##### Table of Contents



UNITED STATES
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, 2008
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission File Number 000-32955
 LSB CORPORATION
  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)
 
  Titles of each Class
    
    Name of each Exchange on which registeredCommon Stock, par value $.10 per share
    
    The NASDAQ Stock Market LLC(including associated Preferred Stock Purchase Rights)
 
  o þ
  o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ
    Class
    
    Outstanding as of March 6, 2009Common Stock, par value $.10 per share
    
    4,470,941 shares
   (1)
    
    Certain information required for Part III of this report is incorporated herein by reference
to the registrants definitive Proxy Statement for its 2009 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, 2008.*
    
    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.




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 1A. RISK FACTORSITEM 1B. UNRESOLVED STAFF COMMENTSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED CONSOLIDATED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURESITEM 9A (T). CONTROLS AND PROCEDURESITEM 9B. OTHER INFORMATIONPART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCEITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSIGNATURESEX-13 2008 ANNUAL REPORT TO STOCKHOLDERSEX-21 SUBSIDIARYEX-23.1 CONSENT OF WOLF & COMPANYEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO    Table of Contents  
 PART I
 CAUTION REGARDING FORWARD-LOOKING STATEMENTS
  CAUTION REGARDING NON-GAAP FINANCIAL MEASURES
  
 ITEM 1. BUSINESS
 SUMMARY
 The Wall
Street Journal
      2




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MARKET AREA
  LENDING ACTIVITIES
  COMMERCIAL REAL ESTATE
 The Wall Street Journal
 COMMERCIAL BUSINESS
 The Wall Street Journal
 CONSTRUCTION
 The Wall Street
Journal
 RESIDENTIAL MORTGAGES
  SECONDARY MORTGAGE MARKET
  HOME EQUITY
 The Wall Street Journal
 CONSUMER
  3




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DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
    EMPLOYEES
  COMPETITION
  SUPERVISION AND REGULATION
   4




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FEDERAL DEPOSIT INSURANCE PREMIUMS
     BANK HOLDING COMPANY ACT, CHANGE IN CONTROL ACT AND REGULATION Y
  5




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GRAMM-LEACH-BLILEY ACT
    FEDERAL RESERVE ACT SECTIONS 23A AND 23B AND REGULATION W
  FEDERAL RESERVE ACT SECTION 22 AND REGULATION O
  HOME OWNERSHIP AND EQUITY PROTECTION ACT AND REGULATION Z
  USA PATRIOT ACT
  SARBANES-OXLEY ACT OF 2002
  6




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##### Table of Contents




    
    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.
  TROUBLED ASSET RELIEF PROGRAM AND EMERGENCY ECONOMIC STABILIZATION ACT
  SECURITIES AND EXCHANGE COMMISSION FILINGS ON COMPANYS WEB SITE
  MASSACHUSETTS BANK REGULATION
  7




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Regulatory Enforcement Authority
    Parity Regulation
  Depositors Insurance Fund
 
 ITEM 1A. RISK FACTORS
 Changes in interest rates could adversely impact the Companys financial condition and results of
operations.
 8




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If the Company has higher loan losses than it has allowed for, its earnings could materially
decrease .
 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.
 The Company operates in a highly regulated environment and may be adversely impacted by changes in
law and regulations
 The Companys FDIC premiums have materially increased and could continue to do so, which could
materially affect the Companys earnings.
 9




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The impact on the Company of recently enacted legislation, in particular the Emergency Economic
Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009 and their
implementing regulations as well as the Presidents Financial Stability Plan, and the Companys
participation in programs thereunder, cannot be predicted at this time.
 The impact of further contemplated legislative and regulatory changes cannot be predicted at this
time.
 The terms governing the issuance of the Preferred Stock to the Treasury may be changed, the effect
of which may have an adverse effect on the Companys operations.
 The Company has strong competition within its market area which may limit the Companys growth and
profitability
 The success of the Company is dependent on retaining certain key personnel or attracting and
retaining additional, qualified personnel
 The limitations on executive compensation imposed through the Companys participation in the
Capital Purchase Program may restrict its ability to attract, retain and motivate key employees,
which could adversely affect our operations.
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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 Company relies on dividends from the Bank for substantially all of its revenue
 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.
 
    
    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.
  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.
   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 first
providing internal control reports.
 11




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##### Table of Contents



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.
 If the Companys investment in the Federal Home Loan Bank of Boston becomes impaired, its earnings
and stockholders equity could decrease
 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.
 
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  12




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ITEM 2. PROPERTIES
   LeaseYear
    
    
    
    
    
    
    
    
    
    CurrentAcquired
    
    Square
    
    Owned/
    
    Term
    
    RenewalOr Leased
    
    Feet
    
    Leased
    
    Expires
    
    OptionsCORPORATE OFFICES AND
MAIN BANKING OFFICE30 Massachusetts Ave.
    
    
    1992
    
    
    
    45,315
    
    
    Owned
    
    
    
    
    
    
    No. Andover, MA 01845BRANCH BANKING OFFICESMassachusetts342 North Main Street
    
    
    1995
    (1)
    
    
    2,449
    
    
    Leased
    
    
    2010
    
    
    Two (5 yrs.)Andover, MA 01810300 Essex
    
    
    1998
    (2)
    
    
    3,432
    
    
    Leased
    
    
    2009
    
    
    Two (1 yr.)Lawrence, MA 0184020 Jackson Street
    
    
    1968
    
    
    
    2,369
    
    
    Leased
    
    
    2010
    
    
    
    Methuen, MA 01844148 Lowell Street
    
    
    1979
    
    
    
    5,234
    
    
    Owned
    
    
    
    
    
    
    Methuen, MA 01844New Hampshire51 Crystal Ave.
    
    
    2007
    (3)
    
    
    2,600
    
    
    Leased
    
    
    2027
    
    
    Four (5 yrs.)Derry, NH 03038401-403 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 moving to this location, the Bank occupied a branch office at 255 Essex Street.(3)
    
    The Bank opened a full service branch at this location in January 2009. 
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  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
 Wall Street Journal
  Common Stock Prices
    
    CashFiscal Year
    
    High
    
    Low
    
    Dividends2008Fourth Quarter
    
    $
    12.99
    
    
    $
    7.25
    
    
    $
    0.15Third Quarter
    
    
    17.50
    
    
    
    9.05
    
    
    
    0.15Second Quarter
    
    
    16.68
    
    
    
    14.86
    
    
    
    0.14First Quarter
    
    
    16.95
    
    
    
    15.50
    
    
    
    0.142007Fourth Quarter
    
    $
    17.47
    
    
    $
    15.30
    
    
    $
    0.14Third Quarter
    
    
    17.14
    
    
    
    15.50
    
    
    
    0.14Second Quarter
    
    
    17.49
    
    
    
    15.85
    
    
    
    0.14First Quarter
    
    
    16.92
    
    
    
    16.40
    
    
    
    0.14
    Supervision and Regulation
   14




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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
 FINANCIAL HIGHLIGHTS
 December 31,
    
    2008
    
    2007
    
    2006
    
    2005
    
    2004(Dollars in Thousands, Except Per Share Data)Balance Sheet Data:Total assets
    
    $
    761,324
    
    
    $
    621,651
    
    
    $
    542,965
    
    
    $
    521,800
    
    
    $
    518,477Loans, gross
    
    
    452,621
    
    
    
    358,113
    
    
    
    288,163
    
    
    
    234,611
    
    
    
    232,810Allowance for loan losses
    
    
    5,885
    
    
    
    4,810
    
    
    
    4,309
    
    
    
    4,126
    
    
    
    4,140Federal funds sold
    
    
    6,469
    
    
    
    56
    
    
    
    11,871
    
    
    
    198
    
    
    
    209Investment securities
    
    
    264,561
    
    
    
    230,596
    
    
    
    218,682
    
    
    
    260,046
    
    
    
    263,303Deposits
    
    
    408,663
    
    
    
    322,083
    
    
    
    295,662
    
    
    
    303,087
    
    
    
    299,106Borrowed funds
    
    
    276,490
    
    
    
    235,351
    
    
    
    184,782
    
    
    
    153,380
    
    
    
    157,263Stockholders equity
    
    
    72,142
    
    
    
    60,298
    
    
    
    58,531
    
    
    
    59,922
    
    
    
    57,838Year Ended December 31
    
    2008
    
    2007
    
    2006
    
    2005
    
    2004Operating Data:Interest income
    
    $
    38,755
    
    
    $
    35,008
    
    
    $
    28,956
    
    
    $
    25,558
    
    
    $
    22,331Interest expense
    
    
    21,880
    
    
    
    19,681
    
    
    
    15,160
    
    
    
    11,638
    
    
    
    8,520Net interest income
    
    
    16,875
    
    
    
    15,327
    
    
    
    13,796
    
    
    
    13,920
    
    
    
    13,811Provision (credit) for loan losses
    
    
    1,285
    
    
    
    645
    
    
    
    160
    
    
    
    
    
    
    
    (300
    )Impairment write-downs on securities
    
    
    (10,105
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Losses on sales of investment securities
    
    
    
    
    
    
    
    
    
    
    (2,417
    )
    
    
    
    
    
    
    Gains on pension plan termination
    
    
    
    
    
    
    762
    
    
    
    602
    
    
    
    
    
    
    
    Other non-interest income
    
    
    2,116
    
    
    
    1,922
    
    
    
    1,410
    
    
    
    1,555
    
    
    
    1,553Lawsuit judgment collected
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,233
    
    
    
    2,280Salaries and employee benefits expense
    
    
    6,706
    
    
    
    6,836
    
    
    
    7,399
    
    
    
    6,899
    
    
    
    6,507Other non-interest expense
    
    
    5,170
    
    
    
    4,721
    
    
    
    5,621
    
    
    
    4,245
    
    
    
    4,157Income (loss) before income taxes
    
    
    (4,275
    )
    
    
    5,809
    
    
    
    211
    
    
    
    6,564
    
    
    
    7,280Income tax (benefit) expense
    
    
    (1,552
    )
    
    
    2,091
    
    
    
    85
    
    
    
    2,407
    
    
    
    2,600Net income (loss)
    
    $
    (2,723
    )
    
    $
    3,718
    
    
    $
    126
    
    
    $
    4,157
    
    
    $
    4,680Basic earnings (loss) per share
    
    $
    (0.61
    )
    
    $
    0.81
    
    
    $
    0.03
    
    
    $
    0.94
    
    
    $
    1.09Diluted earnings (loss) per share
    
    $
    (0.61
    )
    
    $
    0.81
    
    
    $
    0.03
    
    
    $
    0.92
    
    
    $
    1.05At or for the year ended December 31,
    
    2008
    
    2007
    
    2006
    
    2005
    
    2004Other Data:Efficiency ratio
    
    
    62.54
    %
    
    
    67.00
    %
    
    
    85.66
    %
    
    
    72.19
    %
    
    
    69.72
    %Interest rate spread
    
    
    2.14
    
    
    
    2.19
    
    
    
    2.22
    
    
    
    2.34
    
    
    
    2.64Net interest margin on average earning
assets
    
    
    2.50
    
    
    
    2.72
    
    
    
    2.68
    
    
    
    2.66
    
    
    
    2.91Return (loss) on average assets (net income loss/
average assets)
    
    
    (0.39
    )
    
    
    0.64
    
    
    
    0.02
    
    
    
    0.77
    
    
    
    0.96Return (loss) on average equity (net income loss/
average stockholders equity)
    
    
    (4.63
    )
    
    
    6.35
    
    
    
    0.22
    
    
    
    7.14
    
    
    
    8.33Dividend payout ratio (dividends declared per
share divided by diluted earnings per share)
    
    
    n/m
    
    
    
    69.14
    
    
    
    n/m
    
    
    
    60.87
    
    
    
    49.52Average stockholders equity to average
assets ratio
    
    
    8.41
    
    
    
    10.10
    
    
    
    10.80
    
    
    
    10.81
    
    
    
    11.53Cash dividends declared and paid per
common share
    
    $
    0.58
    
    
    $
    0.56
    
    
    $
    0.56
    
    
    $
    0.56
    
    
    $
    0.52Book value per share at year end with CPP
    
    
    16.14
    
    
    
    13.35
    
    
    
    12.74
    
    
    
    13.42
    
    
    
    13.33Book value per share at year end excluding CPP
    
    
    12.78
    
    
    
    13.35
    
    
    
    12.74
    
    
    
    13.42
    
    
    
    13.33Tangible book value per share with CPP at
year end (excludes accumulated other
comprehensive income/loss)
    
    
    15.40
    
    
    
    13.26
    
    
    
    13.05
    
    
    
    13.58
    
    
    
    13.43Tangible book value per share excluding CPP
    
    
    12.04
    
    
    
    13.26
    
    
    
    13.05
    
    
    
    13.58
    
    
    
    13.43Market value per share at year end
    
    
    7.31
    
    
    
    16.00
    
    
    
    16.57
    
    
    
    17.35
    
    
    
    18.52
 
 n/m = not meaningful 15




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
 FORWARD-LOOKING STATEMENTS AND FACTORS WHICH MAY AFFECT FUTURE RESULTS
  OVERVIEW
        16




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CRITICAL ACCOUNTING POLICIES
  ALLOWANCE FOR LOAN LOSSES
  INCOME TAXES
  INVESTMENT SECURITIES
  FINANCIAL CONDITION
 OVERVIEW
  INTEREST EARNING ASSETS
   17




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##### Table of Contents



INVESTMENT SECURITIES
   2008
    
    
    2007Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)U. S. Treasury obligations
    
    $
    6,004
    
    
    
    2.3
    %
    
    $
    5,541
    
    
    
    2.4
    %Government-sponsored enterprise
obligations
    
    
    15,722
    
    
    
    5.9
    %
    
    
    15,810
    
    
    
    6.9
    %Mortgage-backed securities
    
    
    187,206
    
    
    
    70.8
    %
    
    
    136,703
    
    
    
    59.3
    %Collateralized mortgage obligations
    
    
    47,059
    
    
    
    17.8
    %
    
    
    60,147
    
    
    
    26.1
    %Corporate obligations
    
    
    5,683
    
    
    
    2.1
    %
    
    
    5,820
    
    
    
    2.5
    %Mutual funds
    
    
    958
    
    
    
    0.4
    %
    
    
    959
    
    
    
    0.4
    %Equity securities
    
    
    1,929
    
    
    
    0.7
    %
    
    
    5,616
    
    
    
    2.4
    %Total
    
    $
    264,561
    
    
    
    100.0
    %
    
    $
    230,596
    
    
    
    100.0
    %
   Within
    
    Weighted
    
    One to
    
    Weighted
    
    Five
    
    Weighted
    
    OverOne
    
    Average
    
    Five
    
    Average
    
    to Ten
    
    Average
    
    Ten
    
    Average
    
    
    
    
    
    AverageYear
    
    Yield
    
    Years
    
    Yield
    
    Years
    
    Yield
    
    Years
    
    Yield
    
    Total
    
    Yield(Dollars in Thousands)U. S. Treasury bonds and
government-sponsored
enterprise obligations
    
    $
    5,568
    
    
    
    3.22
    %
    
    $
    16,158
    
    
    
    3.76
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    21,726
    
    
    
    3.62
    %Mortgage-backed
securities
    
    
    713
    
    
    
    3.64
    %
    
    
    11,853
    
    
    
    3.74
    %
    
    
    10,616
    
    
    
    4.78
    %
    
    
    164,024
    
    
    
    5.78
    %
    
    
    187,206
    
    
    
    5.59
    %Collateralized mortgage
obligations
    
    
    
    
    
    
    
    
    
    
    88
    
    
    
    5.88
    %
    
    
    9,740
    
    
    
    4.04
    %
    
    
    37,231
    
    
    
    4.79
    %
    
    
    47,059
    
    
    
    4.64
    %Corporate obligations
    
    
    1,964
    
    
    
    5.44
    %
    
    
    3,719
    
    
    
    5.48
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    5,683
    
    
    
    5.47
    %Total
    
    $
    8,245
    
    
    
    3.79
    %
    
    $
    31,818
    
    
    
    3.96
    %
    
    $
    20,356
    
    
    
    4.43
    %
    
    $
    201,255
    
    
    
    5.60
    %
    
    $
    261,674
    
    
    
    5.25
    %
 LOANS
  18




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##### Table of Contents



2008
    
    2007
    
    2006
    
    2005
    
    2004Balance
    
    Percent
    
    Balance
    
    Percent
    
    Balance
    
    Percent
    
    Balance
    
    Percent
    
    Balance
    
    Percent(Dollars in Thousands)Residential real estate loans:Fixed rate
    
    $
    68,040
    
    
    
    15.0
    %
    
    $
    49,513
    
    
    
    13.8
    %
    
    $
    39,076
    
    
    
    13.5
    %
    
    $
    34,028
    
    
    
    14.5
    %
    
    $
    33,061
    
    
    
    14.2
    %Adjustable rate
    
    
    41,236
    
    
    
    9.1
    
    
    
    30,230
    
    
    
    8.4
    
    
    
    30,800
    
    
    
    10.7
    
    
    
    28,159
    
    
    
    12.0
    
    
    
    26,996
    
    
    
    11.6Loans held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    472
    
    
    
    0.2
    
    
    
    
    
    
    
    109,276
    
    
    
    24.1
    
    
    
    79,743
    
    
    
    22.2
    
    
    
    69,876
    
    
    
    24.2
    
    
    
    62,659
    
    
    
    26.7
    
    
    
    60,057
    
    
    
    25.8Home equity loans:Fixed rate
    
    
    12,398
    
    
    
    2.7
    
    
    
    13,821
    
    
    
    3.9
    
    
    
    11,170
    
    
    
    3.9
    
    
    
    3,592
    
    
    
    1.5
    
    
    
    3,535
    
    
    
    1.5Adjustable rate
    
    
    11,574
    
    
    
    2.6
    
    
    
    9,225
    
    
    
    2.6
    
    
    
    9,169
    
    
    
    3.2
    
    
    
    6,820
    
    
    
    2.9
    
    
    
    5,334
    
    
    
    2.323,972
    
    
    
    5.3
    
    
    
    23,046
    
    
    
    6.5
    
    
    
    20,339
    
    
    
    7.1
    
    
    
    10,412
    
    
    
    4.4
    
    
    
    8,869
    
    
    
    3.8Consumer loans
    
    
    831
    
    
    
    0.2
    
    
    
    1,007
    
    
    
    0.3
    
    
    
    975
    
    
    
    0.3
    
    
    
    468
    
    
    
    0.2
    
    
    
    699
    
    
    
    0.3Total retail loans
    
    
    134,079
    
    
    
    29.6
    
    
    
    103,796
    
    
    
    29.0
    
    
    
    91,190
    
    
    
    31.6
    
    
    
    73,539
    
    
    
    31.3
    
    
    
    69,625
    
    
    
    29.9Construction loans
    
    
    61,769
    
    
    
    13.6
    
    
    
    47,885
    
    
    
    13.4
    
    
    
    43,283
    
    
    
    15.0
    
    
    
    24,137
    
    
    
    10.3
    
    
    
    15,211
    
    
    
    6.5Commercial real estate loans:Fixed rate
    
    
    57,757
    
    
    
    12.8
    
    
    
    33,920
    
    
    
    9.5
    
    
    
    17,434
    
    
    
    6.1
    
    
    
    14,793
    
    
    
    6.3
    
    
    
    18,629
    
    
    
    8.0Adjustable rate
    
    
    165,220
    
    
    
    36.5
    
    
    
    144,048
    
    
    
    40.2
    
    
    
    125,386
    
    
    
    43.5
    
    
    
    112,824
    
    
    
    48.1
    
    
    
    112,976
    
    
    
    48.5222,977
    
    
    
    49.3
    
    
    
    177,968
    
    
    
    49.7
    
    
    
    142,820
    
    
    
    49.6
    
    
    
    127,617
    
    
    
    54.4
    
    
    
    131,605
    
    
    
    56.5Commercial loans
    
    
    33,796
    
    
    
    7.5
    
    
    
    28,464
    
    
    
    7.9
    
    
    
    10,870
    
    
    
    3.8
    
    
    
    9,318
    
    
    
    4.0
    
    
    
    16,369
    
    
    
    7.1Total corporate loans
    
    
    318,542
    
    
    
    70.4
    
    
    
    254,317
    
    
    
    71.0
    
    
    
    196,973
    
    
    
    68.4
    
    
    
    161,072
    
    
    
    68.7
    
    
    
    163,185
    
    
    
    70.1Total loans
    
    
    452,621
    
    
    
    100.0
    %
    
    
    358,113
    
    
    
    100.0
    %
    
    
    288,163
    
    
    
    100.0
    %
    
    
    234,611
    
    
    
    100.0
    %
    
    
    232,810
    
    
    
    100.0
    %Allowance for loan losses
    
    
    5,885
    
    
    
    
    
    
    
    4,810
    
    
    
    
    
    
    
    4,309
    
    
    
    
    
    
    
    4,126
    
    
    
    
    
    
    
    4,140Loans, net
    
    $
    446,736
    
    
    
    
    
    
    $
    353,303
    
    
    
    
    
    
    $
    283,854
    
    
    
    
    
    
    $
    230,485
    
    
    
    
    
    
    $
    228,670
  Due AfterDue Within
    
    One Through
    
    Due AfterOne Year
    
    Five Years
    
    Five Years
    

    Total(In Thousands)Construction
    
    $
    42,821
    
    
    $
    12,979
    
    
    $
    5,969
    
    
    $
    61,769Commercial
    
    
    12,265
    
    
    
    14,676
    
    
    
    6,855
    
    
    
    33,796Total
    
    $
    55,086
    
    
    $
    27,655
    
    
    $
    12,824
    
    
    $
    95,565
   ALLOWANCE FOR LOAN LOSSES
  19




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##### Table of Contents



2008
    
    2007
    
    2006
    
    2005
    
    2004(Dollars in Thousands)Balance at beginning of year
    
    $
    4,810
    
    
    $
    4,309
    
    
    $
    4,126
    
    
    $
    4,140
    
    
    $
    4,220Charge-offs by loan type:Residential mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25
    )Commercial
    
    
    (80
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    (111
    )
    
    
    (121
    )
    
    
    
    
    
    
    
    
    
    
    Construction
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    (3
    )
    
    
    (36
    )
    
    
    (30
    )
    
    
    (25
    )
    
    
    (20
    )Total charge-offs
    
    
    (214
    )
    
    
    (157
    )
    
    
    (30
    )
    
    
    (25
    )
    
    
    (45
    )Recoveries by loan type:Residential mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    3
    
    
    
    3
    
    
    
    32
    
    
    
    2
    
    
    
    254Construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    1
    
    
    
    10
    
    
    
    21
    
    
    
    9
    
    
    
    11Total recoveries
    
    
    4
    
    
    
    13
    
    
    
    53
    
    
    
    11
    
    
    
    265Net (charge-offs) recoveries
    
    
    (210
    )
    
    
    (144
    )
    
    
    23
    
    
    
    (14
    )
    
    
    220Provision (credit) for loan losses
    
    
    1,285
    
    
    
    645
    
    
    
    160
    
    
    
    
    
    
    
    (300
    )Ending balance
    
    $
    5,885
    
    
    $
    4,810
    
    
    $
    4,309
    
    
    $
    4,126
    
    
    $
    4,140Ratio of net (charge-offs) recoveries to average loans
outstanding during the period
    
    
    (0.05
    )%
    
    
    (0.04
    )%
    
    
    0.01
    %
    
    
    (0.01
    )%
    
    
    0.10
    %Allowance as a % of total loans
    
    
    1.30
    %
    
    
    1.34
    %
    
    
    1.50
    %
    
    
    1.76
    %
    
    
    1.78
    %
  2008
    
    2007
    
    2006
    
    2005
    
    2004Percent
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent
    
    
    
    
    
    Percentof loans
    
    
    
    
    
    of loans
    
    
    
    
    
    of loans
    
    
    
    
    
    of loans
    
    
    
    
    
    of loansin each
    
    
    
    
    
    in each
    
    
    
    
    
    in each
    
    
    
    
    
    in each
    
    
    
    
    
    in eachcategory
    
    
    
    
    
    category
    
    
    
    
    
    category
    
    
    
    
    
    category
    
    
    
    
    
    categoryto total
    
    
    
    
    
    to total
    
    
    
    
    
    to total
    
    
    
    
    
    to total
    
    
    
    
    
    to totalAmount
    
    loans
    
    Amount
    
    loans
    
    Amount
    
    loans
    
    Amount
    
    loans
    
    Amount
    
    loans(Dollars in Thousands)Construction, commercial and
commercial real estate
    
    $
    5,392
    
    
    
    70.4
    %
    
    $
    4,338
    
    
    
    71.0
    %
    
    $
    3,606
    
    
    
    68.4
    %
    
    $
    3,530
    
    
    
    68.7
    %
    
    $
    3,408
    
    
    
    70.1
    %Residential mortgage and home equity
    
    
    444
    
    
    
    29.4
    
    
    
    353
    
    
    
    28.7
    
    
    
    297
    
    
    
    31.3
    
    
    
    290
    
    
    
    31.1
    
    
    
    273
    
    
    
    29.6Consumer
    
    
    43
    
    
    
    0.2
    
    
    
    36
    
    
    
    0.3
    
    
    
    39
    
    
    
    0.3
    
    
    
    21
    
    
    
    0.2
    
    
    
    30
    
    
    
    0.3Unallocated
    
    
    6
    
    
    
    N/A
    
    
    
    83
    
    
    
    N/A
    
    
    
    367
    
    
    
    N/A
    
    
    
    285
    
    
    
    N/A
    
    
    
    429
    
    
    
    N/A$
    5,885
    
    
    
    100.0
    %
    
    $
    4,810
    
    
    
    100.0
    %
    
    $
    4,309
    
    
    
    100.0
    %
    
    $
    4,126
    
    
    
    100.0
    %
    
    $
    4,140
    
    
    
    100.0
    %
 20




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##### Table of Contents



POTENTIAL PROBLEM LOANS
  RISK ASSETS
  2008
    
    2007
    
    2006
    
    2005
    
    2004(Dollars in Thousands)Risk assets:Non-performing loans:Residential real estate
    
    $
    276
    
    
    $
    281
    
    
    $
    37
    
    
    $
    32
    
    
    $
    Consumer
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction
    
    
    350
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    1,951
    
    
    
    1,242
    
    
    
    1,020
    
    
    
    
    
    
    
    Total non-performing loans
    
    
    2,606
    
    
    
    1,523
    
    
    
    1,057
    
    
    
    32
    
    
    
    Other real estate owned:Land
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34OREO valuation allowance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34
    )Total other real estate owned
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total risk assets
    
    $
    2,726
    
    
    $
    1,523
    
    
    $
    1,057
    
    
    $
    32
    
    
    $
    Risk assets as a percent of total loans and OREO
    
    
    0.6
    %
    
    
    0.4
    %
    
    
    0.4
    %
    
    
    0.0
    %
    
    
    0.0
    %Risk assets as a percent of total assets
    
    
    0.4
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.0
    %
    
    
    0.0
    %
   21




---



##### Table of Contents



INTEREST BEARING LIABILITIES
     DEPOSITS
  BORROWED FUNDS
   RESULTS OF OPERATIONS
 OVERVIEW
   22




---



##### Table of Contents



Reconciliation Table  Non-GAAP Financial Information
 For the twelve months ended December 31,
    
    2008
    
    2007(Dollars in thousands, except share data)Net income (loss) per GAAP
    
    $
    (2,723
    )
    
    $
    3,718Add: Impairment of investments, net of tax
    
    
    6,567
    
    
    
    Less: Settlement gains on pension, net of tax
    
    
    
    
    
    
    (457
    )Normalized net income (non-GAAP)
    
    $
    3,844
    
    
    $
    3,261Diluted normalized earnings per share
    
    $
    0.86
    
    
    $
    0.71Return on average assets, normalized
    
    
    0.55
    %
    
    
    0.56
    %Return on average equity, normalized
    
    
    6.54
    %
    
    
    5.57
    %
        23




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##### Table of Contents



AVERAGE BALANCES, NET INTEREST INCOME AND AVERAGE INTEREST RATES
  2008
    
    2007Average
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    Interest
    
    Average
    
    
    
    
    
    InterestBalance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate(Dollars in Thousands)AssetsLoans:Residential real estate
    
    $
    96,228
    
    
    $
    5,403
    
    
    
    5.61
    %
    
    $
    73,122
    
    
    $
    4,132
    
    
    
    5.65
    %Home equity
    
    
    22,987
    
    
    
    1,198
    
    
    
    5.21
    
    
    
    20,946
    
    
    
    1,332
    
    
    
    6.36Consumer
    
    
    976
    
    
    
    65
    
    
    
    6.66
    
    
    
    874
    
    
    
    59
    
    
    
    6.75Total retail loans
    
    
    120,191
    
    
    
    6,666
    
    
    
    5.55
    
    
    
    94,942
    
    
    
    5,523
    
    
    
    5.82Construction
    
    
    53,720
    
    
    
    3,380
    
    
    
    6.29
    
    
    
    51,940
    
    
    
    4,720
    
    
    
    9.09Commercial real estate
    
    
    202,144
    
    
    
    13,654
    
    
    
    6.75
    
    
    
    157,769
    
    
    
    11,554
    
    
    
    7.32Commercial
    
    
    27,895
    
    
    
    1,705
    
    
    
    6.11
    
    
    
    21,454
    
    
    
    1,697
    
    
    
    7.91Total corporate loans
    
    
    283,759
    
    
    
    18,739
    
    
    
    6.60
    
    
    
    231,163
    
    
    
    17,971
    
    
    
    7.77Total loans
    
    
    403,950
    
    
    
    25,405
    
    
    
    6.29
    
    
    
    326,105
    
    
    
    23,494
    
    
    
    7.20Investment securities:U.S. Treasury and government-
sponsored enterprise obligations
    
    
    23,448
    
    
    
    915
    
    
    
    3.90
    
    
    
    33,777
    
    
    
    1,349
    
    
    
    3.99Other bonds and equity securities
    
    
    25,901
    
    
    
    1,383
    
    
    
    5.34
    
    
    
    18,626
    
    
    
    1,108
    
    
    
    5.95CMOs and mortgage-backed
securities
    
    
    210,565
    
    
    
    10,857
    
    
    
    5.16
    
    
    
    170,526
    
    
    
    8,386
    
    
    
    4.92Short-term investments
    
    
    11,696
    
    
    
    195
    
    
    
    1.67
    
    
    
    13,489
    
    
    
    671
    
    
    
    4.97Total investment securities
    
    
    271,610
    
    
    
    13,350
    
    
    
    4.92
    
    
    
    236,418
    
    
    
    11,514
    
    
    
    4.87Total interest earning assets
    
    
    675,560
    
    
    
    38,755
    
    
    
    5.74
    %
    
    
    562,523
    
    
    
    35,008
    
    
    
    6.22
    %Allowance for loan losses
    
    
    (5,172
    )
    
    
    
    
    
    
    
    
    
    
    (4,505
    )Other assets
    
    
    28,115
    
    
    
    
    
    
    
    
    
    
    
    21,223Total assets
    
    $
    698,503
    
    
    
    
    
    
    
    
    
    
    $
    579,241Liabilities and Stockholders EquityDeposits:Regular savings accounts
    
    $
    41,994
    
    
    $
    575
    
    
    
    1.37
    %
    
    $
    30,917
    
    
    $
    154
    
    
    
    0.50
    %NOW and super NOW accounts
    
    
    17,867
    
    
    
    35
    
    
    
    0.20
    
    
    
    18,013
    
    
    
    33
    
    
    
    0.18Money market accounts
    
    
    81,085
    
    
    
    1,908
    
    
    
    2.35
    
    
    
    74,484
    
    
    
    2,256
    
    
    
    3.03Certificates of deposit
    
    
    194,800
    
    
    
    7,780
    
    
    
    3.99
    
    
    
    160,289
    
    
    
    7,639
    
    
    
    4.77Total interest bearing deposits
    
    
    335,746
    
    
    
    10,298
    
    
    
    3.07
    
    
    
    283,703
    
    
    
    10,082
    
    
    
    3.55Borrowed funds
    
    
    271,357
    
    
    
    11,582
    
    
    
    4.27
    
    
    
    204,431
    
    
    
    9,599
    
    
    
    4.70Total interest bearing liabilities
    
    
    607,103
    
    
    
    21,880
    
    
    
    3.60
    %
    
    
    488,134
    
    
    
    19,681
    
    
    
    4.03
    %Non-interest bearing deposits
    
    
    29,071
    
    
    
    
    
    
    
    
    
    
    
    29,444Other liabilities
    
    
    3,579
    
    
    
    
    
    
    
    
    
    
    
    3,147Total liabilities
    
    
    639,753
    
    
    
    
    
    
    
    
    
    
    
    520,725Stockholders equity
    
    
    58,750
    
    
    
    
    
    
    
    
    
    
    
    58,516Total liabilities and
stockholders equity
    
    $
    698,503
    
    
    
    
    
    
    
    
    
    
    $
    579,241Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.14
    %
    
    
    
    
    
    
    
    
    
    
    2.19
    %Net interest income
    
    
    
    
    
    $
    16,875
    
    
    
    
    
    
    
    
    
    
    $
    15,327Net interest margin on average earning assets
    
    
    
    
    
    
    
    
    
    
    2.50
    %
    
    
    
    
    
    
    
    
    
    
    2.72
    %
 24




---



##### Table of Contents



RATE-VOLUME ANALYSIS
  2008 vs. 2007Change due to
    
    TotalVolume
    
    Rate
    
    Change(In Thousands)Interest income:Loans:Residential real estate
    
    $
    1,298
    
    
    $
    (27
    )
    
    $
    1,271Equity
    
    
    122
    
    
    
    (256
    )
    
    
    (134
    )Consumer
    
    
    7
    
    
    
    (1
    )
    
    
    6Total retail loans
    
    
    1,427
    
    
    
    (284
    )
    
    
    1,143Construction
    
    
    157
    
    
    
    (1,497
    )
    
    
    (1,340
    )Commercial real estate
    
    
    3,052
    
    
    
    (952
    )
    
    
    2,100Commercial
    
    
    444
    
    
    
    (436
    )
    
    
    8Total corporate loans
    
    
    3,653
    
    
    
    (2,885
    )
    
    
    768Total interest on loans
    
    
    5,080
    
    
    
    (3,169
    )
    
    
    1,911Investment securities:U.S. Treasury and government-sponsored
enterprise obligations
    
    
    (404
    )
    
    
    (30
    )
    
    
    (434
    )Other bonds and equity securities
    
    
    398
    
    
    
    (123
    )
    
    
    275Mortgage-backed securities
    
    
    2,048
    
    
    
    423
    
    
    
    2,471Short-term investments
    
    
    (79
    )
    
    
    (397
    )
    
    
    (476
    )Total investments
    
    
    1,963
    
    
    
    (127
    )
    
    
    1,836Total interest income
    
    
    7,043
    
    
    
    (3,296
    )
    
    
    3,747Interest expense:Deposits:Regular savings accounts
    
    
    72
    
    
    
    349
    
    
    
    421NOW and Super NOW accounts
    
    
    
    
    
    
    2
    
    
    
    2Money market accounts
    
    
    187
    
    
    
    (535
    )
    
    
    (348
    )Certificates of deposit
    
    
    1,493
    
    
    
    (1,352
    )
    
    
    141Total interest bearing deposits
    
    
    1,752
    
    
    
    (1,536
    )
    
    
    216Borrowed funds
    
    
    2,991
    
    
    
    (1,008
    )
    
    
    1,983Total interest expense
    
    
    4,743
    
    
    
    (2,544
    )
    
    
    2,199Net interest income
    
    $
    2,300
    
    
    $
    (752
    )
    
    $
    1,548
 NET INTEREST INCOME
     25




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##### Table of Contents



PROVISION FOR LOAN LOSSES
  NON-INTEREST INCOME (LOSS)
       NON-INTEREST EXPENSE
   26




---



##### Table of Contents



INCOME TAXES
    LIQUIDITY
      CONTRACTUAL OBLIGATIONS AND COMMITMENTS
  27




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##### Table of Contents



Payments Due  By PeriodLess than
    
    One to
    
    Three to
    
    AfterContractual obligations
    
    Total
    
    One Year
    
    Three Years
    
    Five Years
    
    Five Years(In Thousands)FHLBB long- term
advances
    
    $
    219,228
    
    
    $
    10,000
    
    
    $
    77,000
    
    
    $
    23,000
    
    
    $
    109,228Wholesale repurchase
agreements
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    Short-term borrowings
    
    
    17,262
    
    
    
    17,262
    
    
    
    
    
    
    
    
    
    
    
    Lease obligations
    
    
    1,526
    
    
    
    245
    
    
    
    226
    
    
    
    206
    
    
    
    849Data processing vendor
    
    
    1,195
    
    
    
    686
    
    
    
    509
    
    
    
    
    
    
    
    Employee benefit
payments (1)
    
    
    1,528
    
    
    
    118
    
    
    
    235
    
    
    
    235
    
    
    
    940Total contractual cash
obligations
    
    $
    280,739
    
    
    $
    28,311
    
    
    $
    77,970
    
    
    $
    63,441
    
    
    $
    111,017
 (1)
    
    The amounts shown reflect expected employee benefits paid by the Company under its
supplemental executive retirement plans through December 31, 2016. Amount of Commitment Expiring  By PeriodLess than
    
    One to
    
    Three to
    
    AfterCommitments
    
    Total
    
    One Year
    
    Three Years
    
    Five Years
    
    Five Years(In Thousands)Loan originations
    
    $
    21,524
    
    
    $
    21,524
    
    
    $
    
    
    
    $
    
    
    
    $
    Lines of credit
    
    
    73,151
    
    
    
    37,213
    
    
    
    13,929
    
    
    
    185
    
    
    
    21,824Commitment
to purchase loans
    
    6,837
    
    
    
    6,837
    
    
    
    
    
    
    
    
    
    
    
    Letters of credit
    
    
    1,610
    
    
    
    1,610
    
    
    
    
    
    
    
    
    
    
    
    Total commitments
    
    $
    103,122
    
    
    $
    67,184
    
    
    $
    13,929
    
    
    $
    185
    
    
    $
    21,824
 OFF-BALANCE SHEET ARRANGEMENTS
  CAPITAL ADEQUACY
    28




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##### Table of Contents



RECENT ACCOUNTING DEVELOPMENTS
 
        29




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##### Table of Contents



IMPACT OF INFLATION AND CHANGING PRICES
   
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 ASSET/LIABILITY MANAGEMENT
  INTEREST RATE SENSITIVITY
    30




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##### Table of Contents



Interest Rate ShockDown
    
    
    Up2008
    
    Flat Rates
    
    

100 bp
    
    

200 bp(In Thousands)Year One
    
    $
    16,861
    
    
    $
    16,480
    
    
    $
    17,866Year Two
    
    
    17,861
    
    
    
    16,769
    
    
    
    20,038Total net interest income for 2 year period
    
    $
    34,722
    
    
    $
    33,249
    
    
    $
    37,904
 Interest Rate ShockDown
    
    
    Up2007
    
    Flat Rates
    
    
    200 bp
    
    
    200 bp(In Thousands)Year One
    
    $
    15,317
    
    
    $
    14,174
    
    
    $
    15,570Year Two
    
    
    14,899
    
    
    
    9,962
    
    
    
    15,985Total net interest income for 2 year period
    
    $
    30,216
    
    
    $
    24,136
    
    
    $
    31,555
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    32CONSOLIDATED BALANCE SHEETS
    
    
    33CONSOLIDATED STATEMENTS OF OPERATIONS
    
    
    34CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
    
    
    35CONSOLIDATED STATEMENTS OF CASH FLOWS
    
    
    36NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    37
 31




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 The Board of Directors and Stockholders  LSB Corporation:
    /s/ Wolf & Company, P.C.
 
 32




---



##### Table of Contents



Consolidated Balance Sheets
 December 31,
    
    2008
    
    
    2007(In Thousands, Except Share Data)Assets:Cash and due from banks
    
    $
    6,859
    
    
    $
    7,494Federal funds sold
    
    
    6,469
    
    
    
    56Total cash and cash equivalents
    
    
    13,328
    
    
    
    7,550Investment securities available for sale, at fair value,
amortized cost of $259,057 in 2008 and $229,885 in 2007 (notes 2 and 7)
    
    
    264,561
    
    
    
    230,596Federal Home Loan Bank stock, at cost (note 3)
    
    
    11,825
    
    
    
    10,185Loans, net of allowance for loan losses of $5,885 in 2008
and $4,810 in 2007 (notes 4 and 7)
    
    
    446,736
    
    
    
    353,303Premises and equipment, net (note 5)
    
    
    5,528
    
    
    
    3,590Accrued interest receivable
    
    
    2,720
    
    
    
    2,453Deferred income tax asset, net (note 8)
    
    
    4,447
    
    
    
    2,485Bank-owned life insurance
    
    
    10,641
    
    
    
    10,200Other real estate owned
    
    
    120
    
    
    
    Other assets
    
    
    1,418
    
    
    
    1,289Total assets
    
    $
    761,324
    
    
    $
    621,651Liabilities and Stockholders Equity:Liabilities:Interest bearing deposits (note 6)
    
    $
    381,117
    
    
    $
    293,232Non-interest bearing deposits (note 6)
    
    
    27,546
    
    
    
    28,851Total deposits
    
    
    408,663
    
    
    
    322,083Long-term borrowed funds (note 7)
    
    
    259,228
    
    
    
    227,378Short-term borrowed funds (note 7)
    
    
    17,262
    
    
    
    7,973Other liabilities
    
    
    4,029
    
    
    
    3,919Total liabilities
    
    
    689,182
    
    
    
    561,353Commitments 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,
(liquidation preference $1,000 per share), 15,000 shares
authorized and issued
    
    
    14,455
    
    
    
    Common stock, $.10 par value; 20,000,000
shares authorized; 4,470,941 and 4,516,561 shares issued
and outstanding in 2008 and 2007, respectively
    
    
    447
    
    
    
    452Additional paid-in capital
    
    
    60,179
    
    
    
    60,382Accumulated deficit
    
    
    (6,250
    )
    
    
    (934
    )Accumulated other comprehensive income
    
    
    3,311
    
    
    
    398Total stockholders equity
    
    
    72,142
    
    
    
    60,298Total liabilities and stockholders equity
    
    $
    761,324
    
    
    $
    621,651
 The accompanying notes are an integral part of these consolidated financial statements.
 33




---



##### Table of Contents



Consolidated Statements of Operations
 Year Ended December 31,
    
    2008
    
    
    2007(In Thousands, Except Share Data)Interest and dividend income:Loans
    
    $
    25,405
    
    
    $
    23,494Investment securities available for sale (note 2)
    
    
    12,727
    
    
    
    10,181Federal Home Loan Bank stock (note 3)
    
    
    428
    
    
    
    662Other interest income
    
    
    195
    
    
    
    671Total interest and dividend income
    
    
    38,755
    
    
    
    35,008Interest expense:Deposits (note 6)
    
    
    10,298
    
    
    
    10,082Long-term borrowed funds
    
    
    11,396
    
    
    
    8,885Short-term borrowed funds
    
    
    186
    
    
    
    714Total interest expense
    
    
    21,880
    
    
    
    19,681Net interest income
    
    
    16,875
    
    
    
    15,327Provision for loan losses (note 4)
    
    
    1,285
    
    
    
    645Net interest income after provision for loan losses
    
    
    15,590
    
    
    
    14,682Non-interest income (loss):Deposit account fees
    
    
    1,043
    
    
    
    1,009Loan servicing fees, net
    
    
    153
    
    
    
    189Impairment write-downs on securities
    
    
    (10,105
    )
    
    
    Gain on pension plan termination (note 10)
    
    
    
    
    
    
    762Income on bank-owned life insurance
    
    
    441
    
    
    
    200Other income
    
    
    479
    
    
    
    524Total non-interest income (loss)
    
    
    (7,989
    )
    
    
    2,684Non-interest expense:Salaries and employee benefits (notes 10 and 11)
    
    
    6,706
    
    
    
    6,836Occupancy and equipment (note 5)
    
    
    1,330
    
    
    
    1,221Data processing
    
    
    938
    
    
    
    1,019Professional
    
    
    580
    
    
    
    463Marketing
    
    
    472
    
    
    
    397Insurance
    
    
    164
    
    
    
    137Other real estate owned
    
    
    139
    
    
    
    Other
    
    
    1,547
    
    
    
    1,484Total non-interest expense
    
    
    11,876
    
    
    
    11,557Income (loss) before income taxes
    
    
    (4,275
    )
    
    
    5,809Income tax expense (benefit) (note 8)
    
    
    (1,552
    )
    
    
    2,091Net income (loss)
    
    $
    (2,723
    )
    
    $
    3,718Average basic shares outstanding
    
    
    4,468,484
    
    
    
    4,575,197Common stock equivalents
    
    
    16,066
    
    
    
    27,509Average diluted shares outstanding
    
    
    4,484,550
    
    
    
    4,602,706Basic earnings (loss) per share
    
    $
    (0.61
    )
    
    $
    0.81Diluted earnings (loss) per share
    
    $
    (0.61
    )
    
    $
    0.81
 The accompanying notes are an integral part of these consolidated financial statements.
 34




---



##### Table of Contents



Consolidated Statements of Changes in  Stockholders Equity
 AccumulatedOther
    
    
    TotalAdditional
    
    
    
    
    
    
    Compre-
    
    
    Stock-Preferred
    
    
    Common
    
    
    Paid-in
    
    
    Accumulated
    
    
    hensive
    
    
    holdersStock
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Income (Loss)
    
    
    Equity(In Thousands, Except Share Data)Balance at December 31, 2006
    
    $
    
    
    
    $
    459
    
    
    $
    61,578
    
    
    $
    (2,090
    )
    
    $
    (1,416
    )
    
    $
    58,531Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,718
    
    
    
    
    
    
    
    3,718Other comprehensive income -
Unrealized gain on securities
available for sale (tax effect $1,416)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,264
    
    
    
    2,264Pension plan settlement gain
(tax effect $312)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (450
    )
    
    
    (450
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,532Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    121
    
    
    
    
    
    
    
    
    
    
    
    121Exercise of stock options and tax benefits
(13,300 shares)
    
    
    
    
    
    
    2
    
    
    
    137
    
    
    
    
    
    
    
    
    
    
    
    139Common stock repurchased (90,356 shares)
    
    
    
    
    
    
    (9
    )
    
    
    (1,454
    )
    
    
    
    
    
    
    
    
    
    
    (1,463
    )Dividends declared and paid ($0.56 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,562
    )
    
    
    
    
    
    
    (2,562
    )Balance at December 31, 2007
    
    
    
    
    
    
    452
    
    
    
    60,382
    
    
    
    (934
    )
    
    
    398
    
    
    
    60,298Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,723
    )
    
    
    
    
    
    
    (2,723
    )Other comprehensive income -
Unrealized gain on securities
available for sale (tax effect $1,935)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,913
    
    
    
    2,913Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    156
    
    
    
    
    
    
    
    
    
    
    
    156Issuance of preferred stock,
net of discount of $549
    
    
    14,451
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,451Accretion of discount on preferred stock
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    Fair value of warrants issued with preferred
stock
    
    
    
    
    
    
    
    
    
    
    549
    
    
    
    
    
    
    
    
    
    
    
    549Exercise of stock options and tax benefits
(9,500 shares)
    
    
    
    
    
    
    1
    
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    121Common stock repurchased (64,620 shares)
    
    
    
    
    
    
    (6
    )
    
    
    (1,028
    )
    
    
    
    
    
    
    
    
    
    
    (1,034
    )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
 Disclosure of reclassification amountfor securities available for sale:Years Ended December 31,
    
    2008
    
    
    2007(In Thousands)Gross unrealized (losses) gains
arising during the period
    
    $
    (5,312
    )
    
    $
    3,680Tax effect
    
    
    1,656
    
    
    
    (1,416
    )Unrealized holding (losses) gains, net of tax
    
    
    (3,656
    )
    
    
    2,264Reclassification adjustment for losses
included in income
    
    
    10,105
    
    
    
    Tax effect
    
    
    (3,536
    )
    
    
    Unrealized gains on securities,
net of reclassification amount
    
    $
    2,913
    
    
    $
    2,264
 The accompanying notes are an integral part of these consolidated financial statements.
 35




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##### Table of Contents



Consolidated Statements  of Cash Flows
 Year Ended December 31,
    
    2008
    
    
    2007(In Thousands)Cash flows from operating activities:Net income (loss)
    
    $
    (2,723
    )
    
    $
    3,718Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses
    
    
    1,285
    
    
    
    645Impairment write-downs on securities
    
    
    10,105
    
    
    
    Net losses on sales of other real estate owned
    
    
    72
    
    
    
    Gains on pension plan termination
    
    
    
    
    
    
    (762
    )Net accretion of investment securities
    
    
    (496
    )
    
    
    (203
    )Depreciation and amortization of premises and equipment
    
    
    605
    
    
    
    606Increase in accrued interest receivable
    
    
    (267
    )
    
    
    (194
    )Deferred income tax expense (benefit)
    
    
    (3,842
    )
    
    
    16Stock-based compensation
    
    
    156
    
    
    
    121Increase in cash surrender value of bank-owned life insurance
    
    
    (441
    )
    
    
    (200
    )Decrease (increase) in other assets
    
    
    (129
    )
    
    
    655(Decrease) increase in other liabilities
    
    
    138
    
    
    
    (132
    )Net cash provided by operating activities
    
    
    4,463
    
    
    
    4,270Cash flows from investing activities:Proceeds from maturities of investment securities available for sale
    
    
    15,741
    
    
    
    23,545Purchases of investment securities available for sale
    
    
    (97,235
    )
    
    
    (60,074
    )Purchases of bank-owned life insurance
    
    
    
    
    
    
    (10,000
    )Purchases of FHLBB stock
    
    
    (1,640
    )
    
    
    (204
    )Redemption of FHLBB stock
    
    
    
    
    
    
    65Principal payments on investment securities available for sale
    
    
    42,713
    
    
    
    28,499Increase in loans, net
    
    
    (96,668
    )
    
    
    (70,094
    )Proceeds from sales of other real estate owned
    
    
    1,758
    
    
    
    Purchases of premises and equipment
    
    
    (2,543
    )
    
    
    (389
    )Net cash used in investing activities
    
    
    (137,874
    )
    
    
    (88,652
    )Cash flows from financing activities:Net increase in deposits
    
    
    86,580
    
    
    
    26,421Additions to long-term borrowed funds
    
    
    63,000
    
    
    
    173,000Payments on long-term borrowed funds
    
    
    (31,150
    )
    
    
    (89,141
    )Net (decrease) increase in short-term borrowed funds
    
    
    9,289
    
    
    
    (33,290
    )Net increase (decrease) in mortgagors escrow accounts
    
    
    (28
    )
    
    
    61Proceeds from issuance of preferred stock and warrants
    
    
    15,000
    
    
    
    Dividends paid
    
    
    (2,589
    )
    
    
    (2,562
    )Proceeds from exercise of stock options
    
    
    117
    
    
    
    117Tax benefits from exercise of stock options
    
    
    4
    
    
    
    22Repurchases of common stock
    
    
    (1,034
    )
    
    
    (1,463
    )Net cash provided by financing activities
    
    
    139,189
    
    
    
    73,165Net increase (decrease) in cash and cash equivalents
    
    
    5,778
    
    
    
    (11,217
    )Cash and cash equivalents, beginning of year
    
    
    7,550
    
    
    
    18,767Cash and cash equivalents, end of year
    
    $
    13,328
    
    
    $
    7,550Cash paid during the year for:Interest on deposits
    
    $
    10,276
    
    
    $
    10,067Interest on borrowed funds
    
    
    11,511
    
    
    
    9,357Income taxes
    
    
    2,405
    
    
    
    2,101Supplemental non-cash investing activities:Transfers to other real estate owned
    
    
    1,950
    
    
    
    
 The accompanying notes are an integral part of these consolidated financial statements.
 36




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##### Table of Contents



NOTES TO CONSOLIDATED  Financial Statements  Years Ended December 31, 2008 and 2007
 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 BASIS OF PRESENTATION.
   CASH AND CASH EQUIVALENTS.
 INVESTMENT SECURITIES.
   FEDERAL HOME LOAN BANK STOCK
 INTEREST ON LOANS .
 LOAN FEES.
 37




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##### Table of Contents



TRANSFER AND SERVICING OF ASSETS AND EXTINGUISHMENTS OF LIABILITIES.
 ALLOWANCE FOR LOAN LOSSES.
       PREMISES AND EQUIPMENT.
 BANK-OWNED LIFE INSURANCE
 OTHER REAL ESTATE OWNED.
 SHARE-BASED COMPENSATION PLANS.
 38




---



##### Table of Contents



INCOME TAXES.
 EARNINGS PER SHARE
 RECENT ACCOUNTING DEVELOPMENTS
      39




---



##### Table of Contents



(2) INVESTMENT SECURITIES
 2008
    
    
    2007Amortized
    
    
    Unrealized
    
    
    Fair
    
    
    Amortized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value
    
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Value(In Thousands)U.S. Treasury obligations
    
    $
    5,578
    
    
    $
    426
    
    
    $
    
    
    
    $
    6,004
    
    
    $
    5,589
    
    
    $
    4
    
    
    $
    (52
    )
    
    $
    5,541Government-sponsored
enterprise obligations (1)
    
    
    15,485
    
    
    
    240
    
    
    
    (3
    )
    
    
    15,722
    
    
    
    15,748
    
    
    
    95
    
    
    
    (33
    )
    
    
    15,810Mortgage-backed securities
    
    
    181,367
    
    
    
    5,919
    
    
    
    (80
    )
    
    
    187,206
    
    
    
    134,969
    
    
    
    2,208
    
    
    
    (474
    )
    
    
    136,703Collateralized mortgage
obligations
    
    
    46,725
    
    
    
    379
    
    
    
    (45
    )
    
    
    47,059
    
    
    
    60,660
    
    
    
    169
    
    
    
    (682
    )
    
    
    60,147Corporate obligations
    
    
    6,433
    
    
    
    
    
    
    
    (750
    )
    
    
    5,683
    
    
    
    6,373
    
    
    
    30
    
    
    
    (583
    )
    
    
    5,820Mutual funds
    
    
    1,000
    
    
    
    
    
    
    
    (42
    )
    
    
    958
    
    
    
    1,000
    
    
    
    
    
    
    
    (41
    )
    
    
    959Equity securities
    
    
    2,469
    
    
    
    
    
    
    
    (540
    )
    
    
    1,929
    
    
    
    5,546
    
    
    
    70
    
    
    
    
    
    
    
    5,616$
    259,057
    
    
    $
    6,964
    
    
    $
    (1,460
    )
    
    $
    264,561
    
    
    $
    229,885
    
    
    $
    2,576
    
    
    $
    (1,865
    )
    
    $
    230,596
 (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.   40




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##### Table of Contents



Wholesale
    
    
    CustomerRepurchase Agreements
    
    
    Repurchase Agreements
    
    
    FHLBB AdvancesAmortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    Value(In Thousands)2008:U.S. Treasury obligations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,074
    
    
    $
    5,494Government-sponsored
enterprise obligations
    
    
    
    
    
    
    
    
    
    
    5,986
    
    
    
    6,136
    
    
    
    9,499
    
    
    
    9,586Mortgage-backed securities
    
    
    47,219
    
    
    
    48,835
    
    
    
    
    
    
    
    
    
    
    
    119,589
    
    
    
    123,544Collateralized mortgage obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,707
    
    
    
    47,0402007:U.S. Treasury obligations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,589
    
    
    $
    5,541Government-sponsored
enterprise obligations
    
    
    
    
    
    
    
    
    
    
    7,945
    
    
    
    7,991
    
    
    
    7,803
    
    
    
    7,819Mortgage-backed securities
    
    
    27,144
    
    
    
    27,887
    
    
    
    
    
    
    
    
    
    
    
    107,825
    
    
    
    108,816Collateralized mortgage obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,660
    
    
    
    60,147
 Other-than-temporarily impaired securities.
  Less Than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized2008
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses(In Thousands)Government-sponsored
enterprise obligations
    
    $
    2,500
    
    
    $
    (3
    )
    
    $
    
    
    
    $
    
    
    
    $
    2,500
    
    
    $
    (3
    )Mortgage-backed securities
    
    
    303
    
    
    
    (1
    )
    
    
    6,864
    
    
    
    (79
    )
    
    
    7,167
    
    
    
    (80
    )Collateralized mortgage
Obligations
    
    
    2,006
    
    
    
    (1
    )
    
    
    7,085
    
    
    
    (44
    )
    
    
    9,091
    
    
    
    (45
    )Corporate obligations
    
    
    1,800
    
    
    
    (677
    )
    
    
    3,883
    
    
    
    (73
    )
    
    
    5,683
    
    
    
    (750
    )Mutual funds
    
    
    
    
    
    
    
    
    
    
    958
    
    
    
    (42
    )
    
    
    958
    
    
    
    (42
    )Equity securities
    
    
    1,500
    
    
    
    (540
    )
    
    
    
    
    
    
    
    
    
    
    1,500
    
    
    
    (540
    )Total temporarily
impaired
securities
    
    $
    8,109
    
    
    $
    (1,222
    )
    
    $
    18,790
    
    
    $
    (238
    )
    
    $
    26,899
    
    
    $
    (1,460
    )
 Less Than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized2007
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses(In Thousands)U.S. Treasury obligations
    
    $
    
    
    
    $
    
    
    
    $
    5,036
    
    
    $
    (52
    )
    
    $
    5,036
    
    
    $
    (52
    )Government-sponsored
enterprise obligations
    
    
    
    
    
    
    
    
    
    
    4,958
    
    
    
    (33
    )
    
    
    4,958
    
    
    
    (33
    )Mortgage-backed securities
    
    
    37
    
    
    
    (1
    )
    
    
    25,559
    
    
    
    (473
    )
    
    
    25,596
    
    
    
    (474
    )Collateralized mortgage
obligations
    
    
    
    
    
    
    
    
    
    
    47,536
    
    
    
    (682
    )
    
    
    47,536
    
    
    
    (682
    )Corporate obligations
    
    
    1,451
    
    
    
    (508
    )
    
    
    1,874
    
    
    
    (75
    )
    
    
    3,325
    
    
    
    (583
    )Mutual funds
    
    
    
    
    
    
    
    
    
    
    959
    
    
    
    (41
    )
    
    
    959
    
    
    
    (41
    )Total temporarily impaired
securities
    
    $
    1,488
    
    
    $
    (509
    )
    
    $
    85,922
    
    
    $
    (1,356
    )
    
    $
    87,410
    
    
    $
    (1,865
    )
 U. S. Treasury and government-sponsored enterprise obligations.
 41




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##### Table of Contents



Mortgage-backed securities and collateralized mortgage obligations.
 Corporate obligations.
 Equity securities and mutual funds.
   Amortized
    
    
    FairDecember 31, 2008
    
    Cost
    
    
    Value(In Thousands)U.S. Treasury and government-sponsored enterprise obligations:Within 1 year
    
    $
    5,501
    
    
    $
    5,5682 to 3 years
    
    
    4,999
    
    
    
    5,1293 to 5 years
    
    
    10,563
    
    
    
    11,02921,063
    
    
    
    21,726Mortgage-backed securities:Within 1 year
    
    
    716
    
    
    
    7131 to 2 years
    
    
    2,084
    
    
    
    2,0362 to 3 years
    
    
    120
    
    
    
    1253 to 5 years
    
    
    9,658
    
    
    
    9,6925 to 10 years
    
    
    10,388
    
    
    
    10,616After 10 years
    
    
    158,401
    
    
    
    164,024181,367
    
    
    
    187,206Collateralized mortgage obligations:3 to 5 years
    
    
    83
    
    
    
    885 to 10 years
    
    
    9,749
    
    
    
    9,740After 10 years
    
    
    36,893
    
    
    
    37,23146,725
    
    
    
    47,059Corporate obligations:Within 1 year
    
    
    1,982
    
    
    
    1,9641 to 2 years
    
    
    4,451
    
    
    
    3,7196,433
    
    
    
    5,683$
    255,588
    
    
    $
    261,674
 42




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##### Table of Contents



(3) FEDERAL HOME LOAN BANK STOCK
  (4) LOANS
  2008
    
    
    2007(In Thousands)Residential real estate
    
    $
    109,276
    
    
    $
    79,743Home equity
    
    
    23,972
    
    
    
    23,046Consumer
    
    
    831
    
    
    
    1,007Retail loans
    
    
    134,079
    
    
    
    103,796Construction
    
    
    61,769
    
    
    
    47,885Commercial real estate
    
    
    222,977
    
    
    
    177,968Commercial business
    
    
    33,796
    
    
    
    28,464Corporate loans
    
    
    318,542
    
    
    
    254,317Total loans
    
    
    452,621
    
    
    
    358,113Allowance for loan losses
    
    
    (5,885
    )
    
    
    (4,810
    )Net loans
    
    $
    446,736
    
    
    $
    353,303
     2008
    
    
    2007(In Thousands)Balance at beginning of year
    
    $
    2,112
    
    
    $
    2,168New loans granted
    
    
    1,145
    
    
    
    638Retirement/reduction of directors and officers
    
    
    (249
    )
    
    
    Repayment of principal
    
    
    (186
    )
    
    
    (694
    )Balance at end of year
    
    $
    2,822
    
    
    $
    2,112
  2008
    
    
    2007(In Thousands)Balance at beginning of year
    
    $
    4,810
    
    
    $
    4,309Total charge-offs
    
    
    (214
    )
    
    
    (157
    )Total recoveries
    
    
    4
    
    
    
    13Net charge-offs
    
    
    (210
    )
    
    
    (144
    )Provision for loan losses
    
    
    1,285
    
    
    
    645Balance at end of year
    
    $
    5,885
    
    
    $
    4,810
  43




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##### Table of Contents



2008
    
    
    2007(In Thousands)Total impaired loans
    
    $
    3,121
    
    
    $
    1,523Impaired loans with reserve
    
    
    
    
    
    
    Impaired loan reserve
    
    
    
    
    
    
    Impaired loans without reserve
    
    
    3,121
    
    
    
    1,523Impaired loans average balance
    
    
    611
    
    
    
    399Interest income in accordance with original loan terms
    
    
    38
    
    
    
    37Interest income recognized
    
    
    
    
    
    
    
  (5) PREMISES AND EQUIPMENT
  EstimatedUseful Lives
    
    
    2008
    
    
    2007(In Thousands)Premises
    
    10  39 years
    
    $
    5,143
    
    
    $
    4,164Equipment
    
    3  5       years
    
    
    5,642
    
    
    
    4,078Leasehold improvements
    
    3  10 years
    
    
    1,047
    
    
    
    1,04711,832
    
    
    
    9,289Less accumulated depreciation and amortization
    
    
    
    
    
    
    (6,304
    )
    
    
    (5,699
    )$
    5,528
    
    
    $
    3,590
     Minimum
    
    
    MinimumRental
    
    
    RentalExpense
    
    
    Income(In Thousands)2009
    
    $
    245
    
    
    $
    2242010
    
    
    123
    
    
    
    1492011
    
    
    103
    
    
    
    1272012
    
    
    103
    
    
    
    192013
    
    
    103
    
    
    
    Thereafter
    
    
    849
    
    
    
    $
    1,526
    
    
    $
    519
  44




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##### Table of Contents



(6) DEPOSITS
  Rates as ofDecember 31,2008
    
    
    2008
    
    
    2007(Dollars in Thousands)Interest bearing accounts:NOW acccounts
    
    
    0.10-0.25
    %
    
    $
    17,239
    
    
    $
    17,877Savings accounts
    
    
    0.50-2.96
    %
    
    
    56,251
    
    
    
    28,452Money market accounts
    
    
    0.50-2.96
    %
    
    
    76,603
    
    
    
    74,621Certificates of deposit
    
    
    1.98-5.37
    %
    
    
    196,629
    
    
    
    141,651Retirement certificates of deposit
    
    
    1.98-5.37
    %
    
    
    34,395
    
    
    
    30,631Total interest bearing deposits
    
    
    
    
    
    
    381,117
    
    
    
    293,232Non-interest bearing demand deposit accounts
    
    
    
    
    
    
    27,546
    
    
    
    28,851Total deposits
    
    
    
    
    
    $
    408,663
    
    
    $
    322,083
   Equal to
    
    
    
    
    
    
    WeightedLess
    
    
    and greater
    
    
    
    
    
    
    Averagethan
    
    
    than
    
    
    
    
    
    
    Interest$100,000
    
    
    $100,000
    
    
    Total
    
    
    Rate(Dollars in Thousands)Three months or less
    
    $
    18,356
    
    
    $
    19,916
    
    
    $
    38,272
    
    
    
    2.97
    %From three to six months
    
    
    25,158
    
    
    
    13,402
    
    
    
    38,560
    
    
    
    3.17From six to twelve months
    
    
    23,475
    
    
    
    13,732
    
    
    
    37,207
    
    
    
    3.35From one to two years
    
    
    32,768
    
    
    
    46,592
    
    
    
    79,360
    
    
    
    4.05From two to three years
    
    
    6,307
    
    
    
    24,008
    
    
    
    30,315
    
    
    
    3.64Three years and thereafter
    
    
    4,088
    
    
    
    3,222
    
    
    
    7,310
    
    
    
    4.35$
    110,152
    
    
    $
    120,872
    
    
    $
    231,024
    
    
    
    3.57
    %
  (7) BORROWED FUNDS
   2008
    
    
    2007Weighted Average
    
    
    
    
    
    
    Weighted AverageAmount
    
    
    Interest Rate
    
    
    Amount
    
    
    Interest Rate(Dollars in Thousands)FHLBB long-term advances
    
    $
    219,228
    
    
    
    4.27
    %
    
    $
    202,378
    
    
    
    4.59
    %Wholesale repurchase agreements
    
    
    40,000
    
    
    
    4.36
    %
    
    
    25,000
    
    
    
    4.83
    %$
    259,228
    
    
    
    4.28
    %
    
    $
    227,378
    
    
    
    4.62
    %
 45




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##### Table of Contents



2008
    
    
    2007Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageMaturity
    
    Amount
    
    
    Interest Rate
    
    
    Amount
    
    
    Interest Rate(Dollars in Thousands)2008
    
    $
    
    
    
    
    
    %
    
    $
    25,000
    
    
    
    4.77
    %2009
    
    
    10,000
    
    
    
    5.14
    
    
    
    10,000
    
    
    
    5.142010
    
    
    44,000
    
    
    
    5.04
    
    
    
    38,000
    
    
    
    5.362011
    
    
    33,000
    
    
    
    3.27
    
    
    
    10,000
    
    
    
    4.932012
    
    
    15,000
    
    
    
    5.18
    
    
    
    15,000
    
    
    
    4.722013
    
    
    8,000
    
    
    
    3.28
    
    
    
    
    
    
    
    Thereafter
    
    
    109,228
    
    
    
    4.12
    
    
    
    104,378
    
    
    
    4.17$
    219,228
    
    
    
    4.27
    %
    
    $
    202,378
    
    
    
    4.59
    %
    2008
    
    
    2007Weighted Average
    
    
    
    
    
    
    Weighted AverageAmount
    
    
    Interest Rate
    
    
    Amount
    
    
    Interest Rate(Dollars in Thousands)FHLBB Ideal Way advances
    
    $
    
    
    
    
    
    %
    
    $
    800
    
    
    
    4.20
    %FHLBB short-term borrowings
    
    
    11,000
    
    
    
    2.08
    
    
    
    
    
    
    
    Customer repurchase agreements
    
    
    6,262
    
    
    
    0.50
    
    
    
    7,173
    
    
    
    2.75$
    17,262
    
    
    
    1.51
    %
    
    $
    7,973
    
    
    
    4.36
    %
  
 2008
    
    
    2007Customer
    
    
    Short-Term
    
    
    Customer
    
    
    Short-TermRepurchase
    
    
    FHLBB
    
    
    Repurchase
    
    
    FHLBBAgreements
    
    
    Advances
    
    
    Agreements
    
    
    Advances(Dollars in Thousands)Outstanding at December 31
    
    $
    6,262
    
    
    $
    11,000
    
    
    $
    7,173
    
    
    $
    800Average balance outstanding during the year
    
    
    5,107
    
    
    
    5,352
    
    
    
    5,599
    
    
    
    9,608Maximum outstanding at any month end
    
    
    7,051
    
    
    
    16,000
    
    
    
    7,217
    
    
    
    31,000Weighted average rate at December 31
    
    
    0.50
    %
    
    
    2.08
    %
    
    
    2.75
    %
    
    
    4.20
    %Weighted average rate during the year
    
    
    1.13
    
    
    
    2.39
    
    
    
    3.54
    
    
    
    5.36
  46




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##### Table of Contents



(8) INCOME
TAXES
 2008
    
    
    2007(In Thousands)Current expense:Federal
    
    $
    1,798
    
    
    $
    1,658State
    
    
    492
    
    
    
    417Total current expense
    
    
    2,290
    
    
    
    2,075Deferred expense (benefit):Federal
    
    
    (3,358
    )
    
    
    17State
    
    
    (1,159
    )
    
    
    4Change in state rates
    
    
    177
    
    
    
    Change in valuation reserve
    
    
    498
    
    
    
    (5
    )Total deferred expense (benefit)
    
    
    (3,842
    )
    
    
    16Total income tax expense (benefit)
    
    $
    (1,552
    )
    
    $
    2,091
  2008
    
    
    2007(In Thousands)Expected federal income tax expense (benefit)
    
    $
    (1,454
    )
    
    $
    1,975Items affecting expected tax:State income tax, net of federal benefit
    
    
    (440
    )
    
    
    278Dividends received deduction
    
    
    (134
    )
    
    
    Tax exempt income
    
    
    (49
    )
    
    
    (44
    )Officers life insurance
    
    
    (150
    )
    
    
    (68
    )Change in state rates
    
    
    177
    
    
    
    Change in valuation reserve
    
    
    498
    
    
    
    (5
    )Other
    
    
    
    
    
    
    (45
    )Total income tax expense (benefit)
    
    $
    (1,552
    )
    
    $
    2,091
  2008
    
    
    2007(In Thousands)Deferred tax assets:Allowance for loan losses
    
    $
    2,370
    
    
    $
    1,969Impairment write-downs on securities
    
    
    4,036
    
    
    
    Pension costs and other post-retirement benefits
    
    
    103
    
    
    
    106Deferred compensation
    
    
    502
    
    
    
    533Depreciation
    
    
    396
    
    
    
    406Other
    
    
    19
    
    
    
    12Gross deferred tax asset
    
    
    7,426
    
    
    
    3,026Valuation reserve
    
    
    (498
    )
    
    
    Deferred tax asset
    
    
    6,928
    
    
    
    3,026Deferred tax liabilities:Unrealized gain on investment securities available for sale
    
    
    (2,193
    )
    
    
    (313
    )Other
    
    
    (288
    )
    
    
    (228
    )Gross deferred tax liability
    
    
    (2,481
    )
    
    
    (541
    )Net deferred income tax asset
    
    $
    4,447
    
    
    $
    2,485
  47




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##### Table of Contents



(9) STOCKHOLDERS EQUITY
     Actual
    
    
    Adequately Capitalized
    
    
    Well Capitalized(Dollars in thousands)
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioAt December 31, 2008LSB CorporationTotal 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
    
    
    
    6.0Tier 1 leverage capital
    
    
    68,487
    
    
    
    9.22
    
    
    
    29,721
    
    
    
    4.0
    
    
    
    37,152
    
    
    
    5.0River BankTotal 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
    
    
    
    6.0Tier 1 leverage capital
    
    
    60,889
    
    
    
    8.18
    
    
    
    29,777
    
    
    
    4.0
    
    
    
    37,222
    
    
    
    5.0At December 31, 2007LSB CorporationTotal risk-based capital
    
    $
    64,686
    
    
    
    14.53
    %
    
    $
    35,623
    
    
    
    8.0
    %
    
    $
    44,529
    
    
    
    10.0
    %Tier 1 risk-based capital
    
    
    59,876
    
    
    
    13.45
    
    
    
    17,812
    
    
    
    4.0
    
    
    
    26,717
    
    
    
    6.0Tier 1 leverage capital
    
    
    59,876
    
    
    
    9.72
    
    
    
    24,635
    
    
    
    4.0
    
    
    
    30,794
    
    
    
    5.0River BankTotal risk-based capital
    
    $
    63,321
    
    
    
    14.22
    %
    
    $
    35,623
    
    
    
    8.0
    %
    
    $
    44,529
    
    
    
    10.0
    %Tier 1 risk-based capital
    
    
    58,511
    
    
    
    13.14
    
    
    
    17,812
    
    
    
    4.0
    
    
    
    26,717
    
    
    
    6.0Tier 1 leverage capital
    
    
    58,511
    
    
    
    9.49
    
    
    
    24,654
    
    
    
    4.0
    
    
    
    30,817
    
    
    
    5.0
 Senior Cumulative Perpetual Preferred Stock, Series B
  48




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##### Table of Contents



Expected dividends
    
    
    5.6
    %Expected term
    
    10 yearsExpected volatility
    
    
    53.0
    %Risk-free interest rate
    
    
    2.6
    %
 Senior Preferred Terms
    Warrant Terms
  Dividend and Repurchase Restrictions
  Stock Repurchase Plan
  49




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##### Table of Contents



Restrictions on Dividends, Loans and Advances
   Stockholders Rights Plan
  (10) EMPLOYEE BENEFITS
 Pension Plan
   4 01(k) Savings Plan
  Post-Retirement Plan Other Than Pensions
   Employee Stock Ownership Plan
  50




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##### Table of Contents



Incentive Compensation Plan
   Employment Termination or Change-in-Control Agreements
   Supplemental Executive Retirement Plan
  Limitation on Compensation Deduction for Senior Executive Officers
  (11) STOCK COMPENSATION AWARDS
  Cumulative OptionAuthorized
    
    
    Cumulative
    
    
    Awards, Net ofAwards
    
    
    Stock Awards
    
    
    Expiration1986 Plan
    
    
    720,500
    
    
    
    N/A
    
    
    
    430,2501997 Plan
    
    
    449,500
    
    
    
    N/A
    
    
    
    427,8502006 Plan
    
    
    400,000
    
    
    
    23,500
    
    
    
    68,5751,570,000
    
    
    
    23,500
    
    
    
    926,675
  51




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##### Table of Contents



2008
    
    
    2007Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    PriceOutstanding at beginning of year
    
    
    251,600
    
    
    $
    14.51
    
    
    
    244,900
    
    
    $
    14.07Granted
    
    
    9,000
    
    
    
    8.00
    
    
    
    38,500
    
    
    
    16.39Exercised
    
    
    (9,500
    )
    
    
    12.39
    
    
    
    (13,300
    )
    
    
    8.76Forfeited
    
    
    (3,000
    )
    
    
    16.77
    
    
    
    (8,500
    )
    
    
    16.69Expired
    
    
    
    
    
    
    
    
    
    
    (10,000
    )
    
    
    16.77Outstanding at end of year
    
    
    248,100
    
    
    
    14.33
    
    
    
    251,600
    
    
    
    14.51Options exercisable end of year
    
    
    240,725
    
    
    
    14.27
    
    
    
    225,850
    
    
    
    14.29Weighted average fair value of
options granted during the year
    
    
    
    
    
    $
    2.01
    
    
    
    
    
    
    $
    3.50
    2008
    
    
    2007Expected volatility
    
    
    53.00
    %
    
    
    25.00
    %Risk-free interest rate
    
    
    2.03
    %
    
    
    3.88
    %Expected dividend yield
    
    
    7.50
    %
    
    
    3.42
    %Expected life in years
    
    7 years
    
    7 years
  52




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##### Table of Contents



(12) CONTINGENCIES
  (13) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
    Fixed
    
    
    Variable2008
    
    Rate
    
    
    Rate
    
    
    Total(In Thousands)Financial instruments with contract amounts represent credit risk:Unused commitments to extend credit:Residential mortgages
    
    $
    8,324
    
    
    $
    160
    
    
    $
    8,484Home equity lines of credit
    
    
    1,034
    
    
    
    11,905
    
    
    
    12,939Personal lines of credit
    
    
    295
    
    
    
    
    
    
    
    295Commercial real estate mortgage
    
    
    13
    
    
    
    22,364
    
    
    
    22,377Construction
    
    
    
    
    
    
    28,497
    
    
    
    28,497Commercial loans
    
    
    103
    
    
    
    28,817
    
    
    
    28,920Total unused commitments
    
    $
    9,769
    
    
    $
    91,743
    
    
    $
    101,512Letters of credit and standby letters of credit
    
    $
    
    
    
    $
    1,610
    
    
    $
    1,610
 Fixed
    
    
    Variable2007
    
    Rate
    
    
    Rate
    
    
    Total(In Thousands)Financial instruments with contract amounts represent credit risk:Unused commitments to extend credit:Residential mortgages
    
    $
    1,540
    
    
    $
    1,620
    
    
    $
    3,160Home equity lines of credit
    
    
    1,372
    
    
    
    12,855
    
    
    
    14,227Personal lines of credit
    
    
    142
    
    
    
    
    
    
    
    142Commercial real estate mortgage
    
    
    283
    
    
    
    29,846
    
    
    
    30,129Construction
    
    
    
    
    
    
    36,128
    
    
    
    36,128Commercial loans
    
    
    156
    
    
    
    26,460
    
    
    
    26,616Total unused commitments
    
    $
    3,493
    
    
    $
    106,909
    
    
    $
    110,402Letters of credit and standby letters of credit
    
    $
    
    
    
    $
    1,770
    
    
    $
    1,770
 (14) FAIR VALUE OF ASSETS AND LIABILITIES
    53




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##### Table of Contents



TotalLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Fair Value(In thousands)Recurring:Investment securities available for sale
    
    $
    7,504
    
    
    $
    256,632
    
    
    $
    425
    
    
    $
    264,561
  Year ended December 31, 2008Investments(In thousands)Balance as of January 1, 2008
    
    $
    425Total realized/unrealized gains (losses)
included in net income
    
    
    Balance as of December 31, 2008
    
    $
    425Change in unrealized gains/(losses) relating to
instruments still held at the reporting date
    
    $
    
    54




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##### Table of Contents



2008
    
    2007Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    Value(In Thousands)Financial assets:Cash and due from banks
    
    $
    6,859
    
    
    $
    6,859
    
    
    $
    7,494
    
    
    $
    7,494Short-term investments
    
    
    6,469
    
    
    
    6,469
    
    
    
    56
    
    
    
    56Investment securities available for sale
    
    
    264,561
    
    
    
    264,561
    
    
    
    230,596
    
    
    
    230,596Federal Home Loan Bank stock
    
    
    11,825
    
    
    
    11,825
    
    
    
    10,185
    
    
    
    10,185Accrued interest receivable
    
    
    2,720
    
    
    
    2,720
    
    
    
    2,453
    
    
    
    2,453Loans, net
    
    
    446,736
    
    
    
    446,609
    
    
    
    353,303
    
    
    
    352,493Financial liabilities:Deposits
    
    
    408,663
    
    
    
    414,082
    
    
    
    322,083
    
    
    
    322,920Borrowed funds
    
    
    276,490
    
    
    
    297,385
    
    
    
    235,351
    
    
    
    243,141Mortgagors escrow accounts
    
    
    619
    
    
    
    619
    
    
    
    647
    
    
    
    647Accrued interest payable
    
    
    1,106
    
    
    
    1,106
    
    
    
    1,013
    
    
    
    1,013
 (16) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS.
  Balance Sheets
    
    2008
    
    
    2007(In Thousands)Assets:Cash deposits in subsidiaries
    
    $
    7,749
    
    
    $
    1,320Investment in subsidiary, at equity
    
    
    64,172
    
    
    
    58,642Other assets
    
    
    423
    
    
    
    458Total assets
    
    $
    72,344
    
    
    $
    60,420Liabilities and Stockholders Equity:Liabilities:Accrued income taxes
    
    $
    24
    
    
    $
    24Accrued expenses
    
    
    178
    
    
    
    98Total liabilities
    
    
    202
    
    
    
    122Total stockholders equity
    
    
    72,142
    
    
    
    60,298Total liabilities and stockholders equity
    
    $
    72,344
    
    
    $
    60,420
 Statements of Operations
    
    2008
    
    
    2007(In Thousands)Dividends from bank subsidiary
    
    $
    2,800
    
    
    $
    3,200Interest income
    
    
    31
    
    
    
    64Total operating income
    
    
    2,831
    
    
    
    3,264Non-interest expenses
    
    
    228
    
    
    
    241Income before income taxes and undistributed earnings
    
    
    2,603
    
    
    
    3,023Income tax benefit
    
    
    (56
    )
    
    
    (61
    )Income before undistributed earnings of subsidiary
    
    
    2,659
    
    
    
    3,084Equity in undistributed earnings (loss) of subsidiary
    
    
    (5,382
    )
    
    
    634Net income (loss)
    
    $
    (2,723
    )
    
    $
    3,718
 55




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##### Table of Contents



Statements of Cash Flows
    
    2008
    
    
    2007(In Thousands)Cash flows from operating activities:Net income (loss)
    
    $
    (2,723
    )
    
    $
    3,718Adjustments to reconcile net income to net cash
provided by operating activities:Net distributed (earnings) loss of subsidiaries
    
    
    5,382
    
    
    
    (634
    )Decrease in other assets
    
    
    36
    
    
    
    55Increase in liabilities
    
    
    80
    
    
    
    49Stock-based compensation
    
    
    156
    
    
    
    121Net cash provided by operating activities
    
    
    2,931
    
    
    
    3,309Cash flows from investing activities:Investment in subsidiary
    
    
    (8,000
    )
    
    
    Net cash used in investing activities
    
    
    (8,000
    )
    
    
    Cash flows from financing activities:Proceeds from exercise of stock options and tax benefits
    
    
    121
    
    
    
    139Repurchases of common stock
    
    
    (1,034
    )
    
    
    (1,463
    )Proceeds from issuance of preferred stock and warrants
    
    
    15,000
    
    
    
    Dividends paid to common stockholders
    
    
    (2,589
    )
    
    
    (2,562
    )Net cash provided (used) by financing activities
    
    
    11,498
    
    
    
    (3,886
    )Net increase (decrease) in cash and cash equivalents
    
    
    6,429
    
    
    
    (577
    )Cash and cash equivalents, beginning of year
    
    
    1,320
    
    
    
    1,897Cash and cash equivalents, end of year
    
    $
    7,749
    
    
    $
    1,320
 56




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##### Table of Contents



(17) Quarterly Results of Operations (Unaudited)
 The sum of the four rounded quarters might not necessarily equal the rounded year-to-date figures.
 Quarter Ended 2008March
    
    
    June
    
    
    September
    
    
    December31
    
    
    30
    
    
    30
    
    
    31(In Thousands, Except Per Share Data)Interest and dividend income
    
    $
    9,282
    
    
    $
    9,560
    
    
    $
    9,925
    
    
    $
    9,988Interest expense
    
    
    5,393
    
    
    
    5,335
    
    
    
    5,482
    
    
    
    5,668Net interest income
    
    
    3,889
    
    
    
    4,225
    
    
    
    4,443
    
    
    
    4,320Provision for loan losses
    
    
    105
    
    
    
    400
    
    
    
    330
    
    
    
    450Net interest income after provision for loan losses
    
    
    3,784
    
    
    
    3,825
    
    
    
    4,113
    
    
    
    3,870Impairment write-downs on securities
    
    
    
    
    
    
    
    
    
    
    (9,383
    )
    
    
    (722
    )Non-interest income
    
    
    494
    
    
    
    510
    
    
    
    535
    
    
    
    577Non-interest expense
    
    
    2,822
    
    
    
    2,982
    
    
    
    2,985
    
    
    
    3,089Income (loss) before income taxes expense
    
    
    1,456
    
    
    
    1,353
    
    
    
    (7,720
    )
    
    
    636Income tax expense (benefit) 1
    
    
    540
    
    
    
    410
    
    
    
    530
    
    
    
    (3,032
    )Net income (loss)
    
    $
    916
    
    
    $
    943
    
    
    $
    (8,250
    )
    
    $
    3,668Basic earnings (loss) per share
    
    $
    0.20
    
    
    $
    0.21
    
    
    $
    (1.85
    )
    
    $
    0.82Diluted earnings (loss) per share
    
    $
    0.20
    
    
    $
    0.21
    
    
    $
    (1.85
    )
    
    $
    0.82
 Quarter Ended 2007March
    
    
    June
    
    
    September
    
    
    December31
    
    
    30
    
    
    30
    
    
    31(In Thousands, Except Per Share Data)Interest and dividend income
    
    $
    8,093
    
    
    $
    8,511
    
    
    $
    9,100
    
    
    $
    9,304Interest expense
    
    
    4,319
    
    
    
    4,667
    
    
    
    5,262
    
    
    
    5,432Net interest income
    
    
    3,774
    
    
    
    3,844
    
    
    
    3,838
    
    
    
    3,872Provision for loan losses
    
    
    60
    
    
    
    155
    
    
    
    250
    
    
    
    180Net interest income after provision for loan losses
    
    
    3,714
    
    
    
    3,689
    
    
    
    3,588
    
    
    
    3,692Settlement gains on pension plan termination
    
    
    
    
    
    
    
    
    
    
    357
    
    
    
    405Non-interest income
    
    
    354
    
    
    
    434
    
    
    
    568
    
    
    
    566Non-interest expense
    
    
    2,858
    
    
    
    2,874
    
    
    
    2,904
    
    
    
    2,922Income before income taxes expense
    
    
    1,210
    
    
    
    1,249
    
    
    
    1,609
    
    
    
    1,741Income tax expense
    
    
    446
    
    
    
    417
    
    
    
    577
    
    
    
    651Net income
    
    $
    764
    
    
    $
    832
    
    
    $
    1,032
    
    
    $
    1,090Basic earnings per share
    
    $
    0.17
    
    
    $
    0.18
    
    
    $
    0.22
    
    
    $
    0.24Diluted earnings per share
    
    $
    0.17
    
    
    $
    0.18
    
    
    $
    0.22
    
    
    $
    0.24
 
 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. 57




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
 S-K
 
 ITEM 9A (T). CONTROLS AND PROCEDURES
    Managements Report on Internal Control Over Financial Reporting
   Internal Control-Integrated Framework
    
 ITEM 9B. OTHER INFORMATION
  
 PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
 ITEM 11. EXECUTIVE COMPENSATION
  58




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##### Table of Contents



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  
 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, 2008 are included in Item 8 of Part II to this
report:Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets at December 31, 2008 and 2007Consolidated Statements of Operations for the years ended December 31, 2008 and 2007Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2008 and 2007Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007Notes 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.
  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)
 59




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##### Table of Contents



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)*
 60




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##### Table of Contents



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)(13)
    
    2008 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
  
 *
    
    Management contract or compensatory plan or arrangement 61




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##### Table of Contents



SIGNATURES
  LSB CorporationBy:
    /s/ Gerald T. MulliganPresident and Chief Executive Officer  Signature
    
    Title
    
    Date/s/ Gerald T. Mulligan

Gerald T. Mulligan
    
    President, Chief Executive Officer and Director
(Principal Executive Officer)
    
    March 26, 2009/s/ Diane L. Walker

Diane L. Walker
    
    Executive Vice President, Treasurer and Chief Financial Officer
(Principal Financial and Principal Accounting
Officer)
    
    March 26, 2009/s/ Thomas J. Burke

Thomas J. Burke
    
    Chairman of the Board
Director
    
    March 26, 2009/s/ John P. Bachini, Jr.

John P. Bachini, Jr.
    
    Director
    
    March 26, 2009/s/ Kathleen Boshar Reynolds

Kathleen Boshar Reynolds
    
    Director
    
    March 26, 2009/s/ Malcolm W. Brawn

Malcolm W. Brawn
    
    Director
    
    March 26, 2009/s/ Richard Hart Harrington

Richard Hart Harrington
    
    Director
    
    March 26, 2009/s/ Robert F. Hatem

Robert F. Hatem
    
    Director
    
    March 26, 2009/s/ Marsha A. McDonough

Marsha A. McDonough
    
    Director
    
    March 26, 2009/s/ Fred P. Shaheen

Fred P. Shaheen
    
    Director
    
    March 26, 2009
 62