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| LSBX > SEC Filings for LSBX > Form 10-Q on 13-Aug-2008 | All Recent SEC Filings |
13-Aug-2008
Quarterly Report
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 customer 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 controlled by a
budget process.
Income tax expense is 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.
The Company believes that the most significant challenge in the current interest
rate environment is to increase net interest income while also maintaining
competitive deposit rates. The Company's net interest income for the six months
ended June 30, 2008 was $8.1 million, a 6.5% increase from $7.6 million for the
comparable period in 2007 primarily due to the sustained loan growth. The
Company's continued emphasis on increasing loan originations instead of
purchasing lower-yielding investment securities favorably affected net interest
income.
FINANCIAL CONDITION
SUMMARY
The Company maintains its commitment to servicing the banking needs of the local
community in the Merrimack Valley area of northeastern Massachusetts and
southern New Hampshire. The Company had total assets of $712.8 million at
June 30, 2008, compared to $621.6 million at December 31, 2007. The increase in
asset size at June 30, 2008 from December 31, 2007 reflected strong loan growth
of $51.5 million since year end 2007 augmented by an increase of $24.8 million
in the investment portfolio from December 31, 2007.
Investments:
The investment securities portfolio totaled $255.4 million, or 35.8% of total
assets at June 30, 2008, compared to $230.6 million, or 37.1% of total assets at
December 31, 2007, an increase of $24.8 million from year-end.
During the first six months of 2008, the Bank experienced cash inflows of
$24.4 million of investments from maturities and prepayments and the funds were
reinvested along with other investment securities purchases for a total of
$51.2 million. These purchases were primarily purchased for use as collateral
for wholesale repurchase agreements, FHLBB short-term and long-term advances and
customer repurchase agreements. The Company intends to reinvest future principal
paydowns and maturities from the investment portfolio and, to a lesser degree,
to fund future loan growth.
The net unrealized loss on securities available for sale as of June 30, 2008
totaled $786,000, or $471,000 net of taxes. The unrealized losses are
attributable to changes in interest rates and a corresponding decline in fair
value. There are two corporate obligations that are on the Bank's securities
watch list due to their current credit ratings by external, independent rating
agencies. The amortized cost of these two corporate bonds totaled $3.9 million
as of June 30, 2008 with an unrealized loss of $114,000, or 2.9% of amortized
cost which represents an improvement of over $300,000 from the end of the first
quarter of 2008. Management is monitoring these securities on a monthly basis
and it is the intent of management to hold these debt securities to maturity.
In the second half of 2007 and the first quarter of 2008, the Company purchased
preferred stock issued by the Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC") at a total cost of
$10.1 million. The fair value of these holdings was below their amortized cost
by $419,000 as of June 30, 2008. Subsequent to quarter-end, the fair value of
these holdings has declined due to uncertainty surrounding further losses and
capital raising efforts by FNMA and FHLMC. Management believes that these
unrealized losses do not constitute other-than-temporary impairment and the
Company has the intent and ability to hold these investments until their
respective maturity dates. In addition, as part of its ongoing
other-than-temporary impairment evaluation process, management will continue to
monitor the fair value of its FNMA and FHLMC preferred stock. On August 6, 2008,
Fitch Ratings downgraded its rating of FHLMC preferred stock to 'A' from
'A+' and placed FHLMC preferred stock (as well as FHLMC subordinated debt) on
rating watch with negative implications. Fitch Ratings most recently assigned a
rating of 'A+' to FNMA preferred stock but on July 17, 2008, Fitch Ratings
placed FNMA preferred stock on rating watch with negative implications. On
August 11, 2008, Standard & Poor's downgraded FNMA and FHLMC preferred stock
(and subordinated debt) to 'A-' from 'AA-'. As of August 11, 2008, the aggregate
fair value of the FNMA and FHLMC preferred stock was $6.4 million. No assurance
can be given that management will not need to recognize an other-than-temporary
impairment charge related to those FNMA and FHLMC preferred stock investments if
the fair values do not recover in the future. In addition, refer to Part II,
Item 1A for risk factors relating to the investment portfolio, including the
recognition of other-than-temporary impairment.
The following table reflects the components and carrying values of the
investment securities portfolio at June 30, 2008 and December 31, 2007:
6/30/08 12/31/07
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
(In thousands)
Investment
securities available
for sale:
U.S. Treasury
obligations $ 5,582 $ 2 $ (8 ) $ 5,576 $ 5,589 $ 4 $ (52 ) $ 5,541
Government-sponsored
enterprise
obligations 19,124 53 (41 ) 19,136 15,748 95 (33 ) 15,810
U.S. Treasury and
government sponsored
enterprise
obligations 24,706 55 (49 ) 24,712 21,337 99 (85 ) 21,351
Mortgage-backed
securities 161,562 1,018 (980 ) 161,600 134,969 2,208 (474 ) 136,703
Collateralized
mortgage obligations 49,937 251 (336 ) 49,852 60,660 169 (682 ) 60,147
Collateralized
mortgage obligations
and mortgage-backed
securities 211,499 1,269 (1,316 ) 211,452 195,629 2,377 (1,156 ) 196,850
Corporate
obligations 6,402 - (133 ) 6,269 6,373 30 (583 ) 5,820
Mutual funds 1,000 - (55 ) 945 1,000 - (41 ) 959
Equity securities 12,580 - (557 ) 12,023 5,546 70 - 5,616
Corporate
obligations and
other investment
securities 19,982 - (745 ) 19,237 12,919 100 (624 ) 12,395
Total investment
securities available
for sale $ 256,187 $ 1,324 $ (2,110 ) $ 255,401 $ 229,885 $ 2,576 $ (1,865 ) $ 230,596
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Loans:
Total loans increased $51.5 million to $409.6 million and represented 57.4% of
total assets at June 30, 2008, versus $358.1 million and 57.6%, respectively, of
total assets at December 31, 2007. Retail loans, comprised primarily of
residential mortgage loans, increased $20.0 million during the first six months
of 2008 while corporate loans, comprised mainly of construction and commercial
real estate loans, increased $31.5 million during the same period. The increase
is due to loan growth experienced in the commercial real estate and residential
loan categories and reflects the continued strategic preference toward loan
originations rather than investment security purchases as well as increased
demand from its borrowers.
The following table reflects the loan portfolio at June 30, 2008 and
December 31, 2007:
6/30/08 12/31/07
(In thousands)
Residential mortgage loans $ 100,176 $ 79,743
Home equity lines and loans 22,693 23,046
Consumer loans 918 1,007
Total retail loans 123,787 103,796
Construction loans 55,450 47,885
Commercial real estate loans 205,543 177,968
Commercial loans 24,839 28,464
Total corporate loans 285,832 254,317
Total loans 409,619 358,113
Allowance for loan losses (5,238 ) (4,810 )
Total loans, net $ 404,381 $ 353,303
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Allowance For Loan Losses:
The following table summarizes changes in the allowance for loan losses for the
three months ended and the six months ended June 30, 2008 and 2007:
Three months ended Six months ended
6/30/08 6/30/07 6/30/08 6/30/07
(In thousands)
Beginning balance $ 4,874 $ 4,366 $ 4,810 $ 4,309
Provision for loan losses 400 155 505 215
Recoveries on loans previously charged-off 1 2 2 7
Loans charged-off (37 ) (6 ) (79 ) (14 )
Ending balance $ 5,238 $ 4,517 $ 5,238 $ 4,517
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The allowance for loan losses increased to $5.2 million at June 30, 2008 as
compared to $4.8 million at December 31, 2007. However, the allowance for loan
losses as a percent of total loans has decreased to 1.28% at June 30, 2008 down
from 1.34% at December 31, 2007, due to an increase in total loans outstanding
at June 30, 2008, compared to December 31, 2007, with the highest level of
growth coming from the commercial real estate and the residential loan
portfolios. The Company considers the current level of the allowance for loan
losses to be appropriate and adequate. The low levels of delinquent loans and
sustained asset quality of the loan portfolio combined with minimal levels of
loan charge-offs contributed to the assessment of the allowance for loan losses.
The Company has not engaged in any subprime lending.
The amount of the allowance for loan losses reflects management's assessment of
estimated credit quality 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 values on a loan by loan
basis, trends of loan delinquencies on a portfolio segment level, risk
classification identified in the Company's regular review of individual loans,
and economic conditions are primary factors in establishing allowance levels.
Management believes the allowance level is adequate to absorb the estimated
credit losses inherent in the loan portfolio. The allowance for loan losses
reflects information available to management at the end of each period.
Risk Assets:
Risk assets consist of non-performing loans and other real estate owned (OREO).
Non-performing loans consist of both loans 90 days or more past due and loans
placed on non-accrual because full collection of the principal balance and
interest is in doubt. Other real estate owned is comprised of foreclosed
properties where the Company has formally received title or has possession of
the collateral and is carried at the lower of the carrying amount of the loan
plus capital improvements or the estimated fair value of the property, less
selling costs.
Total risk assets were $2.1 million and $1.5 million, respectively, at June 30,
2008 and December 31, 2007. Impaired loans totaled $1.3 million and
$1.5 million, respectively, at June 30, 2008 and December 31, 2007. All of the
$1.3 million and $1.5 million in impaired loans at June 30, 2008 and
December 31, 2007, respectively, had been measured using the fair value of the
collateral method and did not require a related allowance. The decrease in
non-performing loans since December 31, 2007 was primarily due to the
reclassification into OREO of three loans to one borrower that were collateral
dependent during the first quarter of 2008. The Company had no impaired loans at
June 30, 2007.
The following table summarizes the Company's risk assets at June 30, 2008,
December 31, 2007 and June 30, 2007:
6/30/08 12/31/07 6/30/07
(Dollars in thousands)
Non-performing loans $ 1,455 $ 1,523 $ 153
Other real estate owned 692 - -
Total risk assets $ 2,147 $ 1,523 $ 153
Risk assets as a percent of total loans and OREO 0.52 % 0.43 % 0.05 %
Risk assets as a percent of total assets 0.30 % 0.24 % 0.03 %
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Deposits:
Deposits increased $50.2 million during the first six months of 2008 to
$372.3 million at June 30, 2008 from $322.1 million at December 31, 2007. Core
deposits, consisting of NOW accounts, demand deposit accounts, savings accounts
and money market accounts, increased $27.8 million, or 18.6%, amounting to
$177.6 million at June 30, 2008, compared to $149.8 million at December 31,
2007. All core deposit categories experienced increases. The most noteworthy
were savings accounts and money market accounts which increased $12.7 million
and $10.7 million, respectively, from December 31, 2007, primarily due to the
higher-rate promotional accounts. Term deposits comprised of brokered
certificates of deposit and certificates of deposit increased $22.4 million, or
13.0%, totaling $194.6 million at June 30, 2008, versus $172.3 million at
December 31, 2007. Brokered certificates of deposit increased $15.0 million from
December 31, 2007, while certificates of deposit increased $7.4 million.
The following table reflects the components of the deposit portfolio at June 30,
2008 and December 31, 2007:
6/30/08 12/31/07
(In thousands)
NOW accounts $ 18,551 $ 17,877
Demand deposit accounts 32,591 28,851
Savings accounts 41,196 28,452
Money market accounts 85,296 74,621
Core deposits 177,634 149,801
Brokered certificates of deposit 20,461 5,461
Certificates of deposit 174,185 166,821
Term deposits 194,646 172,282
Total deposits $ 372,280 $ 322,083
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Borrowed Funds:
Borrowed funds consist of long-term and short-term Federal Home Loan Bank of
Boston (FHLBB) advances and securities sold under agreements to repurchase.
Total borrowed funds amounted to $277.5 million at June 30, 2008, compared to
$235.4 million at December 31, 2007, an increase of $42.1 million. Short-term
borrowed funds increased $3.2 million from December 31, 2007, while long-term
borrowed funds increased $38.9 million due to the availability of more
favorable, longer term rates. Wholesale repurchase agreements increased
$15.0 million in the first half of 2008 and included an embedded cap intended to
provide rate relief to the Company should rates rise abruptly. The Company
believes its borrowing position leaves the Company less vulnerable to rate
fluctuations in the coming year. This was achieved by lowering the average
long-term borrowed cost of funds from 4.62% at December 31, 2007, to 4.24% at
June 30, 2008.
The following table reflects the components of borrowings at June 30, 2008 and
December 31, 2007:
6/30/08 12/31/07
(In thousands)
Long-term borrowed funds:
FHLBB long-term advances $ 226,303 $ 202,378
Wholesale repurchase agreements 40,000 25,000
266,303 227,378
Short-term borrowed funds:
FHLBB Ideal Way advances - 800
FHLBB short-term advances 6,000 -
Customer repurchase agreements 5,160 7,173
11,160 7,973
Total borrowed funds $ 277,463 $ 235,351
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RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2008 AND 2007
SUMMARY
The Company reported net income of $943,000, or $0.21 per diluted share, as
compared to a net income of $832,000, or $0.18 per diluted share, for the three
months ended June 30, 2008 and 2007, respectively. The second quarter of 2008
experienced an increase in net income primarily due to increases in net interest
income of $381,000 and non-interest income of $76,000. Partially offsetting
these increases, the Company recorded a provision for loan losses of $400,000 in
the second quarter of 2008 resulting from continued and sustained corporate and
residential loan growth of $37.1 million in the second quarter of 2008.
Net Interest Income From Operations:
Net interest income for the three months ended June 30, 2008 increased by
$381,000, or 9.9%, to $4.2 million from $3.8 million for the same period of
2007. The net interest rate spread decreased to 2.16% for the three months ended
June 30, 2008 versus 2.24% for the same period of 2007. Interest income for the
three months ended June 30, 2008 increased $1.0 million primarily due to higher
average loan and investment security balances compared to the same period of
2007. Partially offsetting the increase in total interest income was an increase
of $668,000 in total interest expense primarily due to an increase in average
deposit and borrowed funds balances. Net interest margin decreased to 2.54%
versus 2.81% for the quarters ended June 30, 2008 and 2007, respectively.
Interest Income:
Interest income increased $1.0 million, or 12.3%, during the second quarter of
2008 versus the same quarter in 2007, primarily attributable to a rise in
average loan and investment security balances.
Average loan interest rates decreased 95 basis points from 7.24% to 6.29% during
the second quarter of 2008 as compared to the comparable quarter of 2007,
resulting in a decrease of $789,000 to interest income. Average loan balances
rose $70.6 million from $316.4 million in 2007 to $387.1 million in 2008
contributing $1.1 million to interest income.
Average investment security interest rates increased 17 basis points during the
second quarter of 2008 from 4.83% in 2007 to 5.00% in 2008 adding $18,000 to
interest income. Average investment security balances rose $49.4 million from
$232.8 million in 2007 to $282.2 million in 2008 contributing $691,000 to
interest income.
Interest Expense:
Interest expense increased $668,000, or 14.3%, during the second quarter of 2008
from $4.7 million in the second quarter of 2007 to $5.3 million in the second
quarter of 2008, primarily due to the rise in average deposit and average
borrowed funds volumes.
Average deposit interest rates decreased 43 basis points from 3.49% to 3.06% in
the second quarter of 2008 as compared to the comparable quarter of 2007,
decreasing interest expense by $377,000. Average interest-bearing deposit
balances increased by $42.8 million from $276.6 million in 2007 to
$319.4 million in 2008, accompanied by a change in the mix resulting in a
preference for higher costing certificates of deposit, which increased interest
expense by $401,000.
Average borrowed funds interest rates decreased 49 basis points from 4.68% in
the second quarter of 2007 to 4.19% in the same quarter of 2008 resulting in a
decrease of $284,000 to interest expense. Average borrowed fund balances rose
$85.4 million, or 44.1%, from $193.5 million in 2007 to $278.9 million in 2008.
This increase resulted in additional interest expense of $928,000 due to an
increase in longer term borrowed funds.
Provision for Loan Losses:
The provision for loan losses totaled $400,000 and $155,000 for the three months
ended June 30, 2008 and 2007, respectively. The provisions in 2008 and 2007
reflect management's analysis of loan growth during the second quarters of 2008
and 2007 with the highest levels of growth coming from the commercial real
estate and residential loan portfolio. The balance of the allowance for loan
losses has grown to $5.2 million at June 30, 2008, from $4.5 million at June 30,
2007, respectively. The coverage of the allowance for loan losses decreased to
1.28% at June 30, 2008 from 1.36% at June 30, 2007 due to the loan growth of
$37.1 million experienced during the second quarter of 2008 as compared to
$25.4 million in the second quarter of 2007. In addition, the mix of loans has
increased towards retail loans, thereby allowing the coverage ratio to decline
slightly as they represent less risky loans. In addition, the Company has not
engaged in subprime lending.
Non-Interest Income:
. . .
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