||||||||||||
Maximum outstanding at any month end |
7,534 | 16,000 | 7,051 | 16,000 | ||||||||||||
Weighted average rate at December 31 |
0.25 | % | — | % | 0.50 | % | 2.08 | % | ||||||||
Weighted average rate during the year |
0.26 | 1.60 | 1.13 | 2.39 | ||||||||||||
At December 31, 2009 and 2008, the Bank had certain investment securities with a fair value of
$206.7 million and $240.6 million, respectively, pledged as collateral against total borrowings
(see Note 2).
The Federal Home Loan Bank advances are also collateralized by a blanket lien on the Bank’s 1-4
family residential loans, equity loans and lines and certain significant commercial real estate
loans. The Bank’s total borrowing capacity at FHLBB at December 31, 2009 and 2008 was $277.5
million and $299.3 million based on the total available collateral, respectively, of which $206.0
million and $230.2 million was outstanding at December 31, 2009 and 2008, respectively, leaving
additional capacity of $71.5 million and $69.1 million at December 31, 2009 and 2008, respectively.
In addition, the Bank established a collateralized line of credit with the Federal Reserve Bank
discount window for $11.6 million which was available in its entirety at December 31, 2009.
(8) INCOME TAXES
An analysis of income tax expense for the years ended December 31, follows:
| 2009 | 2008 | |||||||
| (In Thousands) | ||||||||
Current expense: |
||||||||
Federal |
$ | 2,304 | $ | 1,798 | ||||
State |
574 | 492 | ||||||
Total current expense |
2,878 | 2,290 | ||||||
Deferred expense (benefit): |
||||||||
Federal |
(125 | ) | (3,358 | ) | ||||
State |
(37 | ) | (1,159 | ) | ||||
Change in state rates |
— | 177 | ||||||
Change in valuation reserve |
(49 | ) | 498 | |||||
Total deferred benefit |
(211 | ) | (3,842 | ) | ||||
Total income tax expense (benefit) |
$ | 2,667 | $ | (1,552 | ) | |||
A reconciliation of the difference between the expected federal income tax expense (benefit)
computed by applying the federal statutory rate of 34%, to pre-tax income or loss to the amount of
actual income tax expense for the years ended December 31, follows:
| 2009 | 2008 | |||||||
| (In Thousands) | ||||||||
Expected federal income tax expense (benefit) |
$ | 2,619 | $ | (1,454 | ) | |||
Items affecting expected tax: |
||||||||
State income tax, net of federal benefit |
354 | (440 | ) | |||||
Dividends received deduction |
(38 | ) | (134 | ) | ||||
Tax exempt income |
(46 | ) | (49 | ) | ||||
Officer’s life insurance |
(163 | ) | (150 | ) | ||||
Change in state rates |
— | 177 | ||||||
Change in valuation reserve |
(49 | ) | 498 | |||||
Other |
(10 | ) | — | |||||
Total income tax expense (benefit) |
$ | 2,667 | $ | (1,552 | ) | |||
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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:
| 2009 | 2008 | |||||||
| (In Thousands) | ||||||||
Deferred tax assets: |
||||||||
Allowance for loan losses |
$ | 2,922 | $ | 2,370 | ||||
Impairment write-downs on securities |
3,628 | 4,036 | ||||||
Pension costs and other post-retirement benefits |
99 | 103 | ||||||
Deferred compensation |
481 | 502 | ||||||
Depreciation |
444 | 396 | ||||||
Other |
44 | 19 | ||||||
Gross deferred tax asset |
7,618 | 7,426 | ||||||
Valuation reserve |
(449 | ) | (498 | ) | ||||
Deferred tax asset |
7,169 | 6,928 | ||||||
Deferred tax liabilities: |
||||||||
Unrealized gain on investment securities available for sale |
(2,536 | ) | (2,193 | ) | ||||
Other |
(318 | ) | (288 | ) | ||||
Gross deferred tax liability |
(2,854 | ) | (2,481 | ) | ||||
Net deferred income tax asset |
$ | 4,315 | $ | 4,447 | ||||
At December 31, 2009, the Bank would need to generate approximately $12.4 million of future net
taxable income over five years 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, 2009 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 changes in interest rates, 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 increase in the valuation reserve for the year ended December 31, 2008, was due to management’s
assessment of the realizability of state tax benefits relating to the impairment write-downs on
securities. The decrease for the year ended December 31, 2009, is due to the sale of a portion of
the securities that had been written down. Management believes that it is more likely than not
that a portion of the state tax benefit will not be realized.
Tax periods ended December 31, 2006, 2007, 2008 and 2009 remain subject to examination by federal
and state taxing authorities.
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 distributions to stockholders. The tax effect of
pre-1988 bad debt tax reserves subject to recapture in the case of certain excess distributions is
approximately $1.0 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 unrealized gains/losses on investment securities available for sale.
Tier 2 capital includes the allowance for loan losses and subordinated debt, subject to guideline
limitations.
At December 31, 2009 and 2008, the Company and the Bank exceeded each of the minimum capital
requirements and the Bank also met the definition of “well capitalized,” as defined by the FRB and
the FDIC under the regulatory framework for prompt corrective action. To be categorized as “well
capitalized,” the Company or the Bank must maintain Tier 1, Total, and Leverage ratios as set forth
in the table below. There are no conditions or events that management believes have changed the
Company’s or the Bank’s classification as “well capitalized.”
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The Company’s and the Bank’s minimum required and actual capital ratios at December 31, 2009 and
2008, follow:
| Actual | Adequately Capitalized | Well Capitalized | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
At December 31, 2009 |
||||||||||||||||||||||||
LSB Corporation |
||||||||||||||||||||||||
Total risk-based capital |
$ | 69,633 | 12.01 | % | $ | 46,379 | 8.0 | % | $ | 57,974 | 10.0 | % | ||||||||||||
Tier 1 risk-based capital |
56,465 | 9.74 | 23,190 | 4.0 | 34,784 | 6.0 | ||||||||||||||||||
Tier 1 leverage capital |
56,465 | 6.98 | 32,365 | 4.0 | 40,457 | 5.0 | ||||||||||||||||||
River Bank |
||||||||||||||||||||||||
Total risk-based capital |
68,669 | 11.84 | % | 46,379 | 8.0 | % | 57,974 | 10.0 | % | |||||||||||||||
Tier 1 risk-based capital |
55,501 | 9.57 | 23,190 | 4.0 | 34,784 | 6.0 | ||||||||||||||||||
Tier 1 leverage capital |
55,501 | 6.85 | 32,393 | 4.0 | 40,491 | 5.0 | ||||||||||||||||||
At December 31, 2008 |
||||||||||||||||||||||||
LSB Corporation |
||||||||||||||||||||||||
Total risk-based capital |
$ | 74,372 | 14.45 | % | $ | 41,183 | 8.0 | % | $ | 51,479 | 10.0 | % | ||||||||||||
Tier 1 risk-based capital |
68,487 | 13.30 | 20,592 | 4.0 | 30,887 | 6.0 | ||||||||||||||||||
Tier 1 leverage capital |
68,487 | 9.22 | 29,721 | 4.0 | 37,152 | 5.0 | ||||||||||||||||||
River Bank |
||||||||||||||||||||||||
Total risk-based capital |
$ | 66,774 | 12.97 | % | $ | 41,183 | 8.0 | % | $ | 51,479 | 10.0 | % | ||||||||||||
Tier 1 risk-based capital |
60,889 | 11.83 | 20,592 | 4.0 | 30,887 | 6.0 | ||||||||||||||||||
Tier 1 leverage capital |
60,889 | 8.18 | 29,777 | 4.0 | 37,222 | 5.0 | ||||||||||||||||||
Senior Cumulative Perpetual Preferred Stock, Series B
On December 12, 2008, the Company issued and sold (i) 15,000 shares of Senior Cumulative Perpetual
Preferred Stock, Series B, (“Senior Preferred”), with a liquidation preference of $1,000 per share
and (ii) ten-year warrants to purchase up to 209,497 shares of the Company’s common stock at an
exercise price of $10.74 per share, to the Treasury as part of the CPP, for an aggregate purchase
price of $15,000,000. On November 18, 2009, the Company redeemed all of the Senior Preferred for a
redemption price of $15,000,000, and on December 16, 2009, the Company repurchased the warrants for
a purchase price of $560,000. As a result of the redemption of the Senior Preferred and the
repurchase of the warrants, the Company no longer is subject to restrictions regarding dividends,
stock repurchases or executive compensation imposed under the Company’s agreements with the
Treasury or under the Treasury regulations applicable to TARP recipients generally.
Accounting for Issuance of Senior Preferred and Warrants
The proceeds from the issuance were allocated between the Senior Preferred and the warrants based
on relative fair value. Accordingly, the fair value of the warrants, in the amount of $549,000
calculated based on the Black Scholes valuation model, was recorded as an increase to Additional
Paid-In Capital. A discount in the amount of $549,000 was recorded on the Senior Preferred and
initially was being accreted over an estimated period of five years using the effective interest
method. The accretion of the discount on the Senior Preferred is treated as a deemed dividend and
is a reduction to net income available to common shareholders for purposes of calculating earnings
per common share. The accretion of the discount in 2008 had no impact on earnings per share.
Senior Preferred Terms
The Senior Preferred had no maturity date and was ranked senior to the common stock with respect to
the payment of dividends, distributions and amounts payable upon liquidation, dissolution and
winding up of the Company. Cumulative dividends on the Senior Preferred accrued at an annual rate
of 5% per year prior to redemption. Dividends were payable quarterly in arrears on February 15,
May 15, August 15 and November 15 of each year.
Warrant Terms
The warrants were exercisable immediately. Prior to the redemption of the warrants, the Treasury
was permitted to transfer or exercise an aggregate of one-half of the shares under the warrants
prior to the earlier of (i) December 12, 2009 or (ii) the date on which the Senior Preferred was
redeemed in whole or the Treasury transferred all of its Senior Preferred to one or more third
parties.
Accounting for the Redemption of Senior Preferred and Warrants
At the time of the redemption of the Senior Preferred, the unamortized discount is accreted in full
and reduced the net income attributable to common shareholders. The repurchase of the warrant on
the other hand, had the impact of reducing cash and additional paid-in capital but no impact on net
income. The combination of the estimated accretion (assuming the original five-year estimated
life), the accelerated accretion based on the repayment of the senior preferred, combined with the
actual cash dividends of $700,000 paid during the period for a total of $1.2 million.
Stock Repurchase Plan
In 2007, the Company announced a common stock repurchase program to repurchase up to 230,000
shares. During 2008 and 2007, 64,620 and 90,356 shares were repurchased under this program,
respectively. As a result of the other-than-temporary impairment charges recorded during 2008, the
Company suspended its stock repurchase program. Further, the Company was not permitted to
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Table of Contents
reinstate the repurchase program without the Treasury’s consent while the Senior Preferred Stock
remained outstanding. Although the Senior Preferred Stock was redeemed, the Company does not
anticipate resuming the stock repurchase program in 2010 at this time.
Restrictions on Dividends, Loans and Advances
The Company functions only as a holding company for River Bank, a wholly-owned subsidiary of the
Company. The Company engages in no business activities directly and is entirely dependent on the
receipt of dividends from the Bank to meet the Company’s separate expenses, repay any indebtedness
and pay dividends. Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company. Without regulatory approval, the total
amount of dividends declared in any calendar year cannot exceed the Bank’s net income for the
current year, plus the Bank’s net income retained for the two previous years. As such, the Bank is
required to seek regulatory approval for the payment of dividends to the Company as of December 31,
2009. In addition, loans or advances by the Bank to the Company are limited to 10 percent of the
Bank’s capital stock and surplus on a secured basis. At December 31, 2009, funds available for
loans or advances by the Bank to the Company amounted to $5.9 million.
The Company and the Bank may not declare or pay dividends if the effect thereof would cause
stockholders’ equity to be reduced below applicable minimum regulatory capital requirements.
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 shares of common stock. The rights are not exercisable until those
aforementioned circumstances occur. The rights under the plan as adopted in 1996 would have expired
in 2006. In November 2005, however, the Board of Directors approved a renewed rights plan to
become effective upon the expiration of the plan in 2006. The terms of the renewed rights plan are
substantially similar to those of the previous plan. The renewed rights plan expires in 2016.
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
401(k) Savings Plan
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 makes
safe harbor contributions of 3% of total compensation on all employees, regardless of their
participation in the voluntary savings plan. The Company recognized expenses of $193,000 and
$186,000 on behalf of the employees who were in the Savings Plan for the years ended December 31,
2009 and 2008, respectively.
Employee Stock Ownership Plan
Effective January 1, 2007, the Company established an Employee Stock Ownership Plan (the “ESOP”)
that covers all employees who meet specified age and length of service requirements. The Company
makes voluntary contributions to the ESOP which will in turn, use the cash contributions to
purchase Company stock on the open market. The Company’s contributions are discretionary and are
included in the salary and employee benefits expense and totaled $163,000 and $162,000 for the
years ended December 31, 2009 and 2008, respectively. The ESOP purchased 17,650 shares of Company
stock at an average cost of $10.98 per share in 2009 and 9,000 shares at an average cost of $13.69
per share in 2008.
Incentive Compensation Plan
The Incentive Compensation Plan provides for the payment of bonuses to officers under certain
circumstances based upon the Company’s pre-tax earnings adjusted for gains or losses from sales of
assets, targeted returns on assets and the individual’s achievement of established goals and
objectives as well as increases in total loans and core deposits. Amounts are allocated to
participants as determined by the Company’s Compensation Committee taking into account the
recommendation of the President and subject to approval by its Board of Directors. During the
years ended December 31, 2009 and 2008, respectively, payments of $247,000 and $234,000,
respectively, were made to all employees under this Plan.
Employment Termination or Change-in-Control Agreements
The Company has entered into special termination agreements with its President and Chief Executive
Officer and certain other executives. The agreements provide generally that if there is a
change-in-control of the Company and if, within two years after such event, the officer’s
employment is terminated for any reason (other than death, disability or cause, as defined in the
agreements), then the officer would be entitled to receive a lump-sum severance payment in an
amount equal to approximately three times his or her average annual compensation over the five
previous years of his or her employment with the Company (or such shorter period in which the
officer was employed) and the continuation of his of her life, medical and disability benefits at
the same level of coverage
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Table of Contents
and at the same out-of-pocket cost to the officer, immediately prior to the change-in-control, or
at the officer’s election, the earlier commencement of the proposed business combination (as
defined in the agreement) that results in such change-in-control.
Supplemental Executive Retirement Agreements
The Company has two supplemental executive retirement agreements with a former president and chief
executive officer. These agreements require payments to the former president that commenced
January 1, 2007 and were based on the three years of gross compensation prior to his retirement.
These agreements are unfunded for both of the years December 31, 2009 and 2008, respectively. As
of December 31, 2009 and 2008, the accrued liability recorded on the consolidated balance sheet was
$1.2 million and $1.3 million, respectively. Interest expense associated with the agreements
totaled $70,000 and $76,000 for the years ended December 31, 2009 and 2008, respectively.
(11) STOCK COMPENSATION AWARDS
The Board grants options on its common stock to Directors 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. The Company issues shares for option exercises and restricted stock issuances from
its pool of authorized but unissued shares. The following table presents the amount of cumulatively
granted options and restricted stock awards, net of cancellations, through December 31, 2009:
| Cumulative Option | ||||||||||||
| Authorized | Cumulative | Awards, Net of | ||||||||||
| Awards | Stock Awards | Expiration | ||||||||||
1986 Plan |
720,500 | N/A | 430,250 | |||||||||
1997 Plan |
449,500 | N/A | 427,850 | |||||||||
2006 Plan |
400,000 | 30,250 | 77,575 | |||||||||
| 1,570,000 | 30,250 | 935,675 | ||||||||||
At December 31, 2009, there were 292,175 shares available for issuance under the Company’s 2006
Stock Option and Incentive Plan and none remaining for issuance under any other Plan.
All options granted prior to December 31, 2005 vested over three years from the date of grant and
have ten-year contractual terms and expire between 2011 and 2015. The vesting schedule for all
options granted provides for 50% of options granted to vest after the first year and an additional
25% to vest each year thereafter.
All incentive stock options granted after January 1, 2006 vest over two years from the date of
grant, have seven-year contractual terms and expire between 2013 and 2014. The vesting schedule
for these grants typically provides for 50% of the options granted to vest immediately and an
additional 25% to vest each year thereafter. Options are fully vested two years after the grant
date with the exception of the non-qualifying stock option grants made to the Directors during 2008
and 2009, which vested immediately at the time of the grant.
In 2009 and 2008, stock awards were made in lieu of a cash bonus and totaled 6,750 and 9,500
shares, respectively. During the years ended December 31, 2009 and 2008, the grant date fair value
of stock awards totaled $72,000 and $76,000, respectively. These stock awards represent shares of
common stock granted with a transfer restriction of one year. These stock awards were fully vested
upon grant.
The total compensation expense related to all equity awards recognized in earnings by the Company
in the years ended December 31, 2009 and 2008 was $121,000 and $156,000 and the related tax benefit
was $2,000 and $4,000, respectively. The expense for the year ended December 31, 2009, represented
expense related to vested stock options of $49,000 and expense related to restricted stock of
$72,000. The expense for the year ended December 31, 2008, represented expense related to vested
stock options of $80,000 and expense related to restricted stock of $76,000.
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Table of Contents
A summary of option activity as of December 31, 2009 and 2008 and changes during the years then
ended follow:
| 2009 | 2008 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Number of | Exercise | Number of | Exercise | |||||||||||||
| Options | Price | Options | Price | |||||||||||||
Outstanding at beginning of year |
248,100 | $ | 14.33 | 251,600 | $ | 14.51 | ||||||||||
Granted |
9,000 | 10.74 | 9,000 | 8.00 | ||||||||||||
Exercised |
(28,995 | ) | 9.13 | (9,500 | ) | 12.39 | ||||||||||
Forfeited |
— | — | (3,000 | ) | 16.77 | |||||||||||
Expired |
(17,705 | ) | 11.67 | — | — | |||||||||||
Outstanding at end of year |
210,400 | 15.12 | 248,100 | 14.33 | ||||||||||||
Options exercisable end of year |
210,400 | 15.12 | 240,725 | 14.27 | ||||||||||||
Weighted average fair value of
options granted during the year |
$ | 2.57 | $ | 2.01 | ||||||||||||
The intrinsic value of the options is based on the average of the high price and low price at which
the Company’s common stock traded on December 31, 2009 of $9.78 as compared to the weighted average
exercise price. At December 31, 2009, the aggregate intrinsic value for both outstanding options
and exercisable options was zero.
For the years ended December 31, 2009 and 2008, the total intrinsic value of options exercised was
$31,000 and $46,000, respectively. At December 31, 2009, there was no unrecognized share-based
compensation expense. The weighted average remaining life of outstanding options and exercisable
options at December 31, 2009 was 4.3 years.
The fair value of each option grant is estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted average assumptions:
| 2009 | 2008 | |||||||
Expected volatility |
29.78 | % | 53.00 | % | ||||
Risk-free interest rate |
3.22 | % | 2.03 | % | ||||
Expected dividend yield |
3.38 | % | 7.50 | % | ||||
Expected life in years |
7 years | 7 years | ||||||
The expected volatility is based on historical volatility. The risk-free interest rates for
periods within the contractual life of the awards are based on the U.S. Treasury yield curve in
effect at the time of the grant. The expected life is based on historical exercise experience.
The dividend yield assumption is based on the Company’s history and expectation of dividend
payouts.
(12) CONTINGENCIES
The Bank and the Company are, from time to time, involved as either a plaintiff or defendant in
various legal actions incident to its business. None of these actions are believed to be material,
either individually or collectively, to the results of operations and financial condition of the
Company.
(13) 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. Included in the unused commitments
are commitments to purchase residential, fixed rate loans subject to the same underwriting
standards as any other residential origination.
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.
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The components of financial instruments with off-balance sheet risk at December 31, follow:
| 2009 | Fixed Rate | Variable Rate | Total | |||||||||
| (In Thousands) | ||||||||||||
Financial instruments with contract amounts represent credit risk: |
||||||||||||
Unused commitments to extend credit: |
||||||||||||
Residential mortgages |
$ | 1,932 | $ | — | $ | 1,932 | ||||||
Home equity lines of credit |
1,001 | 12,017 | 13,018 | |||||||||
Personal lines of credit |
315 | — | 315 | |||||||||
Commercial real estate mortgage |
3,146 | 12,075 | 15,221 | |||||||||
Construction and land |
— | 33,457 | 33,457 | |||||||||
Commercial loans |
2,065 | 35,919 | 37,984 | |||||||||
Total unused commitments |
$ | 8,459 | $ | 93,468 | $ | 101,927 | ||||||
Letters of credit and standby letters of credit |
$ | — | $ | 1,588 | $ | 1,588 | ||||||
| 2008 | Fixed Rate | Variable Rate | Total | |||||||||
| (In Thousands) | ||||||||||||
Financial instruments with contract amounts represent credit risk: |
||||||||||||
Unused commitments to extend credit: |
||||||||||||
Residential mortgages |
$ | 8,324 | $ | 160 | $ | 8,484 | ||||||
Home equity lines of credit |
1,034 | 11,905 | 12,939 | |||||||||
Personal lines of credit |
295 | — | 295 | |||||||||
Commercial real estate mortgage |
13 | 21,297 | 21,310 | |||||||||
Construction and land |
— | 29,564 | 29,564 | |||||||||
Commercial loans |
103 | 28,817 | 28,920 | |||||||||
Total unused commitments |
$ | 9,769 | $ | 91,743 | $ | 101,512 | ||||||
Letters of credit and standby letters of credit |
$ | — | $ | 1,610 | $ | 1,610 | ||||||
(14) FAIR VALUE OF ASSETS AND LIABILITIES
The Company uses fair value measurements to record fair value adjustments to certain assets and
liabilities and to determine fair value disclosures. The fair value of a financial instrument is
the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Fair value is best determined
based upon quoted market prices. However, in many instances, there are no quoted market prices for
the Company’s various financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instrument.
Assets measured at fair value on a recurring basis at December 31, 2009 and 2008 are summarized
below. There are no liabilities measured at fair value on a recurring basis.
| 2009 | Level 1 | Level 2 | Level 3 | Fair Value | ||||||||||||
| (In Thousands) | ||||||||||||||||
Investment securities available for sale: |
||||||||||||||||
U.S. Treasury obligations |
$ | 5,794 | $ | — | $ | — | $ | 5,794 | ||||||||
All other debt securities |
— | 221,584 | — | 221,584 | ||||||||||||
Equity securities |
1,760 | 970 | 425 | 3,155 | ||||||||||||
Total recurring assets |
$ | 7,554 | $ | 222,554 | $ | 425 | $ | 230,533 | ||||||||
| 2008 | Level 1 | Level 2 | Level 3 | Fair Value | ||||||||||||
| (In Thousands) | ||||||||||||||||
Investment securities available for sale: |
||||||||||||||||
U.S. Treasury obligations |
$ | 6,004 | $ | — | $ | — | $ | 6,004 | ||||||||
All other debt securities |
— | 255,670 | — | 255,670 | ||||||||||||
Equity securities |
1,500 | 962 | 425 | 2,887 | ||||||||||||
Total recurring assets |
$ | 7,504 | $ | 256,632 | $ | 425 | $ | 264,561 | ||||||||
There were no changes in Level 3 assets measured at fair value on a recurring basis for the years
ended December 31, 2009 and 2008. The investments carried under Level 3 assumptions are carried at
par value since all redemptions have been made at par value and represent non-marketable
securities.
55
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The Company may also be required, from time to time, to measure certain other assets on a
non-recurring basis in accordance with generally accepted accounting principles. These adjustments
to fair value usually result from application of lower-of-cost-or-market accounting or write-downs
of individual assets. There are no assets measured at fair value on a non-recurring basis at
December 31, 2008 and no liabilities measured at fair value on a non-recurring basis at December
31, 2009 and 2008. The following table summarizes the fair value hierarchy used to determine each
adjustment and the carrying value of the assets measured at fair value on a non-recurring basis as
of December 31, 2009. The losses represent the amount of losses recorded during 2009 on the assets
held at December 31, 2009.
| Year ended | ||||||||||||||||
| December 31, 2009 | ||||||||||||||||
| 2009 | Level 1 | Level 2 | Level 3 | Total Losses | ||||||||||||
| (In Thousands) | ||||||||||||||||
Non recurring: |
||||||||||||||||
Impaired loans |
$ | — | $ | — | $ | 2,781 | $ | 415 | ||||||||
Losses applicable to impaired loans are based on the appraised value of the underlying collateral,
discounted as necessary due to management’s estimates of changes in market conditions. These
losses are recorded as a component in determining the overall adequacy of the allowance for loan
losses. Adjustments to the estimated fair value of impaired loans may result in increases or
decreases to the provision for loan losses.
The following methods and assumptions were used by the Company in estimating fair value
disclosures.
The fair values for cash and short-term investments approximate their carrying amounts because of
the short-term nature of the assets. The securities measured at fair value in Level 1 are based on
quoted market prices in an active exchange market. These securities include marketable equity
securities and U.S. Treasury obligations. Securities measured at fair value in Level 2 are based
on pricing models that consider standard input factors such as observable market data, benchmark
yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. These
securities include government-sponsored enterprise obligations, mortgage-backed securities,
collateralized mortgage obligations and corporate obligations. Securities measured at fair value
in Level 3 include non-marketable equity securities that are carried at par value based on the
redemptive provisions of the issuers. The fair value of stock in the Federal Home Loan Bank of
Boston is based upon the redemption value of the stock which equates to its carrying value. Loans
are estimated by discounting contractual cash flows adjusted for prepayment estimates and using
discount rates approximately equal to current market rates on loans with similar characteristics
and maturities. The incremental credit risk for non-performing loans has been considered in the
determination of the fair value of the loans. The fair values of demand deposit accounts, NOW
accounts, savings accounts and money market accounts are equal to their respective carrying amounts
because they are equal to the amounts payable on demand at the reporting date. Certificates of
deposit, Federal Home Loan Bank advances, and wholesale repurchase agreements are estimated using
discounted value of contractual cash flows. The discount rates used are representative of
approximate market rates currently offered on instruments with similar remaining maturities. The
fair values of short-term borrowed funds, accrued interest receivable, mortgagors’ escrow accounts
and accrued interest payable approximate their carrying amounts because of the short-term nature of
the liabilities. The majority of the Company’s commitments for unused lines and outstanding
standby letters of credit and unadvanced portions of loans are at floating rates and, therefore,
there is no fair value adjustment.
56
Table of Contents
The estimated fair values, and related carrying or notional amounts, of the Bank’s financial
instruments at December 31, follow:
| 2009 | 2008 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| Value | Value | Value | Value | |||||||||||||
| (In Thousands) | ||||||||||||||||
Financial assets: |
||||||||||||||||
Cash and due from banks |
$ | 8,615 | $ | 8,615 | $ | 6,859 | $ | 6,859 | ||||||||
Short-term investments |
6,597 | 6,597 | 6,469 | 6,469 | ||||||||||||
Investment securities available for sale |
230,533 | 230,533 | 264,561 | 264,561 | ||||||||||||
Federal Home Loan Bank stock |
11,825 | 11,825 | 11,825 | 11,825 | ||||||||||||
Accrued interest receivable |
2,727 | 2,727 | 2,720 | 2,720 | ||||||||||||
Loans, net |
529,451 | 526,087 | 446,736 | 446,609 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Core deposits |
252,389 | 252,389 | 177,639 | 177,639 | ||||||||||||
Certificates of deposit |
240,405 | 244,002 | 231,024 | 236,443 | ||||||||||||
Borrowed funds |
259,082 | 272,320 | 276,490 | 297,385 | ||||||||||||
Mortgagors’ escrow accounts |
776 | 776 | 619 | 619 | ||||||||||||
Accrued interest payable |
987 | 987 | 1,106 | 1,106 | ||||||||||||
Certain financial instruments and all nonfinancial instruments are exempt from disclosure
requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily
represent the underlying fair value of the Company.
(15) 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 | 2009 | 2008 | ||||||
| (In Thousands) | ||||||||
Assets: |
||||||||
Cash deposits in subsidiaries |
$ | 1,021 | $ | 7,749 | ||||
Investment in subsidiary, at equity |
59,135 | 64,172 | ||||||
Other assets |
509 | 423 | ||||||
Total assets |
$ | 60,665 | $ | 72,344 | ||||
Liabilities and Stockholders’ Equity: |
||||||||
Liabilities: |
||||||||
Accrued income taxes |
$ | 24 | $ | 24 | ||||
Accrued expenses |
121 | 178 | ||||||
Total liabilities |
145 | 202 | ||||||
Total stockholders’ equity |
60,520 | 72,142 | ||||||
Total liabilities and stockholders’ equity |
$ | 60,665 | $ | 72,344 | ||||
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Table of Contents
| Statements of Operations | 2009 | 2008 | ||||||
| (In Thousands) | ||||||||
Dividends from bank subsidiary |
$ | 10,700 | $ | 2,800 | ||||
Interest income |
122 | 31 | ||||||
Total operating income |
10,822 | 2,831 | ||||||
Non-interest expenses |
229 | 228 | ||||||
Income before income taxes and undistributed earnings |
10,593 | 2,603 | ||||||
Income tax benefit |
(37 | ) | (56 | ) | ||||
Income before undistributed earnings of subsidiary |
10,630 | 2,659 | ||||||
Equity in undistributed earnings (loss) of subsidiary |
(5,593 | ) | (5,382 | ) | ||||
Net income (loss) before preferred stock dividends and accretion |
5,037 | (2,723 | ) | |||||
Preferred stock dividends and accretion |
(1,245 | ) | (4 | ) | ||||
Net income (loss) attributable to common shareholders |
$ | 3,792 | $ | 2,727 | ||||
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.
| Statements of Cash Flows | 2009 | 2008 | ||||||
| (In Thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 5,037 | $ | (2,723 | ) | |||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||
Net distributed (earnings) loss of subsidiaries |
5,593 | 5,382 | ||||||
(Increase) decrease in other assets |
(86 | ) | 36 | |||||
(Decrease) increase in liabilities |
(57 | ) | 80 | |||||
Stock-based compensation |
121 | 156 | ||||||
Net cash provided by operating activities |
10,608 | 2,931 | ||||||
Cash flows from investing activities: |
||||||||
Investment in subsidiary |
— | (8,000 | ) | |||||
Net cash used by investing activities |
— | (8,000 | ) | |||||
Cash flows from financing activities: |
||||||||
Proceeds from exercise of stock options and tax benefits |
268 | 121 | ||||||
Repurchases of common stock |
— | (1,034 | ) | |||||
Proceeds from issuance of preferred stock and warrants |
— | 15,000 | ||||||
Redemption of preferred stock |
(15,000 | ) | — | |||||
Repurchase of warrants issued with preferred stock |
(560 | ) | — | |||||
Dividends paid to preferred stockholders |
(700 | ) | — | |||||
Dividends paid to common stockholders |
(1,344 | ) | (2,589 | ) | ||||
Net cash (used) provided by financing activities |
(17,336 | ) | 11,498 | |||||
Net (decrease) increase in cash and cash equivalents |
(6,728 | ) | 6,429 | |||||
Cash and cash equivalents, beginning of year |
7,749 | 1,320 | ||||||
Cash and cash equivalents, end of year |
$ | 1,021 | $ | 7,749 | ||||
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(16) Quarterly Results of Operations (Unaudited)
The sum of the four rounded quarters might not necessarily equal the rounded year-to-date
figures.
| Quarter Ended 2009 | ||||||||||||||||
| March | June | September | December | |||||||||||||
| 31 | 30 | 30 | 31 | |||||||||||||
| (In Thousands, Except Per Share Data) | ||||||||||||||||
Interest and dividend income |
$ | 10,045 | $ | 10,087 | $ | 10,268 | $ | 10,441 | ||||||||
Interest expense |
5,473 | 5,359 | 5,226 | 5,208 | ||||||||||||
Net interest income |
4,572 | 4,728 | 5,042 | 5,233 | ||||||||||||
Provision for loan losses |
240 | 460 | 400 | 540 | ||||||||||||
Net interest income after provision for loan losses |
4,332 | 4,268 | 4,642 | 4,693 | ||||||||||||
Gains on sales of securities |
227 | 232 | 572 | 803 | ||||||||||||
Prepayment penalty on FHLB advances |
— | — | — | (127 | ) | |||||||||||
Non-interest income |
504 | 542 | 524 | 519 | ||||||||||||
Non-interest expense |
3,623 | 3,457 | 3,267 | 3,680 | ||||||||||||
Income before income taxes expense |
1,440 | 1,585 | 2,471 | 2,208 | ||||||||||||
Income tax expense |
476 | 524 | 910 | 757 | ||||||||||||
Net income before preferred stock dividends and accretion |
964 | 1,061 | 1,561 | 1,451 | ||||||||||||
Preferred stock dividends and accretion |
(159 | ) | (215 | ) | (215 | ) | (656 | ) | ||||||||
Net income attributable to common stockholders |
$ | 805 | $ | 846 | $ | 1,346 | $ | 795 | ||||||||
Basic earnings per common share |
$ | 0.18 | $ | 0.19 | $ | 0.30 | $ | 0.18 | ||||||||
Diluted earnings per common share |
$ | 0.18 | $ | 0.19 | $ | 0.30 | $ | 0.18 | ||||||||
| Quarter Ended 2008 | ||||||||||||||||
| March | June | September | December | |||||||||||||
| 31 | 30 | 30 | 31 | |||||||||||||
| (In Thousands, Except Per Share Data) | ||||||||||||||||
Interest and dividend income |
$ | 9,282 | $ | 9,560 | $ | 9,925 | $ | 9,988 | ||||||||
Interest expense |
5,393 | 5,335 | 5,482 | 5,668 | ||||||||||||
Net interest income |
3,889 | 4,225 | 4,443 | 4,320 | ||||||||||||
Provision for loan losses |
105 | 400 | 330 | 450 | ||||||||||||
Net interest income after provision for loan losses |
3,784 | 3,825 | 4,113 | 3,870 | ||||||||||||
Impairment write-downs on securities |
— | — | (9,383 | ) | (722 | ) | ||||||||||
Non-interest income |
494 | 510 | 535 | 577 | ||||||||||||
Non-interest expense |
2,822 | 2,982 | 2,985 | 3,089 | ||||||||||||
Income (loss) before income taxes expense |
1,456 | 1,353 | (7,720 | ) | 636 | |||||||||||
Income tax expense (benefit)1 |
540 | 410 | 530 | (3,032 | ) | |||||||||||
Net income (loss) before preferred stock accretion |
916 | 943 | (8,250 | ) | 3,668 | |||||||||||
Preferred stock dividends and accretion |
— | — | — | (4 | ) | |||||||||||
Net income (loss) attributable to common stockholders |
$ | 916 | $ | 943 | $ | (8,250 | ) | $ | 3,664 | |||||||
Basic earnings (loss) per common share |
$ | 0.20 | $ | 0.21 | $ | (1.85 | ) | $ | 0.82 | |||||||
Diluted earnings (loss) per common share |
$ | 0.20 | $ | 0.21 | $ | (1.85 | ) | $ | 0.82 | |||||||
| 1 | The tax benefit relating to the impairment write-down of FNMA and FHLMC preferred stock was recognized in the fourth quarter of 2008 when a change in tax law re-characterized these losses from capital losses to ordinary losses. |
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
There were no disagreements or other reportable events of the type for which disclosure would
be required under Item 304(b) of Regulation S-K.
ITEM 9A (T). CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
The Company’s management, including the Company’s Chief Executive Officer and Chief Financial
Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures,” as
such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and
principal financial officer concluded that, as of the end of the period covered by this report, the
Company’s disclosure controls and procedures were effective for the purpose of ensuring that the
information required to be disclosed in the reports that the Company files or submits under the
Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is
accumulated and communicated to the Company’s management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding required
disclosure.
(b) Internal Controls Over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company’s internal control system was designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of the
Company’s financial statements in accordance with accounting principles generally accepted in the
United States of America to the Company’s management and Board of Directors regarding the
preparation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as
of December 31, 2009, using the framework set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment,
we believe that, as of December 31, 2009, the Company’s internal control over financial reporting
is effective.
This annual report does not include an attestation report of the Company’s registered public
accounting firm regarding internal control over financial reporting. Management’s report was not
subject to attestation by the Company’s registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
(c) Changes to Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the three
months ended December 31, 2009, that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by Item 10 of this Form is incorporated by reference herein from those
sections in the Company’s definitive Proxy Statement relating to the 2010 Annual Meeting of
Stockholders of the Company to be held May 4, 2010 (the “Proxy Statement”) entitled “Information
Regarding Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting
Compliance” and “Code of Professional Conduct.”
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 of this Form is incorporated by reference herein from the
section in the Company’s Proxy Statement entitled “Executive Compensation.”
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Table of Contents
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information required by Item 12 of this Form is incorporated by reference herein from the
sections in the Company’s Proxy Statement entitled “Equity Compensation Plan Information” and
“Security Ownership of Certain Beneficial Owners and Management.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information required by Item 13 of this Form is incorporated by reference herein from the
section in the Company’s Proxy Statement entitled “Indebtedness of Directors and Management and
Certain Transactions with Management and Others.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by Item 14 of this Form is incorporated by reference herein from the
sections in the Company’s Proxy Statement entitled “Ratification of Independent Registered Public
Accounting Firm” and “The Board of Directors and its Committees – Audit Committee.”.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
| (1) | Financial Statements: The following Consolidated Financial Statements of LSB Corporation and Subsidiary for the year ended December 31, 2009 are included in Item 8 of Part II to this report: | ||
| Report of Independent Registered Public Accounting Firm | |||
| Consolidated Balance Sheets at December 31, 2009 and 2008 | |||
| Consolidated Statements of Operations for the years ended December 31, 2009 and 2008 | |||
| Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2009 and 2008 | |||
| Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008 | |||
| Notes to Consolidated Financial Statements | |||
| (2) | Financial Statement Schedules: None. | ||
| (3) | List of Exhibits: The following is a list of exhibits which are either filed or incorporated by reference as part of this Annual Report on Form 10-K. 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: | ||
| Number | Description of Exhibit | |
(2)
|
Plan of Reorganization and Acquisition, dated as of March 12, 2001 between LSB Corporation and Lawrence Savings Bank (Filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and incorporated herein by reference) | |
(3) (i).1
|
Articles of Organization of LSB Corporation (Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and incorporated herein by reference) | |
(3) (i).2
|
Articles of Amendment of the Articles of Organization of LSB Corporation, as submitted for filing in the Office of the Secretary of the Commonwealth of Massachusetts on December 30, 2005, (Filed as Exhibit 3(i).1 to the Company’s Current Report on Form 8-K filed January 6, 2006, and incorporated herein by reference) | |
(3) (i).3
|
Articles of Amendment to the Articles of Organization of LSB Corporation, establishing the fixed rate cumulative perpetual preferred stock, Series B (Filed as Exhibit 3.1 to the Company’s Current Report of Form 8-K filed December 17, 2008, and incorporated herein by reference) |
61
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| Exhibits: | ||
| Number | Description of Exhibit | |
(3) (ii)
|
Amended and Restated By-Laws of LSB Corporation (Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed October 31, 2007, and incorporated herein by reference) | |
(3) (iii)
|
Lawrence Savings Bank Certificate of Vote of Directors Establishing a Series of a Class of Stock (Filed as Exhibit 3(iii) to the Company’s 2005 Annual Report on Form 10-K and incorporated herein by reference) | |
(4.1)
|
Specimen certificate of shares of common stock of the Company (Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and incorporated herein by reference) | |
(4.2)
|
Renewed Rights Agreement dated as of November 17, 2005, between LSB Corporation and Computershare Trust Company, N.A., as Rights Agent (Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed January 31, 2006, and incorporated herein by reference) | |
(4.3)
|
Warrant to purchase 209,497 shares of common stock of LSB Corporation dated December 12, 2008, (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed December 17, 2008, and incorporated herein by reference) | |
(10.1)
|
Supplemental Retirement Agreement by and between the Bank and Paul A. Miller dated April 21, 1989, (Filed as Exhibit 10.8 to the Company’s Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and incorporated herein by reference)* | |
(10.2)
|
Supplemental Retirement Agreement by and between the Bank and Paul A. Miller dated April 21, 1996, (Filed as Exhibit 10.9 to the Company’s Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and incorporated herein by reference)* | |
(10.3)
|
Lawrence Savings Bank 1986 Stock Option Plan (Filed as Exhibit 10.14 to the Company’s Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and incorporated herein by reference)* | |
(10.4)
|
Lawrence Savings Bank 1997 Stock Option Plan (Filed as Exhibit 10.15 to the Company’s Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and incorporated herein by reference)* | |
(10.5)
|
LSB Corporation 2006 Stock Option and Incentive Plan (Filed as Exhibit 10.1 to the Company’s Form S-8 filed June 5, 2006)* | |
(10.6)
|
LSB Corporation’s Form of Restricted Stock Agreement (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 26, 2006, and incorporated herein by reference)* | |
(10.7)
|
LSB Corporation’s Form of Incentive Stock Option Agreement (Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December 26, 2006, and incorporated herein by reference)* | |
(10.8)
|
LSB Corporation’s Form of Non-Qualified Stock Option Agreement (Filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed December 26, 2006, and incorporated herein by reference)* | |
(10.9)
|
LSB Corporation and River Bank Employee Stock Ownership Plan (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 19, 2007, and incorporated herein by reference)* | |
(10.10)
|
LSB Corporation and River Bank Special Separation Plan (Filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed December 14, 2007, and incorporated herein by reference)* | |
(10.11)
|
LSB Corporation and River Bank Special Termination Agreement with Gerald T. Mulligan (Filed as Exhibit 10.2 to the Company’s Current Form 10-Q filed August 14, 2006, and incorporated herein by reference)* | |
(10.12)
|
LSB Corporation and River Bank Special Termination Agreement with Michael J. Ecker (Filed as Exhibit 10.3 to the Company’s Current Form 10-Q filed August 14, 2006, and incorporated herein by reference)* | |
(10.13)
|
LSB Corporation and River Bank Special Termination Agreement with Stephen B. Jones (Filed as Exhibit 10.4 to the Company’s Current Form 10-Q filed August 14, 2006, and incorporated herein by reference)* | |
(10.14)
|
LSB Corporation and River Bank Special Termination Agreement with Diane L. Walker (Filed as Exhibit 10.5 to the Company’s Current Form 10-Q filed August 14, 2006, and incorporated herein by reference)* | |
(10.15)
|
LSB Corporation and River Bank Special Termination Agreement with Teresa K. Flynn (Filed as Exhibit 10.1 to the Company’s Current Form 10-Q filed May 11, 2007, and incorporated herein by reference)* |
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| Exhibits: | ||
| Number | Description of Exhibit | |
(10.16)
|
Letter Agreement which incorporates the Securities Purchase Agreement – Standard terms, dated December 12, 2008, between LSB Corporation and the United States Department of the Treasury (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 17, 2008, and incorporated herein by reference) | |
(10.17)
|
Subordinated Debt Agreement dated October 20, 2009, between River Bank and Commerce Bank & Trust Company (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 23, 2009, and incorporated herein by reference) | |
(10.18)
|
Repurchase Agreement dated December 16, 2009, between the United States Department of the Treasury and LSB Corporation (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 17, 2009, and incorporated herein by reference) | |
(13)
|
2009 Annual Report to Stockholders of LSB Corporation enclosed herein (furnished solely for the Commission’s information) | |
(14)
|
LSB Corporation and River Bank Code of Professional Conduct (Filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed November 20, 2006, and incorporated herein by reference) | |
(21)
|
Subsidiary of LSB Corporation and subsidiaries of River Bank | |
(23.1)
|
Consent of Wolf & Company, P.C. | |
(24)
|
Power of Attorney (contained in signature page) | |
(31.1)
|
Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 | |
(31.2)
|
Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 | |
(32.1)
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of 2002 | |
(32.2)
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of 2002 |
Financial Statement excluded from Annual Report to Stockholders: None
| * | Management contract or compensatory plan or arrangement |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| LSB Corporation | ||||||
| By: | /s/ Gerald T. Mulligan | |||||
| President and Chief Executive Officer | ||||||
| Date: March 10, 2010 | ||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated. Each person whose signature appears below hereby makes, constitutes and appoints Gerald
T. Mulligan acting individually, his true and lawful attorney, with full power to sign for such
person and in such person’s name and capacity indicated below any and all amendments to this Form
10-K, hereby ratifying and confirming such person’s signature as it may be signed by said attorney
to any and all amendments.
| Signature | Title | Date | ||
/s/ Gerald T. Mulligan
|
President, Chief Executive Officer and Director
(Principal Executive Officer) |
March 10, 2010 | ||
/s/ Diane L. Walker
|
Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial and Principal Accounting Officer) |
March 10, 2010 | ||
/s/ Thomas J. Burke
|
Chairman of the Board Director |
March 10, 2010 | ||
/s/ John P. Bachini, Jr.
|
Director | March 10, 2010 | ||
/s/ Kathleen Boshar Reynolds
|
Director | March 10, 2010 | ||
/s/ Malcolm W. Brawn
|
Director | March 10, 2010 | ||
/s/ Richard Hart Harrington
|
Director | March 10, 2010 | ||
/s/ Robert F. Hatem
|
Director | March 10, 2010 | ||
/s/ Marsha A. McDonough
|
Director | March 10, 2010 | ||
/s/ Fred P. Shaheen
|
Director | March 10, 2010 |
64