##### 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, 2007
 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(State or other jurisdiction of incorporation or organization)
    
    04-3557612(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 registeredNone
    
    None
  Common Stock, par value $.10 per share
 Preferred Stock Purchased Rights
 o þ
 o þ
 þ o
 þ
  o Large accelerated filer
    
    o Accelerated filer
    
    þ Non-accelerated filer
    
    o Smaller Reporting Company
 o þ
   Class
    
    Outstanding as of March 7, 2008Common Stock, par value $.10 per share
    
    4,483,941 shares
   (1)
    
    Portions of the Companys definitive Proxy Statement for its 2008 Annual Meeting (the Proxy
Statement) attached hereto as Exhibit (20) are incorporated by reference in Part III,
Items 10-13 and Part IV, Item 14 of this Form 10-K. Such information incorporated by
reference shall not be deemed to specifically incorporate by reference the information
referred to in Item 402(a)(8) of Regulation S-K*
    
    For purposes of this calculation only, the common stock of LSB Corporation held by directors
and executive officers of LSB Corporation has been treated as owned by affiliates.




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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 2007 Annual Report to Stockholders of LSB CorporationEX-21 Subsidiaries of LSB CorporationEX-23.1 Consent of Wolf & Company, P.C.EX-23.2 Consent of KPMG LLPEX-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
  
 ITEM 1. BUSINESS
 SUMMARY
 The Wall
Street Journal
      MARKET AREA
  LENDING ACTIVITIES
  3




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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
  DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
  4




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EMPLOYEES
  COMPETITION
  SUPERVISION AND REGULATION
    5




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BANK HOLDING COMPANY ACT, CHANGE IN CONTROL ACT AND REGULATION Y
  GRAMM-LEACH-BLILEY ACT
    FEDERAL RESERVE ACT SECTIONS 23A AND 23B AND REGULATION W
  FEDERAL RESERVE ACT SECTION 22 AND REGULATION O
  FEDERAL DEPOSIT INSURANCE REFORM ACT OF 2005
  USA PATRIOT ACT
  6




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SARBANES-OXLEY ACT OF 2002
  
    
    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 disgorge bonuses
and stock-based compensation for periods for which the company is forced to restate its
financial results, a prohibition of insider stock trades during 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.
  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
 8




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##### Table of Contents



ITEM 1A. RISK FACTORS
 Changes in interest rates could adversely impact the Companys financial condition and results of
operations.
  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 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
 9




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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
 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.
 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.
 10




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##### Table of Contents



ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 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
    
    
    2008
    
    
    Three (1 yr.)Lawrence, MA 0184020 Jackson Street
    
    
    1968
    
    
    
    2,369
    
    
    Leased
    
    
    2008
    
    
    
    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 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 has executed a ground lease and pending permitting and regulatory approvals,
anticipates opening a full service branch
location in 2008. 
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  11




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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
    
    Dividends2007Fourth 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
    
    
    
    0.142006Fourth Quarter
    
    $
    18.06
    
    
    $
    16.00
    
    
    $
    0.14Third Quarter
    
    
    17.50
    
    
    
    16.00
    
    
    
    0.14Second Quarter
    
    
    18.50
    
    
    
    16.54
    
    
    
    0.14First Quarter
    
    
    18.45
    
    
    
    16.95
    
    
    
    0.14
   Supervision and Regulation
   Issuer Purchases of Equity SecuritiesTotal number of shares
    
    Maximum number ofWeighted
    
    purchased as part of
    
    shares that may yetTotal number of
    
    Average price paid
    
    publicly announced
    
    purchased under theShares purchased
    
    per share
    
    plans or programs
    
    plans or program(1)2007October 1  October 31
    
    
    4,000
    
    
    $
    15.85
    
    
    
    4,000
    
    
    
    170,044November 1  November 30
    
    
    30,400
    
    
    $
    15.87
    
    
    
    30,400
    
    
    
    139,644December 1  December 31
    
    None
    
    
    
    
    
    NoneTotal fourth quarter
    
    
    34,400
    
    
    $
    15.87
    
    
    
    34,400
    
    
    
    139,644
 
 (1)
    
    On April 26, 2007, the Company announced a common stock repurchase program to repurchase up to
230,000 shares. The Company has placed no deadline on the duration of the repurchase program.
There were no shares purchased other than through this publicly announced plan or program. 12




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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
 FINANCIAL HIGHLIGHTS
 December 31,

(Dollars in Thousands, Except Per Share Data),

    
    2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Balance Sheet Data:Total assets
    
    $
    621,651
    
    
    $
    542,965
    
    
    $
    521,800
    
    
    $
    518,477
    
    
    $
    466,108Loans, gross
    
    
    358,113
    
    
    
    288,163
    
    
    
    234,611
    
    
    
    232,810
    
    
    
    211,503Allowance for loan losses
    
    
    4,810
    
    
    
    4,309
    
    
    
    4,126
    
    
    
    4,140
    
    
    
    4,220Federal funds sold
    
    
    56
    
    
    
    11,871
    
    
    
    198
    
    
    
    209
    
    
    
    889Investment securities
    
    
    230,596
    
    
    
    218,682
    
    
    
    260,046
    
    
    
    263,303
    
    
    
    232,878Deposits
    
    
    322,083
    
    
    
    295,662
    
    
    
    303,087
    
    
    
    299,106
    
    
    
    272,540Borrowed funds
    
    
    235,351
    
    
    
    184,782
    
    
    
    153,380
    
    
    
    157,263
    
    
    
    133,352Stockholders equity
    
    
    60,298
    
    
    
    58,531
    
    
    
    59,922
    
    
    
    57,838
    
    
    
    55,002
 Year Ended December 31,
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Operating Data:Interest income
    
    $
    35,008
    
    
    $
    28,956
    
    
    $
    25,558
    
    
    $
    22,331
    
    
    $
    21,334Interest expense
    
    
    19,681
    
    
    
    15,160
    
    
    
    11,638
    
    
    
    8,520
    
    
    
    8,977Net interest income
    
    
    15,327
    
    
    
    13,796
    
    
    
    13,920
    
    
    
    13,811
    
    
    
    12,357Provision (credit) for loan losses
    
    
    645
    
    
    
    160
    
    
    
    
    
    
    
    (300
    )
    
    
    Losses on sales of investment securities
    
    
    
    
    
    
    (2,417
    )
    
    
    
    
    
    
    
    
    
    
    (14
    )Gains on pension plan termination
    
    
    762
    
    
    
    602
    
    
    
    
    
    
    
    
    
    
    
    Other non-interest income
    
    
    1,922
    
    
    
    1,410
    
    
    
    1,555
    
    
    
    1,553
    
    
    
    1,622Lawsuit judgment collected
    
    
    
    
    
    
    
    
    
    
    2,233
    
    
    
    2,280
    
    
    
    1,996Salaries and employee benefits expense
    
    
    6,836
    
    
    
    7,399
    
    
    
    6,899
    
    
    
    6,507
    
    
    
    5,923Other non-interest expense
    
    
    4,721
    
    
    
    5,621
    
    
    
    4,245
    
    
    
    4,157
    
    
    
    3,815Income before income taxes
    
    
    5,809
    
    
    
    211
    
    
    
    6,564
    
    
    
    7,280
    
    
    
    6,223Income tax expense
    
    
    2,091
    
    
    
    85
    
    
    
    2,407
    
    
    
    2,600
    
    
    
    2,087Net income
    
    $
    3,718
    
    
    $
    126
    
    
    $
    4,157
    
    
    $
    4,680
    
    
    $
    4,136Basic earnings per share
    
    $
    0.81
    
    
    $
    0.03
    
    
    $
    0.94
    
    
    $
    1.09
    
    
    $
    0.98Diluted earnings per share
    
    $
    0.81
    
    
    $
    0.03
    
    
    $
    0.92
    
    
    $
    1.05
    
    
    $
    0.94
 At or for the year ended December 31,
    
    2007
    
    2006
    
    2005
    
    2004
    
    2003Other Data:Efficiency ratio
    
    
    67.00
    %
    
    
    85.66
    %
    
    
    72.19
    %
    
    
    69.72
    %
    
    
    72.07
    %Interest rate spread
    
    
    2.19
    %
    
    
    2.22
    %
    
    
    2.34
    %
    
    
    2.64
    %
    
    
    2.57
    %Net interest margin on average earning
assets
    
    
    2.72
    
    
    
    2.68
    
    
    
    2.66
    
    
    
    2.91
    
    
    
    2.90Return on average assets (net income /
average assets)
    
    
    0.64
    
    
    
    0.02
    
    
    
    0.77
    
    
    
    0.96
    
    
    
    0.94Return on average equity (net income /
average stockholders equity)
    
    
    6.35
    
    
    
    0.22
    
    
    
    7.14
    
    
    
    8.33
    
    
    
    7.76Dividend payout ratio (dividends declared per
share divided by diluted earnings per share)
    
    
    69.14
    
    
    
    n/m
    
    
    
    60.87
    
    
    
    49.52
    
    
    
    51.06Average stockholders equity to average
assets ratio
    
    
    10.10
    
    
    
    10.80
    
    
    
    10.81
    
    
    
    11.53
    
    
    
    12.16Cash dividends declared and paid per
common share
    
    $
    0.56
    
    
    $
    0.56
    
    
    $
    0.56
    
    
    $
    0.52
    
    
    $
    0.48Book value per share at year end
    
    
    13.35
    
    
    
    12.74
    
    
    
    13.42
    
    
    
    13.33
    
    
    
    12.99Tangible book value per share at year end
(excludes accumulated other comprehensive
income/loss)
    
    
    13.26
    
    
    
    13.05
    
    
    
    13.58
    
    
    
    13.43
    
    
    
    12.98Market value per share
    
    
    16.00
    
    
    
    16.57
    
    
    
    17.35
    
    
    
    18.52
    
    
    
    17.31
 13




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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
       CRITICAL ACCOUNTING POLICIES
  ALLOWANCE FOR LOAN LOSSES
  14




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INCOME TAXES
   INVESTMENT SECURITIES
  FINANCIAL CONDITION
 OVERVIEW
  INTEREST EARNING ASSETS
    INVESTMENT SECURITIES
  15




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2007
    
    
    2006
    
    
    2005(Dollars in Thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentU. S. Treasury bonds
    
    $
    5,541
    
    
    
    2.4
    %
    
    $
    5,214
    
    
    
    2.4
    %
    
    $
    4,769
    
    
    
    10.3
    %Government-sponsored enterprise
obligations
    
    
    15,810
    
    
    
    6.9
    %
    
    
    35,190
    
    
    
    16.1
    %
    
    
    9,667
    
    
    
    20.9
    %Mortgage-backed securities
    
    
    136,703
    
    
    
    59.3
    %
    
    
    97,898
    
    
    
    44.8
    %
    
    
    3,364
    
    
    
    7.3
    %Collateralized mortgage obligations
    
    
    60,147
    
    
    
    26.1
    %
    
    
    71,555
    
    
    
    32.7
    %
    
    
    24,329
    
    
    
    52.3
    %Corporate obligations
    
    
    5,820
    
    
    
    2.5
    %
    
    
    7,364
    
    
    
    3.4
    %
    
    
    3,046
    
    
    
    6.6
    %Mutual funds
    
    
    959
    
    
    
    0.4
    %
    
    
    947
    
    
    
    0.4
    %
    
    
    955
    
    
    
    2.1
    %Equity securities
    
    
    5,616
    
    
    
    2.4
    %
    
    
    514
    
    
    
    0.2
    %
    
    
    233
    
    
    
    0.5
    %Total
    
    $
    230,596
    
    
    
    100.0
    %
    
    $
    218,682
    
    
    
    100.0
    %
    
    $
    46,363
    
    
    
    100.0
    %
  (Dollars in Thousands)
    
    Amount
    
    
    PercentGovernment-sponsored enterprise
obligations
    
    $
    87,017
    
    
    
    40.7
    %Mortgage-backed securities
    
    
    43,701
    
    
    
    20.5
    %Collateralized mortgage obligations
    
    
    70,415
    
    
    
    32.9
    %Corporate obligations
    
    
    11,024
    
    
    
    5.2
    %Municipal obligations
    
    
    1,526
    
    
    
    0.7
    %Total
    
    $
    213,683
    
    
    
    100.0
    %
  Within
    
    
    Weighted
    
    
    One to
    
    
    Weighted
    
    
    Five
    
    
    Weighted
    
    
    OverOne
    
    
    Average
    
    
    Five
    
    
    Average
    
    
    to Ten
    
    
    Average
    
    
    Ten
    
    
    Average
    
    
    Average(Dollars in Thousands)
    
    Year
    
    
    Yield
    
    
    Years
    
    
    Yield
    
    
    Years
    
    
    Yield
    
    
    Years
    
    
    Yield
    
    
    Total
    
    
    YieldU. S. Treasury bonds and
government-sponsored
enterprise obligations
    
    $
    5,474
    
    
    
    5.19
    %
    
    $
    10,841
    
    
    
    4.20
    %
    
    $
    5,036
    
    
    
    3.26
    %
    
    $
    
    
    
    
    
    %
    
    $
    21,351
    
    
    
    4.22
    %Mortgage-backed
securities
    
    
    
    
    
    
    
    %
    
    
    5,580
    
    
    
    4.02
    %
    
    
    13,863
    
    
    
    3.77
    %
    
    
    117,260
    
    
    
    5.87
    %
    
    
    136,703
    
    
    
    5.57
    %Collateralized mortgage
obligations
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    11,157
    
    
    
    4.18
    %
    
    
    48,990
    
    
    
    4.49
    %
    
    
    60,147
    
    
    
    4.43
    %Corporate obligations
    
    
    
    
    
    
    
    %
    
    
    5,820
    
    
    
    5.48
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    5,820
    
    
    
    5.48
    %Total
    
    $
    5,474
    
    
    
    5.19
    %
    
    $
    22,241
    
    
    
    4.50
    %
    
    $
    30,056
    
    
    
    3.84
    %
    
    $
    166,250
    
    
    
    5.46
    %
    
    $
    224,021
    
    
    
    5.13
    %
 16




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##### Table of Contents



LOANS
   2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(Dollars in Thousands)
    
    Balance
    
    
    Percent
    
    
    Balance
    
    
    Percent
    
    
    Balance
    
    
    Percent
    
    
    Balance
    
    
    Percent
    
    
    Balance
    
    PercentResidential real estate
loans:Fixed rate
    
    $
    49,513
    
    
    
    13.8
    %
    
    $
    39,076
    
    
    
    13.5
    %
    
    $
    34,028
    
    
    
    14.5
    %
    
    $
    33,061
    
    
    
    14.2
    %
    
    $
    33,059
    
    
    
    15.7
    %Adjustable rate
    
    
    30,230
    
    
    
    8.4
    
    
    
    30,800
    
    
    
    10.7
    
    
    
    28,159
    
    
    
    12.0
    
    
    
    26,996
    
    
    
    11.6
    
    
    
    23,958
    
    
    
    11.3Loans held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    472
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    338
    
    
    
    0.279,743
    
    
    
    22.2
    
    
    
    69,876
    
    
    
    24.2
    
    
    
    62,659
    
    
    
    26.7
    
    
    
    60,057
    
    
    
    25.8
    
    
    
    57,355
    
    
    
    27.2Home equity loans:Fixed rate
    
    
    13,821
    
    
    
    3.9
    
    
    
    11,170
    
    
    
    3.9
    
    
    
    3,592
    
    
    
    1.5
    
    
    
    3,535
    
    
    
    1.5
    
    
    
    5,882
    
    
    
    2.7Adjustable rate
    
    
    9,225
    
    
    
    2.6
    
    
    
    9,169
    
    
    
    3.2
    
    
    
    6,820
    
    
    
    2.9
    
    
    
    5,334
    
    
    
    2.3
    
    
    
    4,354
    
    
    
    2.123,046
    
    
    
    6.5
    
    
    
    20,339
    
    
    
    7.1
    
    
    
    10,412
    
    
    
    4.4
    
    
    
    8,869
    
    
    
    3.8
    
    
    
    10,236
    
    
    
    4.8Consumer loans
    
    
    1,007
    
    
    
    0.3
    
    
    
    975
    
    
    
    0.3
    
    
    
    468
    
    
    
    0.2
    
    
    
    699
    
    
    
    0.3
    
    
    
    564
    
    
    
    0.3Total retail loans
    
    
    103,796
    
    
    
    29.0
    
    
    
    91,190
    
    
    
    31.6
    
    
    
    73,539
    
    
    
    31.3
    
    
    
    69,625
    
    
    
    29.9
    
    
    
    68,155
    
    
    
    32.3Construction loans
    
    
    47,885
    
    
    
    13.4
    
    
    
    43,283
    
    
    
    15.0
    
    
    
    24,137
    
    
    
    10.3
    
    
    
    15,211
    
    
    
    6.5
    
    
    
    16,040
    
    
    
    7.6Commercial
real estate loans:Fixed rate
    
    
    33,920
    
    
    
    9.5
    
    
    
    17,434
    
    
    
    6.1
    
    
    
    14,793
    
    
    
    6.3
    
    
    
    18,629
    
    
    
    8.0
    
    
    
    16,508
    
    
    
    7.8Adjustable rate
    
    
    144,048
    
    
    
    40.2
    
    
    
    125,386
    
    
    
    43.5
    
    
    
    112,824
    
    
    
    48.1
    
    
    
    112,976
    
    
    
    48.5
    
    
    
    95,995
    
    
    
    45.3177,968
    
    
    
    49.7
    
    
    
    142,820
    
    
    
    49.6
    
    
    
    127,617
    
    
    
    54.4
    
    
    
    131,605
    
    
    
    56.5
    
    
    
    112,503
    
    
    
    53.1Commercial loans
    
    
    28,464
    
    
    
    7.9
    
    
    
    10,870
    
    
    
    3.8
    
    
    
    9,318
    
    
    
    4.0
    
    
    
    16,369
    
    
    
    7.1
    
    
    
    14,805
    
    
    
    7.0Total corporate loans
    
    
    254,317
    
    
    
    71.0
    
    
    
    196,973
    
    
    
    68.4
    
    
    
    161,072
    
    
    
    68.7
    
    
    
    163,185
    
    
    
    70.1
    
    
    
    143,348
    
    
    
    67.7Total loans
    
    
    358,113
    
    
    
    100.0
    %
    
    
    288,163
    
    
    
    100.0
    %
    
    
    234,611
    
    
    
    100.0
    %
    
    
    232,810
    
    
    
    100.0
    %
    
    
    211,503
    
    
    
    100.0
    %Allowance for loan losses
    
    
    4,810
    
    
    
    
    
    
    
    4,309
    
    
    
    
    
    
    
    4,126
    
    
    
    
    
    
    
    4,140
    
    
    
    
    
    
    
    4,220Loans, net
    
    $
    353,303
    
    
    
    
    
    
    $
    283,854
    
    
    
    
    
    
    $
    230,485
    
    
    
    
    
    
    $
    228,670
    
    
    
    
    
    
    $
    207,283
  Due AfterDue Within
    
    
    One Through
    
    
    Due After(In Thousands)
    
    One Year
    
    
    Five Years
    
    
    Five Years
    
    
    TotalConstruction
    
    $
    22,133
    
    
    $
    17,777
    
    
    $
    7,975
    
    
    $
    47,885Commercial
    
    
    15,903
    
    
    
    6,310
    
    
    
    6,251
    
    
    
    28,464Total
    
    $
    38,036
    
    
    $
    24,087
    
    
    $
    14,226
    
    
    $
    76,349
   17




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##### Table of Contents



ALLOWANCE FOR LOAN LOSSES
     (Dollars in Thousands)
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Balance at beginning of year
    
    $
    4,309
    
    
    $
    4,126
    
    
    $
    4,140
    
    
    $
    4,220
    
    
    $
    4,167Charge-offs by loan type:Residential mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25
    )
    
    
     Commercial
    
    
    
    
    
    
    
    
    
    
     
    
    
    
    
    
    
    
     Commercial real estate
    
    
    (121
    )
    
    
    
    
    
    
    
    
    
    
     
    
    
    
    Consumer
    
    
    (36
    )
    
    
    (30
    )
    
    
    (25
    )
    
    
    (20
    )
    
    
    Total charge-offs
    
    
    (157
    )
    
    
    (30
    )
    
    
    (25
    )
    
    
    (45
    )
    
    
    Recoveries by loan type:Residential mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31Commercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
     
    
    
    
     Commercial real estate
    
    
    3
    
    
    
    32
    
    
    
    2
    
    
    
    254
    
    
    
    16Consumer
    
    
    10
    
    
    
    21
    
    
    
    9
    
    
    
    11
    
    
    
    6Total recoveries
    
    
    13
    
    
    
    53
    
    
    
    11
    
    
    
    265
    
    
    
    53Net (charge-offs) recoveries
    
    
    (144
    )
    
    
    23
    
    
    
    (14
    )
    
    
    220
    
    
    
    53Provision (credit) for loan losses
    
    
    645
    
    
    
    160
    
    
    
    
    
    
    
    (300
    )
    
    
     Ending balance
    
    $
    4,810
    
    
    $
    4,309
    
    
    $
    4,126
    
    
    $
    4,140
    
    
    $
    4,220Ratio of net (charge-offs) recoveries to average loans
outstanding during the period
    
    
    (0.04
    )%
    
    
    0.01
    %
    
    
    (0.01
    )%
    
    
    0.10
    %
    
    
    0.02
    %Allowance as a % of total loans
    
    
    1.34
    %
    
    
    1.50
    %
    
    
    1.76
    %
    
    
    1.78
    %
    
    
    2.00
    %
 18




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##### Table of Contents



2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Percent
    
    
    
    
    
    
    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 total(Dollars in Thousands)
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loansConstruction, commercial and
commercial real estate
    
    $
    4,338
    
    
    
    71.0
    %
    
    $
    3,606
    
    
    
    68.4
    %
    
    $
    3,530
    
    
    
    68.7
    %
    
    $
    3,408
    
    
    
    70.1
    %
    
    $
    3,175
    
    
    
    67.7
    %Residential mortgage and home equity
    
    
    353
    
    
    
    28.7
    
    
    
    297
    
    
    
    31.3
    
    
    
    290
    
    
    
    31.1
    
    
    
    273
    
    
    
    29.6
    
    
    
    270
    
    
    
    32.0Consumer
    
    
    36
    
    
    
    0.3
    
    
    
    39
    
    
    
    0.3
    
    
    
    21
    
    
    
    0.2
    
    
    
    30
    
    
    
    0.3
    
    
    
    26
    
    
    
    0.3Unallocated
    
    
    83
    
    
    
    N/A
    
    
    
    367
    
    
    
    N/A
    
    
    
    285
    
    
    
    N/A
    
    
    
    429
    
    
    
    N/A
    
    
    
    749
    
    
    
    N/A$
    4,810
    
    
    
    100.0
    %
    
    $
    4,309
    
    
    
    100.0
    %
    
    $
    4,126
    
    
    
    100.0
    %
    
    $
    4,140
    
    
    
    100.0
    %
    
    $
    4,220
    
    
    
    100.0
    %
     POTENTIAL PROBLEM LOANS
  19




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##### Table of Contents



RISK ASSETS
  (Dollars in Thousands)
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Risk assets:Non-performing loans:Residential real estate
    
    $
    281
    
    
    $
    37
    
    
    $
    32
    
    
    $
    
    
    
    $
    Commercial real estate
    
    
    1,242
    
    
    
    1,020
    
    
    
    
    
    
    
    
    
    
    
    Total non-performing loans
    
    
    1,523
    
    
    
    1,057
    
    
    
    32
    
    
    
    
    
    
    
    Other real estate owned:Land
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    47OREO valuation allowance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34
    )
    
    
    (45
    )Total other real estate owned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Total risk assets
    
    $
    1,523
    
    
    $
    1,057
    
    
    $
    32
    
    
    $
    
    
    
    $
    2Risk assets as a percent of total loans and OREO
    
    
    0.4
    %
    
    
    0.4
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Risk assets as a percent of total assets
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
   INTEREST BEARING LIABILITIES
     DEPOSITS
  20




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##### Table of Contents



BORROWED FUNDS
   RESULTS OF OPERATIONS
 OVERVIEW
       21




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##### Table of Contents



AVERAGE BALANCES, NET INTEREST INCOME AND AVERAGE INTEREST RATES
  2007
    
    
    2006
    
    
    2005Average
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    InterestBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in Thousands)AssetsLoans:Residential real estate
    
    $
    73,122
    
    
    $
    4,132
    
    
    
    5.65
    %
    
    $
    65,815
    
    
    $
    3,573
    
    
    
    5.43
    %
    
    $
    60,733
    
    
    $
    3,170
    
    
    
    5.22
    %Home equity
    
    
    20,946
    
    
    
    1,332
    
    
    
    6.36
    
    
    
    14,294
    
    
    
    872
    
    
    
    6.10
    
    
    
    9,500
    
    
    
    502
    
    
    
    5.28Consumer
    
    
    874
    
    
    
    59
    
    
    
    6.75
    
    
    
    670
    
    
    
    42
    
    
    
    6.27
    
    
    
    631
    
    
    
    38
    
    
    
    6.02Total retail loans
    
    
    94,942
    
    
    
    5,523
    
    
    
    5.82
    
    
    
    80,779
    
    
    
    4,487
    
    
    
    5.55
    
    
    
    70,864
    
    
    
    3,710
    
    
    
    5.24Construction
    
    
    51,940
    
    
    
    4,720
    
    
    
    9.09
    
    
    
    32,678
    
    
    
    2,994
    
    
    
    9.16
    
    
    
    19,164
    
    
    
    1,437
    
    
    
    7.50Commercial real estate
    
    
    157,769
    
    
    
    11,554
    
    
    
    7.32
    
    
    
    131,091
    
    
    
    9,478
    
    
    
    7.23
    
    
    
    131,755
    
    
    
    8,965
    
    
    
    6.80Commercial
    
    
    21,454
    
    
    
    1,697
    
    
    
    7.91
    
    
    
    8,999
    
    
    
    729
    
    
    
    8.10
    
    
    
    12,506
    
    
    
    828
    
    
    
    6.62Total corporate loans
    
    
    231,163
    
    
    
    17,971
    
    
    
    7.77
    
    
    
    172,768
    
    
    
    13,201
    
    
    
    7.64
    
    
    
    163,425
    
    
    
    11,230
    
    
    
    6.87Total loans
    
    
    326,105
    
    
    
    23,494
    
    
    
    7.20
    
    
    
    253,547
    
    
    
    17,688
    
    
    
    6.98
    
    
    
    234,289
    
    
    
    14,940
    
    
    
    6.38Investment securities:U.S. Treasury and government-
sponsored enterprise obligations
    
    
    33,777
    
    
    
    1,349
    
    
    
    3.99
    
    
    
    67,842
    
    
    
    2,326
    
    
    
    3.43
    
    
    
    111,167
    
    
    
    3,473
    
    
    
    3.12Other bonds and equity securities
    
    
    18,626
    
    
    
    1,108
    
    
    
    5.95
    
    
    
    21,778
    
    
    
    1,029
    
    
    
    4.72
    
    
    
    27,885
    
    
    
    1,057
    
    
    
    3.79CMOs and mortgage-backed
securities
    
    
    170,526
    
    
    
    8,386
    
    
    
    4.92
    
    
    
    163,847
    
    
    
    7,514
    
    
    
    4.59
    
    
    
    147,449
    
    
    
    5,986
    
    
    
    4.06Short-term investments
    
    
    13,489
    
    
    
    671
    
    
    
    4.97
    
    
    
    7,655
    
    
    
    399
    
    
    
    5.21
    
    
    
    3,067
    
    
    
    102
    
    
    
    3.33Total investment securities
    
    
    236,418
    
    
    
    11,514
    
    
    
    4.87
    
    
    
    261,122
    
    
    
    11,268
    
    
    
    4.32
    
    
    
    289,568
    
    
    
    10,618
    
    
    
    3.67Total interest earning assets
    
    
    562,523
    
    
    
    35,008
    
    
    
    6.22
    %
    
    
    514,669
    
    
    
    28,956
    
    
    
    5.63
    %
    
    
    523,857
    
    
    
    25,558
    
    
    
    4.88
    %Allowance for loan losses
    
    
    (4,505
    )
    
    
    
    
    
    
    
    
    
    
    (4,188
    )
    
    
    
    
    
    
    
    
    
    
    (4,150
    )Other assets
    
    
    21,223
    
    
    
    
    
    
    
    
    
    
    
    18,870
    
    
    
    
    
    
    
    
    
    
    
    18,545Total assets
    
    $
    579,241
    
    
    
    
    
    
    
    
    
    
    $
    529,351
    
    
    
    
    
    
    
    
    
    
    $
    538,252Liabilities and
Stockholders EquityDeposits:Regular savings accounts
    
    $
    30,917
    
    
 $
    154
    
    
    
    0.50
    %
    
    $
    38,058
    
    
    $
    189
    
    
    
    0.50
    %
    
    $
    44,676
    
    
    $
    221
    
    
    
    0.49
    %NOW and super NOW accounts
    
    
    18,013
    
    
    
    33
    
    
    
    0.18
    
    
    
    27,915
    
    
    
    38
    
    
    
    0.14
    
    
    
    38,601
    
    
    
    47
    
    
    
    0.12Money market accounts
    
    
    74,484
    
    
    
    2,256
    
    
    
    3.03
    
    
    
    77,148
    
    
    
    1,944
    
    
    
    2.52
    
    
    
    80,338
    
    
    
    1,355
    
    
    
    1.69Certificates of deposit
    
    
    160,289
    
    
    
    7,639
    
    
    
    4.77
    
    
    
    135,475
    
    
    
    5,154
    
    
    
    3.80
    
    
    
    122,434
    
    
    
    3,421
    
    
    
    2.79Total interest bearing deposits
    
    
    283,703
    
    
    
    10,082
    
    
    
    3.55
    
    
    
    278,596
    
    
    
    7,325
    
    
    
    2.63
    
    
    
    286,049
    
    
    
    5,044
    
    
    
    1.76Borrowed funds
    
    
    204,431
    
    
    
    9,599
    
    
    
    4.70
    
    
    
    165,388
    
    
    
    7,835
    
    
    
    4.74
    
    
    
    171,615
    
    
    
    6,594
    
    
    
    3.84Total interest bearing liabilities
    
    
    488,134
    
    
    
    19,681
    
    
    
    4.03
    %
    
    
    443,984
    
    
    
    15,160
    
    
    
    3.41
    %
    
    
    457,664
    
    
    
    11,638
    
    
    
    2.54
    %Non-interest bearing deposits
    
    
    29,444
    
    
    
    
    
    
    
    
    
    
    
    23,506
    
    
    
    
    
    
    
    
    
    
    
    19,005Other liabilities
    
    
    3,147
    
    
    
    
    
    
    
    
    
    
    
    4,667
    
    
    
    
    
    
    
    
    
    
    
    3,375Total liabilities
    
    
    520,725
    
    
    
    
    
    
    
    
    
    
    
    472,157
    
    
    
    
    
    
    
    
    
    
    
    480,044Stockholders equity
    
    
    58,516
    
    
    
    
    
    
    
    
    
    
    
    57,194
    
    
    
    
    
    
    
    
    
    
    
    58,208Total liabilities and
stockholders equity
    
    $
    579,241
    
    
    
    
    
    
    
    
    
    
    $
    529,351
    
    
    
    
    
    
    
    
    
    
    $
    538,252Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.19
    %
    
    
    
    
    
    
    
    
    
    
    2.22
    %
    
    
    
    
    
    
    
    
    
    
    2.34
    %Net interest income
    
    
    
    
    
    $
    15,327
    
    
    
    
    
    
    
    
    
    
    $
    13,796
    
    
    
    
    
    
    
    
    
    
    $
    13,920Net interest margin on
average earning assets
    
    
    
    
    
    
    
    
    
    
    2.72
    %
    
    
    
    
    
    
    
    
    
    
    2.68
    %
    
    
    
    
    
    
    
    
    
    
    2.66
    %
 22




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##### Table of Contents



RATE-VOLUME ANALYSIS
  2007 vs. 2006
    
    
    2006 vs. 2005Change due to
    
    
    Total
    
    
    Change due to
    
    
    Total(In Thousands)
    
    Volume
    
    
    Rate
    
    
    Change
    
    
    Volume
    
    
    Rate
    
    
    ChangeInterest income:Loans:Residential real estate
    
    $
    409
    
    
    $
    150
    
    
    $
    559
    
    
    $
    272
    
    
    $
    131
    
    
    $
    403Equity
    
    
    422
    
    
    
    38
    
    
    
    460
    
    
    
    283
    
    
    
    87
    
    
    
    370Consumer
    
    
    14
    
    
    
    3
    
    
    
    17
    
    
    
    2
    
    
    
    2
    
    
    
    4Total retail loans
    
    
    845
    
    
    
    191
    
    
    
    1,036
    
    
    
    557
    
    
    
    220
    
    
    
    777Construction
    
    
    1,751
    
    
    
    (25
    )
    
    
    1,726
    
    
    
    1,184
    
    
    
    373
    
    
    
    1,557Commercial real estate
    
    
    1,952
    
    
    
    124
    
    
    
    2,076
    
    
    
    (45
    )
    
    
    558
    
    
    
    513Commercial
    
    
    986
    
    
    
    (18
    )
    
    
    968
    
    
    
    (261
    )
    
    
    162
    
    
    
    (99
    )Total corporate loans
    
    
    4,689
    
    
    
    81
    
    
    
    4,770
    
    
    
    878
    
    
    
    1,093
    
    
    
    1,971Total interest on loans
    
    
    5,534
    
    
    
    272
    
    
    
    5,806
    
    
    
    1,435
    
    
    
    1,313
    
    
    
    2,748Investment securities:U.S. Treasury and Government
Agency obligations
    
    
    (1,312
    )
    
    
    335
    
    
    
    (977
    )
    
    
    (1,459
    )
    
    
    312
    
    
    
    (1,147
    )Other bonds and equity securities
    
    
    (163
    )
    
    
    242
    
    
    
    79
    
    
    
    (258
    )
    
    
    230
    
    
    
    (28
    )Mortgage-backed securities
    
    
    314
    
    
    
    558
    
    
    
    872
    
    
    
    706
    
    
    
    822
    
    
    
    1,528Short-term investments
    
    
    291
    
    
    
    (19
    )
    
    
    272
    
    
    
    215
    
    
    
    82
    
    
    
    297Total investments
    
    
    (870
    )
    
    
    1,116
    
    
    
    246
    
    
    
    (796
    )
    
    
    1,446
    
    
    
    650Total interest income
    
    
    4,664
    
    
    
    1,388
    
    
    
    6,052
    
    
    
    639
    
    
    
    2,759
    
    
    
    3,398Interest expense:Deposits:Regular savings accounts
    
    
    (36
    )
    
    
    1
    
    
    
    (35
    )
    
    
    (33
    )
    
    
    1
    
    
    
    (32
    )NOW and Super NOW accounts
    
    
    (16
    )
    
    
    11
    
    
    
    (5
    )
    
    
    (14
    )
    
    
    5
    
    
    
    (9
    )Money market accounts
    
    
    (69
    )
    
    
    381
    
    
    
    312
    
    
    
    (56
    )
    
    
    645
    
    
    
    589Certificates of deposit
    
    
    1,044
    
    
    
    1,441
    
    
    
    2,485
    
    
    
    394
    
    
    
    1,339
    
    
    
    1,733Total interest bearing deposits
    
    
    923
    
    
    
    1,834
    
    
    
    2,757
    
    
    
    291
    
    
    
    1,990
    
    
    
    2,281Borrowed funds
    
    
    1,803
    
    
    
    (39
    )
    
    
    1,764
    
    
    
    (254
    )
    
    
    1,495
    
    
    
    1,241Total interest expense
    
    
    2,726
    
    
    
    1,795
    
    
    
    4,521
    
    
    
    37
    
    
    
    3,485
    
    
    
    3,522Net interest income
    
    $
    1,938
    
    
    $
    (407
    )
    
    $
    1,531
    
    
    $
    602
    
    
    $
    (726
    )
    
    $
    (124
    )
 NET INTEREST INCOME
    23




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##### Table of Contents



PROVISION FOR LOAN LOSSES
  NON-INTEREST INCOME (LOSS)
  24




---



##### Table of Contents



NON-INTEREST EXPENSE
    INCOME TAXES
  LIQUIDITY
   25




---



##### Table of Contents



CONTRACTUAL OBLIGATIONS AND COMMITMENTS
   Payments Due  By PeriodContractual obligations
    
    
    
    
    
    Less than
    
    One to
    
    Four to
    
    After(In Thousands)
    
    Total
    
    One Year
    
    Three Years
    
    Five Years
    
    Five YearsFHLBB long- term
advances
    
    $
    202,378
    
    
    $
    25,000
    
    
    $
    48,000
    
    
    $
    25,000
    
    
    $
    104,378Wholesale repurchase
agreements
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    Short-term borrowings
    
    
    7,973
    
    
    
    7,973
    
    
    
    
    
    
    
    
    
    
    
    Lease obligations
    
    
    1,685
    
    
    
    219
    
    
    
    308
    
    
    
    206
    
    
    
    952Data processing vendor
    
    
    1,529
    
    
    
    671
    
    
    
    858
    
    
    
    
    
    
    
    Employee benefit
payments (1)
    
    
    1,176
    
    
    
    118
    
    
    
    235
    
    
    
    235
    
    
    
    588Total contractual cash
obligations
    
    $
    239,741
    
    
    $
    33,981
    
    
    $
    49,401
    
    
    $
    50,441
    
    
    $
    105,918
 (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 PeriodCommitments
    
    
    
    
    
    Less than
    
    One to
    
    Four to
    
    After(In Thousands)

    
    Total
    
    One Year
    
    Three Years
    
    Five Years
    
    Five YearsLoan originations
    
    $
    38,255
    
    
    $
    38,255
    
    
    $
    
    
    
    $
    
    
    
    $
    Lines of credit
    
    
    71,097
    
    
    
    34,506
    
    
    
    20,594
    
    
    
    657
    
    
    
    15,340Letters of credit
    
    
    1,770
    
    
    
    1,770
    
    
    
    
    
    
    
    
    
    
    
    Total commitments
    
    $
    111,122
    
    
    $
    74,531
    
    
    $
    20,594
    
    
    $
    657
    
    
    $
    15,340
  CAPITAL ADEQUACY
  26




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##### Table of Contents



RECENT ACCOUNTING DEVELOPMENTS
    IMPACT OF INFLATION AND CHANGING PRICES
   
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 ASSET/LIABILITY MANAGEMENT
  INTEREST RATE SENSITIVITY
  27




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##### Table of Contents



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
 Interest Rate ShockDown
    
    
    Up2006
    
    Flat Rates
    
    
    200 bp
    
    
    200 bp(In Thousands)Year One
    
    $
    14,477
    
    
    $
    14,382
    
    
    $
    13,992Year Two
    
    
    14,380
    
    
    
    13,064
    
    
    
    12,826Total net interest income for 2 year period
    
    $
    28,857
    
    
    $
    27,446
    
    
    $
    26,818
  28




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 PageREPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
    
    
    30-31CONSOLIDATED BALANCE SHEETS
    
    
    32CONSOLIDATED STATEMENTS OF INCOME
    
    
    33CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
    
    
    34CONSOLIDATED STATEMENTS OF CASH FLOWS
    
    
    35NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    36
 29




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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.
 30




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 The Board of Directors and Stockholders  LSB Corporation:
    /s/ KPMG LLP
 31




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##### Table of Contents



Consolidated Balance Sheets
 December 31, 
(In Thousands, Except Share Data)
    
    2007
    
    
    2006Assets:Cash and due from banks
    
    $
    7,494
    
    
    $
    6,896Federal funds sold
    
    
    56
    
    
    
    11,871Total cash and cash equivalents
    
    
    7,550
    
    
    
    18,767Investment securities available for sale
amortized cost of $229,885 in 2007 and $221,652 in 2006 (notes 2 and 7)
    
    
    230,596
    
    
    
    218,682Federal Home Loan Bank stock, at cost (note 3)
    
    
    10,185
    
    
    
    10,046Loans, net of allowance for loan losses of $4,810 in 2007
and $4,309 in 2006 (notes 4 and 7)
    
    
    353,303
    
    
    
    283,854Premises and equipment, net (note 5)
    
    
    3,590
    
    
    
    3,807Accrued interest receivable
    
    
    2,453
    
    
    
    2,259Current income tax receivable
    
    
    
    
    
    
    357Deferred income tax asset, net (note 8)
    
    
    2,485
    
    
    
    3,606Bank-owned life insurance
    
    
    10,200
    
    
    
    Other assets
    
    
    1,289
    
    
    
    1,587Total assets
    
    $
    621,651
    
    
    $
    542,965Liabilities and Stockholders Equity:Liabilities:Interest bearing deposits (note 6)
    
    $
    293,232
    
    
    $
    264,238Non-interest bearing deposits (note 6)
    
    
    28,851
    
    
    
    31,424Total deposits
    
    
    322,083
    
    
    
    295,662Long-term borrowed funds (note 7)
    
    
    227,378
    
    
    
    143,519Short-term borrowed funds (note 7)
    
    
    7,973
    
    
    
    41,263Other liabilities
    
    
    3,919
    
    
    
    3,990Total liabilities
    
    
    561,353
    
    
    
    484,434Commitments and contingencies (notes 5, 12 and 13)Stockholders equity (notes 9 and 11):Preferred stock, $.10 par value; 5,000,000
shares authorized, none issued
    
    
    
    
    
    
    Common stock, $.10 par value; 20,000,000
shares authorized; 4,516,561 and 4,593,617 shares issued
and outstanding in 2007 and 2006, respectively
    
    
    452
    
    
    
    459Additional paid-in capital
    
    
    60,382
    
    
    
    61,578Accumulated deficit
    
    
    (934
    )
    
    
    (2,090
    )Accumulated other comprehensive income (loss), net of tax
    
    
    398
    
    
    
    (1,416
    )Total stockholders equity
    
    
    60,298
    
    
    
    58,531Total liabilities and stockholders equity
    
    $
    621,651
    
    
    $
    542,965
 The accompanying notes are an integral part of these consolidated financial statements.
 32




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##### Table of Contents



Consolidated Statements of Income
 Year Ended December 31,
(In Thousands, Except Share Data)
    
    2007
    
    
    2006
    
    
    2005Interest and dividend income:Loans
    
    $
    23,494
    
    
    $
    17,688
    
    
    $
    14,940Investment securities held to maturity
    
    
    
    
    
    
    1,925
    
    
    
    8,135Investment securities available for sale
    
    
    10,181
    
    
    
    8,405
    
    
    
    1,959Federal Home Loan Bank stock (note 3)
    
    
    662
    
    
    
    539
    
    
    
    422Other interest income
    
    
    671
    
    
    
    399
    
    
    
    102Total interest and dividend income
    
    
    35,008
    
    
    
    28,956
    
    
    
    25,558Interest expense:Deposits (note 6)
    
    
    10,082
    
    
    
    7,325
    
    
    
    5,044Long-term borrowed funds
    
    
    8,885
    
    
    
    5,231
    
    
    
    4,946Short-term borrowed funds
    
    
    714
    
    
    
    2,604
    
    
    
    1,648Total interest expense
    
    
    19,681
    
    
    
    15,160
    
    
    
    11,638Net interest income
    
    
    15,327
    
    
    
    13,796
    
    
    
    13,920Provision for loan losses (note 4)
    
    
    645
    
    
    
    160
    
    
    
    Net interest income after provision for loan losses
    
    
    14,682
    
    
    
    13,636
    
    
    
    13,920Non-interest income(loss):Deposit account fees
    
    
    1,009
    
    
    
    792
    
    
    
    870Loan servicing fees, net
    
    
    189
    
    
    
    105
    
    
    
    162Gains on sales of mortgage loans, net
    
    
    
    
    
    
    6
    
    
    
    37Losses on sales of investment securities (note 2)
    
    
    
    
    
    
    (2,417
    )
    
    
    Gains on pension plan termination (note 10)
    
    
    762
    
    
    
    602
    
    
    
    Lawsuit judgment collected (note 12)
    
    
    
    
    
    
    
    
    
    
    2,233Income on bank-owned life insurance
    
    
    200
    
    
    
    
    
    
    
    Other income
    
    
    524
    
    
    
    507
    
    
    
    486Total non-interest income (loss)
    
    
    2,684
    
    
    
    (405
    )
    
    
    3,788Non-interest expense:Salaries and employee benefits (notes 10 and 11)
    
    
    6,836
    
    
    
    7,399
    
    
    
    6,899Occupancy and equipment expense (note 5)
    
    
    1,221
    
    
    
    1,369
    
    
    
    944Data processing expense
    
    
    1,019
    
    
    
    1,036
    
    
    
    882Professional expense
    
    
    463
    
    
    
    597
    
    
    
    543Marketing expense
    
    
    397
    
    
    
    608
    
    
    
    296Insurance expense
    
    
    137
    
    
    
    168
    
    
    
    166Other expense
    
    
    1,484
    
    
    
    1,843
    
    
    
    1,414Total non-interest expense
    
    
    11,557
    
    
    
    13,020
    
    
    
    11,144Income before income tax expense
    
    
    5,809
    
    
    
    211
    
    
    
    6,564Income tax expense (note 8)
    
    
    2,091
    
    
    
    85
    
    
    
    2,407Net income
    
    $
    3,718
    
    
    $
    126
    
    
    $
    4,157Average basic shares outstanding
    
    
    4,575,197
    
    
    
    4,543,251
    
    
    
    4,427,525Common stock equivalents
    
    
    27,509
    
    
    
    57,514
    
    
    
    100,668Average diluted shares outstanding
    
    
    4,602,706
    
    
    
    4,600,765
    
    
    
    4,528,193Basic earnings per share
    
    $
    0.81
    
    
    $
    0.03
    
    
    $
    0.94Diluted earnings per share
    
    $
    0.81
    
    
    $
    0.03
    
    
    $
    0.92
 The accompanying notes are an integral part of these consolidated financial statements.
 33




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##### Table of Contents



Consolidated Statements of Changes in
 Stockholders Equity
 Retained
    
    
    Accumulated
    
    
    TotalAdditional
    
    
    Earnings
    
    
    Other
    
    
    Stock-Common
    
    
    Paid-in
    
    
    (Accumulated
    
    
    Comprehensive
    
    
    holdersStock
    
    
    Capital
    
    
    Deficit)
    
    
    Income (Loss)
    
    
    Equity(In Thousands, Except Share Data)Balance at December 31, 2004
    
    $
    434
    
    
    $
    59,145
    
    
    $
    (1,347
    )
    
    $
    (394
    )
    
    $
    57,838Net income
    
    
    
    
    
    
    
    
    
    
    4,157
    
    
    
    
    
    
    
    4,157Other comprehensive loss -
Unrealized loss on securities
available for sale (tax effect $211)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (312
    )
    
    
    (312
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,845Exercise of stock options and tax benefits
(168,250 shares)
    
    
    12
    
    
    
    711
    
    
    
    
    
    
    
    
    
    
    
    723Dividends declared and paid ($0.56 per share)
    
    
    
    
    
    
    
    
    
    
    (2,484
    )
    
    
    
    
    
    
    (2,484
    )Balance at December 31, 2005
    
    
    446
    
    
    
    59,856
    
    
    
    326
    
    
    
    (706
    )
    
    
    59,922Net income
    
    
    
    
    
    
    
    
    
    
    126
    
    
    
    
    
    
    
    126Other comprehensive loss -
Unrealized loss on securities
available for sale (tax effect $619)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,160
    )
    
    
    (1,160
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,034
    )Stock-based compensation
    
    
    
    
    
    
    400
    
    
    
    
    
    
    
    
    
    
    
    400Exercise of stock options and tax benefits
(133,775 shares)
    
    
    13
    
    
    
    1,322
    
    
    
    
    
    
    
    
    
    
    
    1,335Adjustment to initially apply
SFAS No. 158, (tax effect $312)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    450
    
    
    
    450Dividends declared and paid ($0.56 per share)
    
    
    
    
    
    
    
    
    
    
    (2,542
    )
    
    
    
    
    
    
    (2,542
    )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
    
    
    $
    60,298
  Years Ended December 31,
    
    2007
    
    
    2006
    
    
    2005(In Thousands)Gross unrealized (losses) gains
arising during the period
    
    $
    3,680
    
    
    $
    (4,174
    )
    
    $
    (523
    )Tax effect
    
    
    (1,416
    )
    
    
    1,419
    
    
    
    211Unrealized holding (losses) gains net of tax
    
    
    2,264
    
    
    
    (2,755
    )
    
    
    (312
    )Less: reclassification adjustment for gains (losses)
included in net income
    
    
    
    
    
    
    (2,417
    )
    
    
    Tax effect
    
    
    
    
    
    
    822
    
    
    
    Unrealized (losses) gains on securities,
net of reclassification
    
    $
    2,264
    
    
    $
    (1,160
    )
    
    $
    (312
    )
 The accompanying notes are an integral part of these consolidated financial statements.
 34




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##### Table of Contents



Consolidated Statements
 of Cash Flows
 Year Ended December 31,
(In Thousands)
    
    2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    3,718
    
    
    $
    126
    
    
    $
    4,157Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses
    
    
    645
    
    
    
    160
    
    
    
    Gains on sales of mortgage loans, net
    
    
    
    
    
    
    (6
    )
    
    
    (37
    )Losses on sale of investment securities
    
    
    
    
    
    
    2,417
    
    
    
    Gains on pension plan termination
    
    
    (762
    )
    
    
    (602
    )
    
    
    Net amortization (accretion) of investment securities
    
    
    (203
    )
    
    
    593
    
    
    
    1,428Depreciation and amortization of premises and equipment
    
    
    606
    
    
    
    606
    
    
    
    450Loans originated for sale
    
    
    
    
    
    
    (1,043
    )
    
    
    (3,872
    )Proceeds from sales of mortgage loans
    
    
    
    
    
    
    1,521
    
    
    
    3,437(Increase) decrease in accrued interest receivable
    
    
    (194
    )
    
    
    199
    
    
    
    436Deferred income tax expense (benefit)
    
    
    16
    
    
    
    148
    
    
    
    (167
    )Stock-based compensation
    
    
    121
    
    
    
    400
    
    
    
    Increase in cash surrender value of Bank-owned life insurance
    
    
    (200
    )
    
    
    
    
    
    
    Tax benefits from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    211Decrease in other assets
    
    
    655
    
    
    
    147
    
    
    
    227(Decrease) increase in other liabilities
    
    
    (132
    )
    
    
    (899
    )
    
    
    1,352Net cash provided by operating activities
    
    
    4,270
    
    
    
    3,767
    
    
    
    7,622Cash flows from investing activities:Proceeds from maturities of investment securities held to maturity
    
    
    
    
    
    
    2,900
    
    
    
    54,770Proceeds from maturities of investment securities available for sale
    
    
    23,545
    
    
    
    16,680
    
    
    
    25,000Sales of investment securities available for sale
    
    
    
    
    
    
    78,457
    
    
    
    Purchases of investment securities held to maturity
    
    
    
    
    
    
    
    
    
    
    (71,914
    )Purchases of investment securities available for sale
    
    
    (60,074
    )
    
    
    (20,766
    )
    
    
    (14,198
    )Purchases of mortgage-backed securities held to maturity
    
    
    
    
    
    
    
    
    
    
    (23,971
    )Purchases of mortgage-backed securities available for sale
    
    
    
    
    
    
    (63,544
    )
    
    
    Purchase of equity securities available for sale
    
    
    
    
    
    
    (358
    )
    
    
    (72
    )Purchases of Bank-owned life insurance
    
    
    (10,000
    )
    
    
    
    
    
    
    Purchases of Federal Home Loan Bank stock
    
    
    (204
    )
    
    
    (889
    )
    
    
    (2,210
    )Principal payments of investment securities held to maturity
    
    
    
    
    
    
    4,680
    
    
    
    26,468Principal payments of investment securities available for sale
    
    
    28,499
    
    
    
    18,526
    
    
    
    5,222Redemption of Federal Home Loan Bank stock
    
    
    65
    
    
    
    940
    
    
    
    Increase in loans, net
    
    
    (70,094
    )
    
    
    (54,001
    )
    
    
    (1,343
    )Purchases of premises and equipment
    
    
    (389
    )
    
    
    (1,162
    )
    
    
    (215
    )Net cash used in investing activities
    
    
    (88,652
    )
    
    
    (18,537
    )
    
    
    (2,463
    )Cash flows from financing activities:Net increase (decrease) in deposits
    
    
    26,421
    
    
    
    (7,425
    )
    
    
    3,981Additions to long-term borrowed funds
    
    
    173,000
    
    
    
    82,000
    
    
    
    48,900Payments on long-term borrowed funds
    
    
    (89,141
    )
    
    
    (60,342
    )
    
    
    (32,141
    )(Decrease) increase in short-term borrowed funds
    
    
    (33,290
    )
    
    
    9,744
    
    
    
    (20,642
    )Increase in advance payments by borrowers
    
    
    61
    
    
    
    80
    
    
    
    Dividends paid to stockholders
    
    
    (2,562
    )
    
    
    (2,542
    )
    
    
    (2,484
    )Proceeds from exercise of stock options
    
    
    117
    
    
    
    1,213
    
    
    
    512Tax benefits from exercise of stock options
    
    
    22
    
    
    
    122
    
    
    
    Repurchases of common stock
    
    
    (1,463
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    73,165
    
    
    
    22,850
    
    
    
    (1,874
    )Net (decrease) increase in cash and cash equivalents
    
    
    (11,217
    )
    
    
    8,080
    
    
    
    3,285Cash and cash equivalents, beginning of year
    
    
    18,767
    
    
    
    10,687
    
    
    
    7,402Cash and cash equivalents, end of year
    
    $
    7,550
    
    
    $
    18,767
    
    
    $
    10,687Cash paid during the year for:Interest on deposits
    
    $
    10,067
    
    
    $
    7,317
    
    
    $
    5,052Interest on borrowed funds
    
    
    9,357
    
    
    
    7,599
    
    
    
    6,517Income taxes
    
    
    2,101
    
    
    
    959
    
    
    
    2,012Cash received during the year for:Income taxes
    
    
    635
    
    
    
    192
    
    
    
    215
 The accompanying notes are an integral part of these consolidated financial statements.
 35




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##### Table of Contents



NOTES TO CONSOLIDATED  Financial Statements  Years Ended December 31, 2007, 2006 and 2005
 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 BASIS OF PRESENTATION.
   CASH AND CASH EQUIVALENTS.
 INVESTMENT SECURITIES.
   INTEREST ON LOANS .
 LOAN FEES.
 TRANSFER AND SERVICING OF ASSETS AND EXTINGUISHMENTS OF LIABILITIES.
 36




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##### Table of Contents



ALLOWANCE FOR LOAN LOSSES.
       PREMISES AND EQUIPMENT.
 BANK-OWNED LIFE INSURANCE
 OTHER REAL ESTATE OWNED.
 STOCK COMPENSATION PLANS.
  37




---



##### Table of Contents



PENSION EXPENSE.
   INCOME TAXES.
 EARNINGS PER SHARE
 RECENT ACCOUNTING DEVELOPMENTS
  38




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##### Table of Contents

\

(2) INVESTMENT SECURITIES
  2007
    
    
    2006Amortized
    
    
    Unrealized
    
    
    Fair
    
    
    Amortized
    
    
    Unrealized
    
    
    Fair(In Thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Value
    
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueUS Treasury obligations
    
    $
    5,589
    
    
    $
    4
    
    
    $
    (52
    )
    
    $
    5,541
    
    
    $
    5,605
    
    
    $
    
    
    
    $
    (391
    )
    
    $
    5,214Government-sponsored
enterprise obligations (1)
    
    
    15,748
    
    
    
    95
    
    
    
    (33
    )
    
    
    15,810
    
    
    
    35,710
    
    
    
    14
    
    
    
    (534
    )
    
    
    35,190Mortgage-backed securities
    
    
    134,969
    
    
    
    2,208
    
    
    
    (474
    )
    
    
    136,703
    
    
    
    98,608
    
    
    
    606
    
    
    
    (1,316
    )
    
    
    97,898Collateralized mortgage
obligations
    
    
    60,660
    
    
    
    169
    
    
    
    (682
    )
    
    
    60,147
    
    
    
    72,899
    
    
    
    73
    
    
    
    (1,417
    )
    
    
    71,555Corporate obligations
    
    
    6,373
    
    
    
    30
    
    
    
    (583
    )
    
    
    5,820
    
    
    
    7,316
    
    
    
    50
    
    
    
    (2
    )
    
    
    7,364Mutual funds
    
    
    1,000
    
    
    
    
    
    
    
    (41
    )
    
    
    959
    
    
    
    1,000
    
    
    
    
    
    
    
    (53
    )
    
    
    947Equity securities
    
    
    5,546
    
    
    
    70
    
    
    
    
    
    
    
    5,616
    
    
    
    514
    
    
    
    
    
    
    
    
    
    
    
    514$
    229,885
    
    
    $
    2,576
    
    
    $
    (1,865
    )
    
    $
    230,596
    
    
    $
    221,652
    
    
    $
    743
    
    
    $
    (3,713
    )
    
    $
    218,682
 
 (1)
    
    Government-sponsored enterprises 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 United States Treasury.   39




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##### Table of Contents



Wholesale
    
    CustomerRepurchase Agreements
    
    Repurchase Agreements
    
    FHLB AdvancesAmortized
    
    Fair
    
    Amortized
    
    Fair
    
    Amortized
    
    Fair(In Thousands)
    
    Cost
    
    Value
    
    Cost
    
    Value
    
    Cost
    
    Value2007: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
    
    
    
    60,1472006:U.S. Treasury obligations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,605
    
    
    $
    5,214Government-sponsored
enterprise obligations
    
    
    
    
    
    
    
    
    
    
    9,840
    
    
    
    9,854
    
    
    
    25,870
    
    
    
    25,336Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,521
    
    
    
    96,800Collateralized mortgage obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,668
    
    
    
    71,324
 OTHER THAN TEMPORARILY IMPAIRED SECURITIES
  Less Than 12 Months
    
    
    12 Months or Longer
    
    
    Total2007
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized(In Thousands)

    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesUS 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
    )
 Less Than 12 Months
    
    
    12 Months or Longer
    
    
    Total2006
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized(In Thousands)

    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesUS Treasury obligations
    
    $
    
    
    
    $
    
    
    
    $
    5,214
    
    
    $
    (391
    )
    
    $
    5,214
    
    
    $
    (391
    )Government-sponsored
enterprise obligations
    
    
    3,119
    
    
    
    (100
    )
    
    
    22,217
    
    
    
    (434
    )
    
    
    25,336
    
    
    
    (534
    )Mortgage-backed securities
    
    
    4,408
    
    
    
    (28
    )
    
    
    34,907
    
    
    
    (1,288
    )
    
    
    39,315
    
    
    
    (1,316
    )Collateralized mortgage
obligations
    
    
    12,846
    
    
    
    (64
    )
    
    
    54,405
    
    
    
    (1,353
    )
    
    
    67,251
    
    
    
    (1,417
    )Corporate obligations
    
    
    1,924
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    1,924
    
    
    
    (2
    )Mutual funds
    
    
    947
    
    
    
    (53
    )
    
    
    
    
    
    
    
    
    
    
    947
    
    
    
    (53
    )Total temporarily impaired
securities
    
    $
    23,244
    
    
    $
    (247
    )
    
    $
    116,743
    
    
    $
    (3,466
    )
    
    $
    139,987
    
    
    $
    (3,713
    )
 40




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##### Table of Contents



U. S.
Treasury and government-sponsored enterprises.
 Mortgage-backed securities and collateralized mortgage obligations.
 Corporate obligations.
 Mutual funds.
  WeightedDecember 31, 2007
    
    Amortized
    
    
    Fair
    
    
    Average(Dollars in Thousands)

    
    Cost
    
    
    Value
    
    
    YieldUS Treasury and government-sponsored enterprises:Within 1 year
    
    $
    5,439
    
    
    $
    5,474
    
    
    
    5.19
    %1 to 2 years
    
    
    4,991
    
    
    
    4,958
    
    
    
    3.33
    %3 to 5 years
    
    
    5,818
    
    
    
    5,883
    
    
    
    4.93
    %5 to 10 years
    
    
    5,089
    
    
    
    5,036
    
    
    
    3.26
    %After 10 years
    
    
    520
    
    
    
    519
    
    
    
    6.16
    %21,337
    
    
    
    21,351
    
    
    
    4.22
    %Mortgage-backed securities:1 to 2 years
    
    
    1,241
    
    
    
    1,217
    
    
    
    3.76
    %2 to 3 years
    
    
    2,729
    
    
    
    2,599
    
    
    
    3.29
    %3 to 5 years
    
    
    1,738
    
    
    
    1,764
    
    
    
    5.27
    %5 to 10 years
    
    
    14,096
    
    
    
    13,863
    
    
    
    3.77
    %After 10 years
    
    
    115,165
    
    
    
    117,260
    
    
    
    5.87
    %134,969
    
    
    
    136,703
    
    
    
    5.57
    %Collateralized mortgage obligations:5 to 10 years
    
    
    11,242
    
    
    
    11,157
    
    
    
    4.18
    %After 10 years
    
    
    49,418
    
    
    
    48,990
    
    
    
    4.49
    %60,660
    
    
    
    60,147
    
    
    
    4.43
    %Corporate obligations:1 to 2 years
    
    
    1,958
    
    
    
    1,451
    
    
    
    5.41
    %2 to 3 years
    
    
    4,415
    
    
    
    4,369
    
    
    
    5.51
    %6,373
    
    
    
    5,820
    
    
    
    5.48
    %$
    223,339
    
    
    $
    224,021
    
    
    
    5.13
    %
 41




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##### Table of Contents



(3) FEDERAL HOME LOAN BANK STOCK
  (4) LOANS
  (In Thousands)
    
    2007
    
    
    2006Residential real estate
    
    $
    79,743
    
    
    $
    69,876Home equity
    
    
    23,046
    
    
    
    20,339Consumer
    
    
    1,007
    
    
    
    975Retail loans
    
    
    103,796
    
    
    
    91,190Construction
    
    
    47,885
    
    
    
    43,283Commercial real estate
    
    
    177,968
    
    
    
    142,820Commercial business
    
    
    28,464
    
    
    
    10,870Corporate loans
    
    
    254,317
    
    
    
    196,973Total loans
    
    
    358,113
    
    
    
    288,163Allowance for loan losses
    
    
    (4,810
    )
    
    
    (4,309
    )Net loans
    
    $
    353,303
    
    
    $
    283,854
     (In Thousands)
    
    2007
    
    
    2006Balance at beginning of year
    
    $
    2,168
    
    
    $
    2,251New loans granted
    
    
    638
    
    
    
    385Retirement/reduction of directors and officers
    
    
    
    
    
    
    (23
    )Repayment of principal
    
    
    (694
    )
    
    
    (445
    )Balance at end of year
    
    $
    2,112
    
    
    $
    2,168
  (In Thousands)
    
    2007
    
    
    2006
    
    
    2005Balance at beginning of year
    
    $
    4,309
    
    
    $
    4,126
    
    
    $
    4,140Total charge-offs
    
    
    (157
    )
    
    
    (30
    )
    
    
    (25
    )Total recoveries
    
    
    13
    
    
    
    53
    
    
    
    11Net (charge-offs) recoveries
    
    
    (144
    )
    
    
    23
    
    
    
    (14
    )Provision for loan losses
    
    
    645
    
    
    
    160
    
    
    
    Balance at end of year
    
    $
    4,810
    
    
    $
    4,309
    
    
    $
    4,126
  42




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##### Table of Contents



(In Thousands)
    
    2007
    
    2006
    
    2005Interest income in accordance with original loan terms
    
    $
    37
    
    
    $
    56
    
    
    $
    1Interest income recognized
    
    
    
    
    
    
    
    
    
    
    Foregone interest income
    
    
    37
    
    
    
    56
    
    
    
    1
  (In Thousands)
    
    2007
    
    2006
    
    2005Total impaired loans
    
    $
    1,523
    
    
    $
    1,020
    
    
    $
    Impaired loans with reserve
    
    
    
    
    
    
    
    
    
    
    Impaired loan reserve
    
    
    
    
    
    
    
    
    
    
    Impaired loans without reserve
    
    
    1,523
    
    
    
    1,020
    
    
    
    Impaired loans average balance
    
    
    399
    
    
    
    1,078
    
    
    
    Interest income in accordance with original loan terms
    
    
    37
    
    
    
    54
    
    
    
    Interest income recognized
    
    
    
    
    
    
    
    
    
    
    
 (5) PREMISES AND EQUIPMENT
  Estimated(In Thousands)
    
    Useful Lives
    
    
    2007
    
    
    2006Premises
    
    10  39 years
    
    $
    4,164
    
    
    $
    4,150Equipment
    
    3  5   years
    
    
    4,078
    
    
    
    3,702Leasehold improvements
    
    3  10 years
    
    
    1,047
    
    
    
    1,0479,289
    
    
    
    8,899Less accumulated depreciation and amortization
    
    
    
    
    
    
    (5,699
    )
    
    
    (5,092
    )$
    3,590
    
    
    $
    3,807
    Minimum
    
    
    MinimumRental
    
    
    Rental(In Thousands)
    
    Expense
    
    
    Income2008
    
    $
    219
    
    
    $
    2302009
    
    
    197
    
    
    
    1512010
    
    
    111
    
    
    
    622011
    
    
    103
    
    
    
    432012
    
    
    103
    
    
    
    Thereafter
    
    
    952
    
    
    
    $
    1,685
    
    
    $
    486
  43




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##### Table of Contents



(6) DEPOSITS
  Rates as ofDecember 31,(Dollars in Thousands)
    
    2007
    
    
    2007
    
    
    2006Interest bearing accounts:NOW acccounts
    
    
    0.10-0.25
    %
    
    $
    17,877
    
    
    $
    17,707Savings accounts
    
    
    0.50
    %
    
    
    28,452
    
    
    
    33,676Money market accounts
    
    
    1.00-4.17
    %
    
    
    74,621
    
    
    
    73,163Certificates of deposit
    
    
    2.72-5.37
    %
    
    
    141,651
    
    
    
    109,635Retirement certificates of deposit
    
    
    2.72-5.37
    %
    
    
    30,631
    
    
    
    30,057Total interest bearing deposits
    
    
    
    
    
    
    293,232
    
    
    
    264,238Non-interest bearing demand deposit accounts
    
    
    
    
    
    
    28,851
    
    
    
    31,424Total deposits
    
    
    
    
    
    $
    322,083
    
    
    $
    295,662
   (In Thousands)
    
    2007
    
    
    2006
    
    
    2005NOW accounts
    
    $
    33
    
    
    $
    38
    
    
    $
    47Savings accounts
    
    
    158
    
    
    
    190
    
    
    
    221Money market accounts
    
    
    2,256
    
    
    
    1,944
    
    
    
    1,355Certificates of deposit
    
    
    6,230
    
    
    
    4,008
    
    
    
    2,480Retirement certificates of deposit
    
    
    1,405
    
    
    
    1,145
    
    
    
    941Total interest expense
    
    $
    10,082
    
    
    $
    7,325
    
    
    $
    5,044
  Equal to

    
    
    
    
    
    
    WeightedLess
    
    
    and greater
    
    
    
    
    
    
    Averagethan
    
    
    than
    
    
    
    
    
    
    Interest(Dollars in Thousands)
    
    $100,000
    
    
    $100,000
    
    
    Total
    
    
    RateThree months or less
    
    $
    24,944
    
    
    $
    15,459
    
    
    $
    40,403
    
    
    
    4.89
    %From three to six months
    
    
    33,473
    
    
    
    19,582
    
    
    
    53,055
    
    
    
    4.88From six to twelve months
    
    
    30,530
    
    
    
    18,557
    
    
    
    49,087
    
    
    
    4.91From one to two years
    
    
    8,658
    
    
    
    4,108
    
    
    
    12,766
    
    
    
    4.32From two to three years
    
    
    5,428
    
    
    
    8,828
    
    
    
    14,256
    
    
    
    4.81Three years and thereafter
    
    
    1,857
    
    
    
    858
    
    
    
    2,715
    
    
    
    4.57$
    104,890
    
    
    $
    67,392
    
    
    $
    172,282
    
    
    
    4.84
    %
  (7) BORROWED FUNDS
  44




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##### Table of Contents



2007
    
    
    2006Weighted Average
    
    
    
    
    
    
    Weighted Average(In Thousands)
    
    Amount
    
    
    Interest Rate
    
    
    Amount
    
    
    Interest RateFHLB long-term advances
    
    $
    202,378
    
    
    
    4.59
    %
    
    $
    143,519
    
    
    
    4.59
    %Wholesale repurchase agreements
    
    
    25,000
    
    
    
    4.83
    %
    
    
    
    
    
    
    $
    227,378
    
    
    
    4.62
    %
    
    $
    143,519
    
    
    
    4.59
    %
  2007
    
    
    2006Weighted
    
    
    
    
    
    
    WeightedMaturity
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average(Dollars in Thousands)

    
    Amount
    
    
    Interest Rate
    
    
    Amount
    
    
    Interest Rate2007
    
    $
    
    
    
    
    
    %
    
    $
    39,000
    
    
    
    4.37
    %2008
    
    
    25,000
    
    
    
    4.77
    
    
    
    21,000
    
    
    
    4.892009
    
    
    10,000
    
    
    
    5.14
    
    
    
    
    
    
    
    2010
    
    
    38,000
    
    
    
    5.36
    
    
    
    25,000
    
    
    
    5.602011
    
    
    10,000
    
    
    
    4.93
    
    
    
    10,000
    
    
    
    4.932012
    
    
    15,000
    
    
    
    4.72
    
    
    
    
    
    
    
    Thereafter
    
    
    104,378
    
    
    
    4.17
    
    
    
    48,519
    
    
    
    4.04$
    202,378
    
    
    
    4.59
    %
    
    $
    143,519
    
    
    
    4.59
    %
    2007
    
    
    2006Weighted Average
    
    
    
    
    
    
    Weighted Average(Dollars In Thousands)
    
    Amount
    
    
    Interest Rate
    
    
    Amount
    
    
    Interest RateFHLB Ideal Way advances
    
    $
    800
    
    
    
    4.20
    %
    
    $
    
    
    
    
    
    %FHLB short-term borrowings
    
    
    
    
    
    
    
    
    
    
    36,000
    
    
    
    5.31
    %Customer repurchase agreements
    
    
    7,173
    
    
    
    2.75
    %
    
    
    5,263
    
    
    
    3.75
    %$
    7,973
    
    
    
    4.36
    %
    
    $
    41,263
    
    
    
    5.11
    %
 45




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##### Table of Contents



2007
    
    2006
    
    2005Customer
    
    Short-Term
    
    Customer
    
    Short-Term
    
    Customer
    
    Short-TermRepurchase
    
    FHLBB
    
    Repurchase
    
    FHLBB
    
    Repurchase
    
    FHLBB(Dollars in Thousands)
    
    Agreements
    
    Advances
    
    Agreements
    
    Advances
    
    Agreements
    
    AdvancesOutstanding at December 31
    
    $
    7,173
    
    
    $
    800
    
    
    $
    5,263
    
    
    $
    36,000
    
    
    $
    4,519
    
    
    $
    27,000Average balance outstanding during the year
    
    
    5,599
    
    
    
    9,608
    
    
    
    4,915
    
    
    
    47,143
    
    
    
    3,113
    
    
    
    49,964Maximum outstanding at any month end
    
    
    7,217
    
    
    
    31,000
    
    
    
    6,646
    
    
    
    61,000
    
    
    
    4,519
    
    
    
    85,000Weighted average rate at December 31
    
    
    2.75
    %
    
    
    4.20
    %
    
    
    3.75
    %
    
    
    5.31
    %
    
    
    2.75
    %
    
    
    4.31
    %Weighted average rate during the year
    
    
    3.54
    
    
    
    5.36
    
    
    
    3.50
    
    
    
    5.16
    
    
    
    1.79
    
    
    
    3.18
   (8) INCOME TAXES
  (In Thousands)
    
    2007
    
    
    2006
    
    
    2005Current expense (benefit):Federal
    
    $
    1,658
    
    
    $
    (123
    )
    
    $
    2,154State
    
    
    417
    
    
    
    60
    
    
    
    420Total current expense (benefit)
    
    
    2,075
    
    
    
    (63
    )
    
    
    2,574Deferred expense (benefit):Federal
    
    
    17
    
    
    
    142
    
    
    
    (119
    )State
    
    
    4
    
    
    
    38
    
    
    
    (45
    )Change in valuation reserve
    
    
    (5
    )
    
    
    (32
    )
    
    
    (3
    )Total deferred expense
    
    
    16
    
    
    
    148
    
    
    
    (167
    )Total income tax expense
    
    $
    2,091
    
    
    $
    85
    
    
    $
    2,407
  (In Thousands)
    
    2007
    
    
    2006
    
    
    2005Expected federal income tax expense
    
    $
    1,975
    
    
    $
    72
    
    
    $
    2,231Items affecting expected tax:State income tax, net of federal benefit
    
    
    278
    
    
    
    64
    
    
    
    247Tax exempt income
    
    
    (44
    )
    
    
    (111
    )
    
    
    (113
    )Officers life insurance
    
    
    (68
    )
    
    
    
    
    
    
    Other
    
    
    (45
    )
    
    
    92
    
    
    
    45Change in valuation reserve
    
    
    (5
    )
    
    
    (32
    )
    
    
    (3
    )Total income tax expense
    
    $
    2,091
    
    
    $
    85
    
    
    $
    2,407
 46




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##### Table of Contents



(In Thousands)
    
    2007
    
    
    2006Deferred tax assets:Allowance for loan losses
    
    $
    1,969
    
    
    $
    1,659Capital loss carryforward
    
    
    
    
    
    
    5Unrealized loss on investment securities available for sale
    
    
    
    
    
    
    1,104Pension costs and other post-retirement benefits
    
    
    106
    
    
    
    108Deferred compensation
    
    
    533
    
    
    
    555Depreciation
    
    
    406
    
    
    
    363Other
    
    
    12
    
    
    
    45Gross deferred tax asset
    
    
    3,026
    
    
    
    3,839Valuation reserve
    
    
    
    
    
    
    (5
    )Deferred tax asset
    
    
    3,026
    
    
    
    3,834Deferred tax liabilities:Unrealized gain on investment securities available for sale
    
    
    (313
    )
    
    
    Other
    
    
    (228
    )
    
    
    (228
    )Gross deferred tax liability
    
    
    (541
    )
    
    
    (228
    )Net deferred income tax asset
    
    $
    2,485
    
    
    $
    3,606
    (9) STOCKHOLDERS EQUITY
    47




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##### Table of Contents



Risk-Based RatiosTier 1 Capital
    
    Total Capital
    
    Leverage Capital(Dollars in Thousands)
    
    2007
    
    2006
    
    2007
    
    2006
    
    2007
    
    2006Capital Ratios:Adequately capitalized
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    4.00
    %
    
    
    4.00
    %Well capitalized
    
    
    6.00
    %
    
    
    6.00
    %
    
    
    10.00
    %
    
    
    10.00
    %
    
    
    5.00
    %
    
    
    5.00
    %Actual ratios:LSB Corporation
    
    
    13.45
    %
    
    
    15.73
    %
    
    
    14.53
    %
    
    
    16.86
    %
    
    
    9.72
    %
    
    
    11.18
    %River Bank
    
    
    13.14
    %
    
    
    15.17
    %
    
    
    14.22
    %
    
    
    16.31
    %
    
    
    9.49
    %
    
    
    10.77
    %Capital Amounts:Adequately capitalizedLSB Corporation
    
    $
    17,812
    
    
    $
    15,237
    
    
    $
    35,623
    
    
    $
    30,474
    
    
    $
    24,635
    
    
    $
    21,446River Bank
    
    
    17,812
    
    
    
    15,223
    
    
    
    35,623
    
    
    
    30,446
    
    
    
    24,654
    
    
    
    21,450Well capitalizedLSB Corporation
    
    
    26,717
    
    
    
    22,855
    
    
    
    44,529
    
    
    
    38,092
    
    
    
    30,794
    
    
    
    26,808River Bank
    
    
    26,717
    
    
    
    22,835
    
    
    
    44,529
    
    
    
    38,058
    
    
    
    30,817
    
    
    
    26,813Actual amounts:LSB Corporation
    
    
    59,876
    
    
    
    59,916
    
    
    
    64,686
    
    
    
    64,225
    
    
    
    59,876
    
    
    
    59,916River Bank
    
    
    58,511
    
    
    
    57,749
    
    
    
    63,321
    
    
    
    62,057
    
    
    
    58,511
    
    
    
    57,749
 Stock Repurchase Plan
  Restrictions on Dividends, Loans and Advances
    Stockholders Rights Plan
  Treasury Stock
  48




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##### Table of Contents



(10) EMPLOYEE BENEFITS
 Pension Plan
      Year Ended October 31,
    
    2007
    
    
    2006
    
    
    2005(In Thousands)Change in projected benefit obligation:Benefit obligation at beginning of year
    
    $
    6,100
    
    
    $
    8,350
    
    
    $
    7,456Service cost
    
    
    
    
    
    
    353
    
    
    
    347Interest cost
    
    
    308
    
    
    
    480
    
    
    
    428Curtailment and settlement gains on pension plan termination
    
    
    (762
    )
    
    
    (602
    )
    
    
    Actuarial (gain) loss
    
    
    717
    
    
    
    (485
    )
    
    
    261Benefits paid
    
    
    (6,363
    )
    
    
    (1,996
    )
    
    
    (142
    )Projected benefit obligation at end of year
    
    $
    
    
    
    $
    6,100
    
    
    $
    8,350Change in plan assets:Fair value of plan assets at beginning of year
    
    $
    6,100
    
    
    $
    7,231
    
    
    $
    6,778Actual return on plan assets
    
    
    263
    
    
    
    865
    
    
    
    595Employer contribution
    
    
    
    
    
    
    
    
    
    
    Benefits paid
    
    
    (6,363
    )
    
    
    (1,996
    )
    
    
    (142
    )Fair value of plan assets at end of year
    
    $
    
    
    
    $
    6,100
    
    
    $
    7,231
  49




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##### Table of Contents



2007
    
    
    2006
    
    
    2005(In Thousands)Service cost
    
    $
    
    
    
    $
    353
    
    
    $
    347Interest cost
    
    
    308
    
    
    
    480
    
    
    
    428Expected return on plan assets
    
    
    (296
    )
    
    
    (579
    )
    
    
    (542
    )Net amortization and deferrals
    
    
    (12
    )
    
    
    (4
    )
    
    
    (4
    )Net periodic pension cost
    
    $
    
    
    
    $
    250
    
    
    $
    229
  2007
    
    
    2006
    
    
    2005Discount rate
    
    
    4.85
    %
    
    
    5.75
    %
    
    
    5.75
    %Rate of increase in compensation levels
    
    
    
    
    
    
    4.50
    
    
    
    4.50Expected long-term rate of return on assets
    
    
    4.85
    %
    
    
    8.00
    
    
    
    8.00
  401(k) Savings Plan
  Post-Retirement Plan Other Than Pensions
   Employee Stock Ownership Plan
  Incentive Compensation Plan
  Employment Termination or Change-in-Control Agreements
  50




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##### Table of Contents



Supplemental Executive Retirement Plan
  (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
    
    
    
    444,7752006 Plan
    
    
    400,000
    
    
    
    14,000
    
    
    
    59,5751,570,000
    
    
    
    14,000
    
    
    
    934,600
      51




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##### Table of Contents



2007
    
    
    2006
    
    
    2005Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Number of
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceOutstanding at beginning of year
    
    
    244,900
    
    
    $
    14.07
    
    
    
    349,100
    
    
    $
    12.88
    
    
    
    511,350
    
    
    $
    10.97Granted
    
    
    38,500
    
    
    
    16.39
    
    
    
    40,000
    
    
    
    16.41
    
    
    
    8,400
    
    
    
    17.66Exercised
    
    
    (13,300
    )
    
    
    8.76
    
    
    
    (133,775
    )
    
    
    11.44
    
    
    
    (168,250
    )
    
    
    7.24Forfeited
    
    
    (8,500
    )
    
    
    16.69
    
    
    
    (10,425
    )
    
    
    16.77
    
    
    
    
    
    
    
    Expired
    
    
    (10,000
    )
    
    
    16.77
    
    
    
    
    
    
    
    
    
    
    
    (2,400
    )
    
    
    18.25Outstanding at end of year
    
    
    251,600
    
    
    
    14.51
    
    
    
    244,900
    
    
    
    14.07
    
    
    
    349,100
    
    
    
    12.88Options exercisable end of year
    
    
    225,850
    
    
    
    14.29
    
    
    
    209,325
    
    
    
    13.65
    
    
    
    249,050
    
    
    
    12.07Weighted average fair value of
options granted during the year
    
    
    
    
    
    $
    3.50
    
    
    
    
    
    
    $
    3.76
    
    
    
    
    
    
    $
    3.17
    2007
    
    2006
    
    2005Expected volatility
    
    
    25.00
    %
    
    
    25.00
    %
    
    
    29.30
    %Risk-free interest rate
    
    
    3.88
    %
    
    
    4.60
    %
    
    
    3.82
    %Expected dividend yield
    
    
    3.42
    %
    
    
    3.41
    %
    
    
    3.25
    %Expected life in years
    
    7 years
    
    7 years
    
    7 years
   Nonvested Stock OptionsWeighted AverageGrant DateShares
    
    
    Fair ValueNonvested at January 1, 2007
    
    
    35,575
    
    
    $
    16.59Granted
    
    
    38,500
    
    
    
    16.39Vested
    
    
    (47,325
    )
    
    
    16.50Forfeited
    
    
    (1,000
    )
    
    
    16.41Nonvested at December 31, 2007
    
    
    25,750
    
    
    $
    16.46
   52




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##### Table of Contents



(12) CONTINGENCIES
  Lawrence Savings Bank vs. Garabedian et al.,
 (13) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
    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
 Fixed
    
    
    Variable2006
    
    Rate
    
    
    Rate
    
    
    Total(In Thousands)Financial instruments with contract amounts represent credit risk:Unused commitments to extend credit:Residential mortgages
    
    $
    757
    
    
    $
    
    
    
    $
    757Home equity lines of credit
    
    
    1,625
    
    
    
    10,226
    
    
    
    11,851Personal lines of credit
    
    
    145
    
    
    
    
    
    
    
    145Commercial real estate mortgage
    
    
    27
    
    
    
    33,839
    
    
    
    33,866Construction
    
    
    
    
    
    
    42,559
    
    
    
    42,559Commercial loans
    
    
    26
    
    
    
    36,294
    
    
    
    36,320Total unused commitments
    
    $
    2,580
    
    
    $
    122,918
    
    
    $
    125,498Letters of credit and standby letters of credit
    
    $
    
    
    
    $
    1,137
    
    
    $
    1,137
 53




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##### Table of Contents



(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
    2007
    
    2006Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    Value(In Thousands)Financial assets:Cash and due from banks
    
    $
    7,494
    
    
    $
    7,494
    
    
    $
    6,896
    
    
    $
    6,896Short-term investments
    
    
    56
    
    
    
    56
    
    
    
    11,871
    
    
    
    11,871Investment securities available for sale
    
    
    230,596
    
    
    
    230,596
    
    
    
    218,682
    
    
    
    218,682Federal Home Loan Bank stock
    
    
    10,185
    
    
    
    10,185
    
    
    
    10,046
    
    
    
    10,046Accrued interest receivable
    
    
    2,453
    
    
    
    2,453
    
    
    
    2,259
    
    
    
    2,259Loans, net
    
    
    353,303
    
    
    
    352,493
    
    
    
    283,854
    
    
    
    281,665Financial liabilities:Deposits
    
    
    322,083
    
    
    
    322,920
    
    
    
    295,662
    
    
    
    295,012Borrowed funds
    
    
    235,351
    
    
    
    243,141
    
    
    
    184,782
    
    
    
    184,713Mortgagors escrow accounts
    
    
    647
    
    
    
    647
    
    
    
    586
    
    
    
    586Accrued interest payable
    
    
    1,013
    
    
    
    1,013
    
    
    
    756
    
    
    
    756
  54




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##### Table of Contents



(15) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS.
  Balance Sheets
    
    2007
    
    
    2006(In Thousands)Assets:Cash deposits in subsidiaries
    
    $
    1,320
    
    
    $
    1,897Investment in subsidiary, at equity
    
    
    58,642
    
    
    
    56,194Other assets
    
    
    458
    
    
    
    513Total assets
    
    $
    60,420
    
    
    $
    58,604Liabilities and Stockholders Equity:Liabilities:Accrued income taxes
    
    $
    24
    
    
    $
    Accrued expenses
    
    
    98
    
    
    
    73Total liabilities
    
    
    122
    
    
    
    73Total stockholders equity
    
    
    60,298
    
    
    
    58,531Total liabilities and stockholders equity
    
    $
    60,420
    
    
    $
    58,604
 Statements of Operations
    
    2007
    
    
    2006
    
    
    2005(In Thousands)Dividends from bank subsidiary
    
    $
    3,200
    
    
    $
    
    
    
    $
    1,800Interest income
    
    
    64
    
    
    
    106
    
    
    
    103Total operating income
    
    
    3,264
    
    
    
    106
    
    
    
    1,903Non-interest expenses
    
    
    241
    
    
    
    357
    
    
    
    243Income before income taxes and undistributed earnings
    
    
    3,023
    
    
    
    (251
    )
    
    
    1,660Income tax benefit
    
    
    (61
    )
    
    
    (88
    )
    
    
    (48
    )Income before undistributed earnings of subsidiary
    
    
    3,084
    
    
    
    (163
    )
    
    
    1,708Equity in undistributed earnings of subsidiary
    
    
    634
    
    
    
    289
    
    
    
    2,449Net income
    
    $
    3,718
    
    
    $
    126
    
    
    $
    4,157
  55




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##### Table of Contents



Statements of Cash Flows
    
    2007
    
    
    2006
    
    
    2005(In Thousands)Cash flows from operating activities:Net income
    
    $
    3,718
    
    
    $
    126
    
    
    $
    4,157Adjustments to reconcile net income to net cash
provided by operating activities:Net distributed earnings of subsidiaries
    
    
    (634
    )
    
    
    (289
    )
    
    
    (2,449
    )Decrease (increase) in other assets
    
    
    55
    
    
    
    (284
    )
    
    
    (217
    )Increase in liabilities
    
    
    49
    
    
    
    23
    
    
    
    (22
    )Accretion of discounts on investment securities
    
    
    
    
    
    
    (19
    )
    
    
    (103
    )Net cash (used) provided by operating activities
    
    
    3,188
    
    
    
    (443
    )
    
    
    1,366Cash flows from investing activities:Purchases of investment securities held to maturity
    
    
    
    
    
    
    
    
    
    
    (32,882
    )Proceeds from maturities of investment securities
    
    
    
    
    
    
    2,900
    
    
    
    33,100Net cash provided by investing activities
    
    
    
    
    
    
    2,900
    
    
    
    218Cash flows from financing activities:Proceeds from exercise of stock options and tax benefits
    
    
    260
    
    
    
    1,735
    
    
    
    723Repurchases of common stock
    
    
    (1,463
    )
    
    
    
    
    
    
    Dividends paid to stockholders
    
    
    (2,562
    )
    
    
    (2,542
    )
    
    
    (2,484
    )Net cash used in financing activities
    
    
    (3,765
    )
    
    
    (807
    )
    
    
    (1,761
    )Net (decrease) increase in cash and cash equivalents
    
    
    (577
    )
    
    
    1,650
    
    
    
    (177
    )Cash and cash equivalents, beginning of year
    
    
    1,897
    
    
    
    247
    
    
    $
    424Cash and cash equivalents, end of year
    
    $
    1,320
    
    
    $
    1,897
    
    
    $
    247
 56




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##### Table of Contents



(16) Quarterly Results of Operations (Unaudited)
  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 tax 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
 2006March
    
    
    June
    
    
    September
    
    
    December31
    
    
    30
    
    
    30
    
    
    31(In Thousands, Except Per Share Data)Interest and dividend income
    
    $
    6,535
    
    
    $
    7,047
    
    
    $
    7,553
    
    
    $
    7,821Interest expense
    
    
    3,241
    
    
    
    3,744
    
    
    
    3,924
    
    
    
    4,253Net interest income
    
    
    3,294
    
    
    
    3,303
    
    
    
    3,629
    
    
    
    3,568Provision for loan losses
    
    
    
    
    
    
    30
    
    
    
    30
    
    
    
    100Net interest income after provision for loan losses
    
    
    3,294
    
    
    
    3,273
    
    
    
    3,599
    
    
    
    3,468Loss on sale of investments
    
    
    
    
    
    
    (2,417
    ) (1)
    
    
    
    
    
    
    Curtailment gain on pension plan termination
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    602Non-interest income
    
    
    330
    
    
    
    343
    
    
    
    327
    
    
    
    410Non-interest expense
    
    
    3,223
    
    
    
    4,149
    (2)
    
    
    2,645
    
    
    
    3,000Income (loss) before income tax
    
    
    401
    
    
    
    (2,950
    )
    
    
    1,281
    
    
    
    1,480Income tax expense (benefit)
    
    
    141
    
    
    
    (1,008
    )
    
    
    473
    
    
    
    480Net income (loss)
    
    $
    260
    
    
    $
    (1,942
    )
    
    $
    808
    
    
    $
    1,000Basic earnings (loss) per share
    
    $
    0.06
    
    
    $
    (0.43
    )
    
    $
    0.18
    
    
    $
    0.22Diluted earnings (loss) per share
    
    $
    0.06
    
    
    $
    (0.42
    )
    
    $
    0.18
    
    
    $
    0.22
 
 (1)
    
    Includes losses of $2.4 million realized from a balance sheet restructuring of the investment
portfolio.(2)
    
    Includes $800,000 in costs related to the name change of the Companys subsidiary bank to River
Bank and former employee severance payments. 57




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
  
 
 ITEM 9A (T). CONTROLS AND PROCEDURES
    Managements Report on Internal Control Over Financial Reporting
   Internal Control-Integrated Framework
    
 ITEM 9B. OTHER INFORMATION
  58




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 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, 2007 are included in Item 8 of Part II to this report:Reports of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2007 and 2006Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2007, 2006 and 2005Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005Notes 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.
 59




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##### Table of Contents



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) (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)(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)*
 60




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##### Table of Contents



Number
    
    Description of Exhibit(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)*(13)
    
    2007 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.(23.2)
    
    Consent of KPMG LLP(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 25, 2008/s/ Diane L. Walker

Diane L. Walker
    
    Executive Vice President, Treasurer and Chief
Financial Officer
(Principal Financial and Principal Accounting
Officer)
    
    March 25, 2008/s/ Thomas J. Burke

Thomas J. Burke
    
    Chairman of the BoardDirector
    
    March 25, 2008/s/ Eugene A. Beliveau

Eugene A. Beliveau
    
    Director
    
    March 25, 2008/s/ Kathleen Boshar Reynolds

Kathleen Boshar Reynolds
    
    Director
    
    March 25, 2008/s/ Malcolm W. Brawn

Malcolm W. Brawn
    
    Director
    
    March 25, 2008/s/ Byron R. Cleveland, Jr.

Byron R. Cleveland, Jr.
    
    Director
    
    March 25, 2008/s/ Richard Hart Harrington

Richard Hart Harrington
    
    Director
    
    March 25, 2008/s/ Robert F. Hatem

Robert F. Hatem
    
    Director
    
    March 25, 2008/s/ Marsha A. McDonough

Marsha A. McDonough
    
    Director
    
    March 25, 2008
 62