##### Table of Contents



Letter
to the Stockholders LSB Corporation (the Company) reported net income of $4,680,000 or $1.05 diluted earnings
per share for the year ended December 31, 2004 compared to net income of $4,136,000 or $0.94
diluted earnings per share for the year ended December 31, 2003. The Company and its wholly owned
subsidiary, Lawrence Savings Bank, (the Bank) focus and commitment in 2004 has been to customers,
the local community, financial performance, lawsuit recovery, capital adequacy and shareholders
value. Customers On June 10, 2004 the Bank hosted a ribbon cutting ceremony to celebrate the opening of their new
branch in Salem, New Hampshire at 401 Main Street in the Route 97 Shops plaza. The new full-service
Salem branch features drive-up banking open at 7:30 a.m. for early morning commuters; a drive up
ATM and night deposit box for convenient after-hours access. This new branch location helps to
better-serve our retail and business customers in this area and attract new customers to the Bank.
During the year, there were several new products introduced to deposit customers such as a new
service to reduce charges by vendors for overdraft fees to their checking accounts and to provide
customers with a choice of various free checking accounts depending on their needs. Community The Company conducts its business in the Merrimack Valley in Massachusetts and southern New
Hampshire. The Company helps meet the needs of the community through various means. The Officers
meet these needs through participation in various organizations located in or around the community.
Almost all Officers have had direct or indirect participation for many years with community
organizations. Some of these organizations provide direct care to individuals such as Family
Service, Inc., Lawrence General Hospital, YWCA, Salvation Army and Samaritans. Other organizations
provide a higher level of service to the community such as the Chamber of Commerce, Exchange Club,
Kiwanis and Rotary. There are industry organizations that our Officers actively participate beside
these community organizations such as the Deposit Insurance Fund (DIF), Savings Bank Employee
Retirement Associations (SBERA) and MassBankers. All these organizations serviced by our Officers
keep us in touch with the needs of our customers and the community. Financial Performance Meeting the needs of customer and the community can be a challenging job while maintaining
financial performance. The focus has been to originate commercial real estate, construction and
commercial loans while increasing our core deposits. The net-interest margin has improved slightly
to 2.91% in 2004 from 2.90% in 2003 and down from 3.20% in 2002. Loan growth and purchases of
investment securities, when profitable to do so, has increased net interest income in 2004 to
approximately $13,811,000 up from $12,357,000 in 2003 and $13,573,000 in 2002. Non-interest income (excluding the lawsuit payments in 2004 and 2003) decreased by $55,000 to
$1,553,000 in 2004 from $1,608,000 in 2003 as a result of a decrease in gains on mortgage loan
sales of $399,000 due to a lower level of loan sales in 2004. Partially offsetting this decrease
were increases in loan fees of $164,000 and deposit account fees increasing by $176,000 in 2004
from 2003.




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##### Table of Contents



Non-interest expenses increased by $926,000 to $10,664,000 for the year 2004 compared to
$9,738,000 in 2003. This increase was mainly attributable to salaries and benefits increasing to
$6,507,000 from $5,923,000 for the year ended December 31, 2004 from 2003, respectively. Occupancy
and equipment expense increased to $872,000 in 2004 from $752,000 in 2003, due to an increase in
rent and depreciation expenses associated with the new branch. Professional fees declined slightly
to $623,000 in 2004 from $643,000 in 2003 attributable to a reduction in legal expenses. Data
processing expenses increased by $151,000 to $878,000 in 2004, from $727,000 in 2003, due to
installation of new communication lines for the Banks Wide Area Network (WAN). Marketing
expenses increased to $273,000 in 2004 from $95,000 in 2003, due to increased advertising for the
new Salem, New Hampshire branch and promotions for new product lines. Lawsuit Recoveries On June 15, 2004, the Company reported the receipt of $2.5 million on a U.S. Bankruptcy Judges
Order on the Trustees Motion for authorization to make an interim distribution in a case in which
the Companys wholly owned subsidiary, Lawrence Savings Bank (the Bank), is the only secured
creditor. The after tax impact is approximately $1,565,000, which represents approximately $0.35
per diluted earnings per share. On October 21, 2003 the Massachusetts Appeals Court rendered a favorable opinion on a lawsuit in
which the Bank was the plaintiff. The Company received payment in the amount of $1,996,000 on
October 30, 2003. The after tax impact is approximately $1,251,000, which represents approximately
$0.29 per diluted earnings per share. Capital Adequacy Total Assets increased by $52,369,000 or 11.2% during 2004 while maintaining adequate capital. The
Company is considered to be well capitalized as defined by the Federal Reserve Bank and the
Federal Deposit Insurance Corporation for all periods presented. The Corporations leverage ratio
was 11.25% and 12.11% at December 31, 2004 and December 31, 2003, respectively. Stockholders Value The Companys stock price closed at $18.52 and $17.31 at December 31, 2004 and 2003, respectively.
The increase of $1.21 represents approximately a 7.0% increase at December 31, 2004 compared to
December 31, 2003. Shareholders received an increase in the dividend paid during the year to $0.52
per share or an 8.3% increase in 2004 compared to $0.48 per share in 2003 with a dividend payout
ratio of approximately 47.7% and 50.0%, respectively. During 2005, our Board of Directors,
management and staff will continue to work to further improve the earnings of the Company and
stockholder value. -s- Paul A. Miller Paul A. Miller
President and Chief Executive Officer
LSB CORPORATION 2




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Financial
Table of Contents 4
    

Financial
Highlights5
    

Business8
    
    Managements Discussion and Analysis
of Financial Condition and Results
of Operations22
    

Report
of Management Responsibility23
    

Report
of independent registered public accounting firm24
    

Consolidated
Balance Sheets25
    
    Consolidated Statements of
Operations26
    
    Consolidated Statements of Changes in
Stockholders Equity27
    
    Consolidated Statements of
Cash Flows28
    
    Notes to Consolidated Financial
Statements47
    

Stockholders
Information
  3




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##### Table of Contents



FINANCIAL HIGHLIGHTS December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in Thousands, Except Per Share Data)Balance Sheet Data :Total assets
    
    $
    518,477
    
    
    $
    466,108
    
    
    $
    439,134
    
    
    $
    438,267
    
    
    $
    413,090Loans, gross
    
    
    232,810
    
    
    
    211,503
    
    
    
    243,127
    
    
    
    236,397
    
    
    
    222,045Allowance for loan losses
    
    
    4,140
    
    
    
    4,220
    
    
    
    4,167
    
    
    
    4,070
    
    
    
    3,685Other real estate owned
    
    
    
    
    
    
    2
    
    
    
    12
    
    
    
    22
    
    
    
    32Federal funds sold
    
    
    209
    
    
    
    889
    
    
    
    9,633
    
    
    
    5,705
    
    
    
    15,427U.S. Treasury, Federal
agency and Corporate obligations
    
    
    259,831
    
    
    
    226,338
    
    
    
    155,132
    
    
    
    160,337
    
    
    
    125,542Municipal obligations
    
    
    1,576
    
    
    
    1,624
    
    
    
    4,021
    
    
    
    2,062
    
    
    
    60Other securities
    
    
    1,896
    
    
    
    4,916
    
    
    
    7,256
    
    
    
    11,369
    
    
    
    25,231Deposits
    
    
    299,106
    
    
    
    272,540
    
    
    
    279,465
    
    
    
    268,450
    
    
    
    270,548Borrowed funds
    
    
    157,263
    
    
    
    133,352
    
    
    
    101,591
    
    
    
    111,099
    
    
    
    86,161Equity
    
    
    57,838
    
    
    
    55,002
    
    
    
    54,059
    
    
    
    54,092
    
    
    
    52,313
 Year Ended December 31,
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Operating Data:Interest income
    
    $
    22,331
    
    
    $
    21,334
    
    
    $
    25,138
    
    
    $
    28,792
    
    
    $
    29,037Interest expense
    
    
    8,520
    
    
    
    8,977
    
    
    
    11,565
    
    
    
    15,611
    
    
    
    16,358Net interest income
    
    
    13,811
    
    
    
    12,357
    
    
    
    13,573
    
    
    
    13,181
    
    
    
    12,679Provision for loan (recoveries) losses
    
    
    (300
    )
    
    
    
    
    
    
    
    
    
    
    175
    
    
    
    250Non-interest income
    
    
    1,553
    
    
    
    1,608
    
    
    
    1,493
    
    
    
    1,426
    
    
    
    1,124Lawsuit judgment collected
    
    
    2,280
    
    
    
    1,996
    
    
    
    
    
    
    
    
    
    
    
    Non-interest expense
    
    
    10,664
    
    
    
    9,738
    
    
    
    10,155
    
    
    
    9,122
    
    
    
    8,376Income before income taxes
    
    
    7,280
    
    
    
    6,223
    
    
    
    4,911
    
    
    
    5,310
    
    
    
    5,177Income tax expense
    
    
    2,600
    
    
    
    2,087
    
    
    
    1,811
    
    
    
    1,953
    
    
    
    854Net income
    
    $
    4,680
    
    
    $
    4,136
    
    
    $
    3,100
    
    
    $
    3,357
    
    
    $
    4,323Basic earnings per share
    
    $
    1.09
    
    
    $
    0.98
    
    
    $
    0.71
    
    
    $
    0.77
    
    
    $
    0.99Diluted earnings per share
    
    $
    1.05
    
    
    $
    0.94
    
    
    $
    0.69
    
    
    $
    0.74
    
    
    $
    0.97
 At or for the year ended December 31,
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Other Data:Interest rate spread
    
    
    2.64
    %
    
    
    2.57
    %
    
    
    2.78
    %
    
    
    2.64
    %
    
    
    2.66
    %Net interest margin on average earning
assets
    
    
    2.91
    
    
    
    2.90
    
    
    
    3.20
    
    
    
    3.21
    
    
    
    3.22Return on average assets (net income /
average assets)
    
    
    0.96
    
    
    
    0.94
    
    
    
    0.71
    
    
    
    0.79
    
    
    
    1.05Return on average equity (net income /
average stockholders equity)
    
    
    8.33
    
    
    
    7.76
    
    
    
    5.72
    
    
    
    6.35
    
    
    
    8.72Dividend payout ratio (dividends declared per
share divided by basic earnings per share)
    
    
    47.71
    
    
    
    48.98
    
    
    
    61.97
    
    
    
    51.95
    
    
    
    26.26Average stockholders equity to average
assets ratio
    
    
    11.53
    
    
    
    12.16
    
    
    
    12.34
    
    
    
    12.39
    
    
    
    12.06Cash dividends declared and paid per
common share
    
    $
    0.52
    
    
    $
    0.48
    
    
    $
    0.44
    
    
    $
    0.40
    
    
    $
    0.26Book value per share at year end
    
    
    13.33
    
    
    
    12.99
    
    
    
    12.71
    
    
    
    12.35
    
    
    
    11.99
 4




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##### Table of Contents



BUSINESSSummary LSB Corporation (the Corporation or the Company) is a one bank-holding company principally
conducting business through Lawrence Savings Bank (the Bank). The Corporation became the holding
company for the Bank on July 1, 2001 pursuant to a plan of reorganization in which each share of
Bank common stock then outstanding (and accompanying preferred stock purchase rights) was converted
into and exchanged for one share of the Corporations common stock (and accompanying preferred
stock purchase rights). The Corporations common stock is currently traded on the Nasdaq Stock
Market under the symbol LSBX. Prices of the common stock
are reported in The Wall Street Journal
as LSB Corp. The Bank was established as a Massachusetts savings bank in 1868; the Bank converted from mutual to
stock form on May 9, 1986. The Corporation is subject to regulation and supervision by the Board of Governors of the Federal
Reserve System (FRB), and Massachusetts Division of Banks. The Bank is subject to supervision and
regulation of, and periodic examination by, the Federal Deposit Insurance Corporation (FDIC) and
the Massachusetts Division of Banks. The Bank has four wholly-owned subsidiaries at December 31, 2004. Shawsheen Security Corporation
and Shawsheen Security Corporation II engage exclusively in buying, selling, dealing in and holding securities
for their own accounts. Pemberton Corporation and Spruce Wood Realty Trust, respectively, hold
foreclosed real estate and real estate used in the ordinary course of the Banks business. The Bank offers various financial products to the general public. These products include loans for
residential real estate, commercial real estate, construction, consumer and commercial businesses.
The Bank offers various deposit accounts including savings, checking, money market, certificates of
deposit and individual retirement accounts. The Bank invests a portion of its funds in federal
funds and investment securities. The principal source of funds for the Corporation is dividends from its Bank subsidiary. The
principal sources of funds for the Banks lending and investment activities are deposits, loan
payments and prepayments, investment securities payments and maturities, advances from the Federal
Home Loan Bank, Federal funds purchased and securities sold under agreements to repurchase. Market Area The Banks primary market area is the Merrimack Valley in Massachusetts and southern New Hampshire.
The Bank has six banking offices in the communities of Andover, Lawrence, Methuen (2), North
Andover, Massachusetts and Salem, New Hampshire. Lending Activities The Banks loan portfolio consists of commercial real estate, commercial business, construction,
residential mortgage, home equity and consumer loans. The Bank is aggressive in seeking loans from
creditworthy customers; competition on both pricing and underwriting terms has been strong in the
Banks market area. Gross loans at December 31, 2004 were $232.8 million up from $211.5 million at
December 31, 2003, but down from $243.1 million in 2002. Commercial
real estate. The Bank originates loans secured by real estate other than 1-4
family residential properties. These loans are generally secured by various types of commercial
real estate including income properties, commercial facilities (including retail, manufacturing,
office and office condominiums) and small businesses. The interest rates on these loans are fixed
or variable. The interest rates are based on a margin over similar terms from FHLB advances or
another index (such as the Prime Rate as published in The Wall
Street Journal) for a similar term.
The margin is determined by the Bank based on the creditworthiness of the borrower, relationship
profitability and competitive factors. Commercial
business . The Bank originates loans secured by business assets which are not
real estate. The Bank has Preferred Lender status from the U.S. Small Business Administration
(SBA), which the SBA guarantees repayment of some portion of the loan amount. The interest rates
on these loans may be fixed or variable. The rates are primarily based on a margin over the Prime
Rate as published in The Wall Street Journal or the Base Rate determined by the Bank. The margin is
determined based on the creditworthiness of the borrower, security offered and competitive factors. Construction. These are generally short-term loans for land development, construction of
residential homes built on speculation, construction of homes for homeowners with permanent
financing, and construction of commercial facilities (including retail, manufacturing and office
space). These loans are generally priced to yield The Wall Street Journal Prime Rate plus a margin.
Construction loans may involve additional risk due to uncertainty of estimated cost of completion
of a project, or ultimate sale of the property to an end buyer. The Bank attempts to reduce these
risks by lending to contractors with pre-arranged buyers or permanent financing commitments upon
completion, or to businesses that are expanding and will occupy the completed project. Residential
mortgages. The Bank originates fixed and adjustable rate residential mortgage
loans which are underwritten to be eligible for sale in the secondary market. These loans are
secured primarily by owner occupied 1-4 family primary residential properties. Adjustable rate
mortgage loans are generally held by the Bank in the loan portfolio as a means to manage interest
rate risk. Fixed rate mortgages are generally sold into the secondary market unless management
believes they represent a good long-term asset based on various factors such as loan-to-value
ratios, interest rates and managements expectations of a loans duration. 5




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##### Table of Contents



Secondary
mortgage market. The Bank is an approved seller and servicer for the Federal
Home Loan Mortgage Corporation (FHLMC) and the Massachusetts Housing Financing Agency (MHFA).
Sales of mortgage loans may be made at a premium or discount resulting in gains or losses on the
transaction. Based on the structure of the sale, loans sold to the secondary market may provide the
Bank with service fee income over the life of the loan. Home
equity. The Bank makes second mortgage and home equity loans. Home equity loans can be
accessed by the borrower through a deposit account established with the Bank. These loans carry
interest rates that are either fixed or variable based on the Prime
Rate published in The Wall
Street Journal plus or minus a margin above or below this rate depending on the particular product
selected by the borrower. Consumer. The Bank offers a variety of consumer loan products including overdraft lines of
credit, collateral loans, and secured and unsecured personal loans. These loans are generally fixed
rate in nature. The Bank adjusts interest rates on these products from time to time based on
competitive factors in the marketplace. Deposit
Activity and Other Sources of Funds Deposits and borrowings are the primary source of funds for funding loans and purchasing investment
securities. The mix of deposits and borrowings is dependent on many factors, such as loan demand,
competition, the economy, interest rates, and capital resources. Deposits are obtained from the
general public through the Banks branch offices by additions to various deposit accounts,
including checking, savings, money market, certificates of deposit and individual
retirement accounts. The interest rates on these accounts generally are competitive with other
local financial institutions. The Banks core deposit products (savings, checking and money market
accounts) allow customers more flexibility and access and generally earn lower interest rates than
other types of accounts due to the Banks operating costs to service these accounts. Certificates
of deposit provide customers with higher interest rates, but less flexibility and access to
deposits. Increasing and decreasing interest rates offered on certificates of deposit allows the
Bank to adjust its sources of funds while providing a competitive interest rate. In addition to
deposit accounts, other sources of funds include advances from the Federal Home Loan Bank of Boston
(FHLB), Federal funds purchased and securities sold under agreements to repurchase. The Bank is a member of the Federal Home Loan Bank of Boston (FHLB). The Bank is required to own
stock of the FHLB which is carried on the Banks balance sheet at par. On April 19, 2004, the FHLB
implemented a new capital structure and stock investment requirements for members to comply with
the Gramm-Leach-Bliley Act of 1999. There are two components of the minimum stock investment
requirements. 1) The Membership Stock Investment Requirement is equal to 0.35% of Class B Stock for
Qualifying Collateral as determined by the FHLB from the most recently available FDIC Call Report
from the Bank. 2) The Activity Based Stock Investment Requirement is equal to 4.50% of the Banks
outstanding advances with the FHLB. The Bank receives an amount equal to the par value of the FHLB
stock when excess stock is redeemed. Competition The Bank competes with local, regional and national financial service providers in its lending and
deposit activities. The Bank competes in the local market against other local and branch offices of
regional financial institutions such as banks, thrifts and credit unions. In addition, local and
national non-bank businesses such as mortgage companies, securities brokerage firms, insurance
companies and mutual funds offer services competitive with those of the Bank. Bank mergers and
recent legislation permitting interstate and cross-industry expansion may increase competition in
the Banks market area. The Bank competes on the basis of interest rates, deposit and loan terms,
fees, office location, product and service arrays, customer convenience and technological
advantages. Competition in the Banks deposit taking and lending activities is affected by
movements in interest rates, local and national market developments, economic trends and the Banks
ability to adjust to change. Supervision and regulation The Corporation is subject to regulation and supervision by the Federal Reserve Board (FRB)
pursuant to the Bank Holding Company Act of 1956, as amended, and files with the FRB an annual
report and such additional reports as the FRB may require. The Corporation is also subject to the
jurisdiction of the Massachusetts Division of Banks. As a bank holding company, the Corporations
activities are limited to the business of banking and activities closely related or incidental to
banking. The Corporation may not directly or indirectly acquire the ownership or control of more
than five percent of any class of voting shares or substantially all of the assets of any company
that is not engaged in activities closely related to banking and also generally must provide notice
to or obtain approval of the FRB in connection with any such acquisition. The Bank is an FDIC
insured state-chartered savings bank subject to the regulations and supervisory authority of, and
periodic examinations by, both the Federal Deposit Insurance Corporation (FDIC) and the
Massachusetts Division of Banks. These examinations test the Banks safety and soundness and
compliance with various statutory and regulatory requirements. The Corporation and the Bank are
both subject to federal and state taxation authorities. The Bank is subject to certain reserve and
reporting requirements as a non-member bank of the Federal Reserve System. Federal and state bank
regulatory agencies have authority to issue cease and desist orders, assess civil money penalties,
remove officers and directors, issue capital directives and impose prompt corrective action
restrictions or requirements to address safety and soundness and compliance issues of the Bank. In
addition, the Bank must obtain prior regulatory approvals to undertake certain banking transactions
and initiatives, including establishment, relocation or termination of a banking office, and merger
or acquisition transactions with other banks or non-banking entities. The supervision and
regulation of the Bank are intended primarily for the protection of depositors and non-business
borrowers. The results of examinations provide regulators with a means of measuring and assessing each
institution and taking prompt corrective actions to address any safety and soundness or compliance
issues. 6




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##### Table of Contents



USA
Patriot Act. On October 26, 2001, President George W. Bush signed into law
the Uniting and Strengthening America by providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (or USA Patriot Act). Title III of the USA Patriot Act, known as
The International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the Act)
is intended to make it more difficult for terrorists to launder money in the United States. In
addition, the Act also makes it easier for law enforcement and regulatory officials to share
information and identify illegal money laundering activity. Section 326 of the Act requires the Secretary of the Treasury to promulgate regulations effective
no later than October 25, 2002 that would substantially increase the identification and
verification requirements for customers of financial institutions. The regulations may require, at
a minimum, financial institutions to develop procedures for verifying the identity of a person
opening an account, maintaining records of such information, and, consulting lists of suspected
terrorists to determine whether a person seeking to open an account appears on any such list. In addition, under Section 311 of the Act the Secretary of the Treasury may require, by regulation
or by order, that financial institutions take certain special measures for all institutions,
accounts or transactions that the Secretary deems to be a
primary money laundering concern. Most significant among these are requirements (known as know
your customer requirement) to maintain records and report information which identify the
participants in a transaction involving a primary money laundering concern, and to maintain
information relative to the beneficiaries of such a transaction. Section 352 of the Act amends the Bank Secrecy Act to require all financial institutions to
establish anti-money laundering programs. These must include, at a minimum: (A) the development of
internal policies, procedures, and controls; (B) the designation of a compliance officer; (C) an
ongoing employee training program; and (D) an independent audit function to test programs. The
Secretary of the Treasury may prescribe minimum standards for such programs effective April 24,
2002. Under Section 314 of the USA Patriot Act, the Secretary of the Treasury must promulgate regulations
by February 23, 2002 to encourage cooperation among financial institutions, their regulators, and
law enforcement officials. The purpose is to help provide financial institutions with information
regarding suspected terrorist or money laundering activity. The regulations may require each
financial institution to designate one or more individuals to receive such information and may
establish procedures for the protection of such information. Sarbanes-Oxley
Act of 2002. On July 31, 2002, President George W. Bush
signed into law the Sarbanes  Oxley Act of 2002 (or the Sarbanes-Oxley Act). The
Sarbanes-Oxley Act establishes a comprehensive framework for modernizing and reforming the
oversight of public company financial accounting and disclosure practices. Principal components of
the Sarbanes-Oxley Act include:  
    The creation of a 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 black-out 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.
    Requirements that public companies disclose whether they have a code of ethics for
their senior financial officers and if not, why not, and that management periodically
assess and report on the adequacy of the companys internal controls.
    The imposition of new and accelerated public company disclosure requirements,
requirements to report off balance sheet transactions and of accelerated reporting of
insider transactions in company stock The SEC has issued final and proposed regulations implementing many of the Sarbanes-Oxley Act
provisions. Management anticipate that the Company will incur additional expenses during 2005 in
complying with the provisions of the Sarbanes-Oxley Act of 2002 and the resulting
regulations, management does not expect that such compliance will have a material impact on our
results of operation or financial condition. On March 2, 2005, the SEC announced an extension of
compliance dates for non-accelerated filers regarding internal controls over financial reporting
requirements (Section 404 of the Sarbanes-Oxley Act of 2002). The Company is considered a
non-accelerated filer with the SEC and must begin to comply with Section 404 requirements for its
fiscal year ending on or after July 15, 2006. 7




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##### Table of Contents



Securities
and Exchange Commission Filings on Companys Web Site. Under the Securities Exchange Act of 1934
Sections 13 and 15(d), periodic and current reports must be filed with the Securities and Exchange Commission
(SEC). The Company electronically files the following reports with the SEC: Form 10-K (Annual
Report), Form 10-Q (Quarterly Report), Form 8-K (Report of Unscheduled Material Events), Form 3, 4
& 5 (Statements of Ownership), Form S-3 and 8-A (Registration Statements, and Form DEF 14A (Proxy
Statement). The Company may file additional forms. The SEC maintains
an Internet site, www.sec.gov
in which all forms filed electronically may be accessed. The Companys website:
www.lawrencesavings.com has a new section for SEC filings available free of charge and provides a
link under www.lawrencesavings.com/stockholder-info.asp. 
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements and Factors Which May Affect Future Results This Annual Report contains forward-looking statements (within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 as amended) that
are subject to risks and uncertainties. Forward-looking statements include information concerning
possible or assumed future results of operations of the Company, projected or anticipated benefits,
or events related to other future developments involving the Company or the industry in which it
operates. Also, when verbs in the present tense such as believes, expects,
anticipates, continues, attempts or similar expressions are used, forward-looking statements
are being made. Stockholders should note that many factors, some of which are discussed elsewhere
in this document and in the documents which we incorporate by reference, could affect the future
financial results of the Company and could cause results to differ materially from those expressed
in or incorporated by reference in this document. Those factors include fluctuations in interest
rates, disruptions in credit markets, inflation, changes in the regulatory environment, government
regulations and changes in regional and local economic conditions and changes in the competitive
environment in the geographic and business areas in which the Company conducts its operations. As a
result of such risks and uncertainties, the Companys actual results may differ materially from
such forward-looking statements. The Company does not undertake, and specifically disclaims any
obligation to publicly release revisions to any such forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the date of such
statements. Executive Level Overview The Companys financial results are dependent on the following areas of the income statement: net
interest income, provision for loan losses, non-interest income, non-interest expense and provision
for income taxes. Net interest income is the primary earnings of the Company and the main focus of
management. Net interest income is the difference between interest earned on loans and investment
securities and interest paid on deposits and borrowings. Deposits and borrowings have short
durations and the cost of these funds do not rise and fall in tandem with earnings on loans and
investment securities. There are many risks involved in managing net interest income including, but
not limited to underwriting standards, interest rate and duration risk. These risks have a direct
impact on the level of net- interest income. The Company manages these risks through credit review
by an outside firm and regular meetings of its Asset and Liability Management Committee (ALCO).
The credit review process reviews loans for underwriting and grading of loan quality while ALCO
reviews liquidity, interest rate risk and capital resources. Loan quality has a direct impact on
the amount of provisions for loan losses the Company reports. Non-interest income has a direct impact on earnings of the Company. Maintenance of customers
accounts for loans and deposits generate fee income depending on the product selected. The Company
generates gains on sales of mortgage loans and receives fee income from servicing loans sold.
Non-interest income is primarily impacted by the volume of customers transactions which could
change in response to interest rates, pricing and competition. Non-interest expenses include various expenses of the Company which are controlled by a budget
process. In 2004 and 2003, management determined that net-interest income would experience some
compression due to lower interest rates and implemented various expense reduction programs to help
offset the reduction in net interest income. Provisions for income taxes are directly related to earnings or implemented tax strategies of the
Company. Changes in the statutory tax rates and the earnings of the Company, the Bank and its
subsidiaries would affect the amount of income taxes reported. There are areas in the Consolidated Financial Statements where significant estimates or assumptions
are used. Management monitors the application of the Companys Critical Accounting Policies in
relation to the nature and impact of these estimates and assumptions on earnings. The Critical
Accounting Policies are discussed below. Critical Accounting Policies Critical accounting policies are defined as those policies that involve significant judgments and
uncertainties, and could potentially result in materially different results under different
assumptions and conditions. Management believes that the Companys critical accounting policies
upon which the Consolidated Financial Statements depend and which involve the most complex or
subjective decisions or assessments are as follows: Allowance for Loan Losses: The allowance balance reflects managements
assessment of losses and is based on a review of the risk characteristics of the loan portfolio.
The Company considers many factors in determining the adequacy of the allowance for loan losses.
Collateral value on a loan-by-loan basis, trends of loan delinquencies on a portfolio segment
level, risk classification identified in the Companys regular review of individual loans, and
economic conditions are primary factors in establishing the allowance. The allowance for loan
losses reflects all information available at the end of the year. The allowance is increased by
provisions for loan losses, which are a charge to the income statement, and by recoveries on loans
previously charged-off. The allowance is reduced by 8




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##### Table of Contents



loans charged-off and by negative (credit) provisions to the allowance. For a further
discussion of the Companys methodology of assessing the adequacy of the allowance for loan losses,
see Managements Discussion and Analysis of Financial Condition and Results of Operation and see
Note 1 to the Consolidated Financial Statements for more details on establishing the allowance for
loan losses. Income Taxes: Operating losses in the early 1990s resulted in available tax loss
carry-forwards. A deferred tax valuation allowance is required to reduce the potential deferred tax
asset when it is more likely than not that all or some portion of the potential deferred tax asset
will not be realized due to the lack of sufficient taxable income in the carry-forward period.
Deferred tax assets and liabilities are recognized for estimated future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Deferred tax valuation
allowances are established and based on managements judgment as to whether it is more likely than
not that all or some portion of the future tax benefits of prior operating losses will be realized.
It should be noted, however, that factors beyond managements control, such as the general state of
the economy and real estate values, can affect future levels of taxable income and that no
assurance can be given that sufficient taxable income will be generated to fully absorb gross
deductible temporary differences. For a further discussion on income taxes, see Managements
Discussion and Analysis of Financial Condition and Results of Operation and see Note 1 & 8 to the
Consolidated Financial Statements. Mortgage Servicing Rights: When loans are sold with servicing rights
retained, the Company allocates the carrying
amount of the loan between the underlying asset sold and the rights retained, based on their
relative fair values. The fair value is estimated using market prices when available or using a
valuation model that calculates the present value of future servicing fee income using discount
rates and prepayment assumptions that management believes represent current market conditions. The
following risk characteristics are considered for determining fair value; loan type, interest rate,
loan term and remaining maturities. The resulting mortgage servicing rights are amortized over the
period of estimated net servicing income using a method which approximates the interest method.
Actual prepayment experience is reviewed periodically. When actual prepayments exceed estimated
prepayments, the balance of the mortgage servicing rights is adjusted accordingly through the
establishment of a valuation allowance. Periodically, the mortgage servicing rights are assessed
for impairment based on the fair value of such rights and any impairment is recognized by a charge
to the valuation allowance. For further details on mortgage servicing rights see Notes 1 & 4 to the
Consolidated Financial Statement. Financial
ConditionOverview Total assets amounted to $518.5 million at December 31, 2004 up from $466.1 million at December 31,
2003. The increase in asset size is due to an increase of $31.7 million in investment securities
and $21.3 million in loans. The cash used for the investment security purchases and loan growth
came from $26.6 million in deposit growth and an increase in borrowed funds totaling $23.9 million
from December 31, 2003. Interest Earning Assets The Company manages its earning assets by utilizing available capital resources in a manner
consistent with the Companys credit, investment and leverage policies. Loans, U.S. Treasury and
Government Agency obligations, mortgage-backed securities, other investment securities, and
short-term investments comprise the Companys earning assets. Total earning assets averaged $474.1
million in 2004, an increase of $48.4 million or 11.4% from 2003. One of the Companys primary objectives continues to be the origination of loans that are soundly
underwritten and collateralized. The Companys average loan portfolios decreased in 2004. The
change in these portfolios caused the average balance of the loan portfolio to decrease by $1.5
million in 2004 to $217.7 million. The Company increases the investment portfolio through funds obtained from the FHLB, repurchase
agreements and other borrowings when it is profitable to do so. The average balance of investment
securities, including U.S. Treasury and Government Agency securities, mortgage-backed securities,
other bonds and equity securities, and short-term investments amounted to $256.4 million in 2004 as
compared to $206.5 million in 2003. These securities represent 52.6% of the Companys average
assets at December 31, 2004 versus 47.1% of average assets at December 31, 2003. Investment Securities The investment portfolio totaled $263.3 million and $232.9 million, respectively, at December 31,
2004 and 2003, reflecting an increase of $30.4 million or 13.1% in 2004. The largest increase of
$24.5 million was in asset-backed securities. Also experiencing increases were U.S. Government
Agency obligations and U.S. Treasury obligations increasing $22.7 million and $50 thousand,
respectively. Partially offsetting these increases were decreases of $10.6 million, $6.1 million
and $48 thousand in mortgage-backed securities, corporate obligations and municipal obligations,
respectively, as these securities matured. For more information on investment securities, see
Financial Highlights and Note 2 of the Consolidated Financial Statements. 9




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##### Table of Contents



Loans Total loans at December 31, 2004 and 2003 amounted to $232.8 million and $211.5 million,
respectively, reflecting an increase of $21.3 million or 10.1% in 2004. Residential loans increased
$3.0 million or 5.3% during 2004. Also increasing were commercial loans and commercial real estate
loans by $1.6 million and $19.1 million, respectively. The increase in the portfolios was due to
increased borrowers demand for these types of loans and the completion of the construction
projects transferred to the commercial real estate portfolio. Construction loans decreased $829
thousand or 5.2% due to the completion of some projects which have been transferred into the
commercial real estate portfolio partially offset by new loan originations. Home equity loans
decreased $1.4 million or 13.4% as a result of customers paying off Home equity loans when they
refinance existing residential first mortgage loans. For more information on loans, see Interest
Rate Sensitivity and Note 4 to the Consolidated Financial Statements.
The components of the loan portfolio at December 31, follow: 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Balance
    
    
    Percent
    
    
    Balance
    
    
    Percent
    
    
    Balance
    
    
    Percent
    
    
    Balance
    
    
    Percent
    
    
    Balance
    
    
    Percent(Dollars in Thousands)Residential real estate loans:Fixed rate
    
    $
    33,061
    
    
    
    14.2
    %
    
    $
    33,059
    
    
    
    15.7
    %
    
    $
    31,583
    
    
    
    13.0
    %
    
    $
    40,861
    
    
    
    17.3
    %
    
    $
    44,350
    
    
    
    20.0
    %Adjustable rate
    
    
    26,996
    
    
    
    11.6
    
    
    
    23,958
    
    
    
    11.3
    
    
    
    28,557
    
    
    
    11.7
    
    
    
    37,744
    
    
    
    16.0
    
    
    
    33,576
    
    
    
    15.160,057
    
    
    
    25.8
    
    
    
    57,017
    
    
    
    27.0
    
    
    
    60,140
    
    
    
    24.7
    
    
    
    78,605
    
    
    
    33.3
    
    
    
    77,926
    
    
    
    35.1Home equity loans:Fixed rate
    
    
    3,535
    
    
    
    1.5
    
    
    
    5,882
    
    
    
    2.7
    
    
    
    7,915
    
    
    
    3.3
    
    
    
    10,155
    
    
    
    4.3
    
    
    
    12,367
    
    
    
    5.6Adjustable rate
    
    
    5,334
    
    
    
    2.3
    
    
    
    4,354
    
    
    
    2.1
    
    
    
    3,575
    
    
    
    1.5
    
    
    
    3,238
    
    
    
    1.4
    
    
    
    3,630
    
    
    
    1.68,869
    
    
    
    3.8
    
    
    
    10,236
    
    
    
    4.8
    
    
    
    11,490
    
    
    
    4.8
    
    
    
    13,393
    
    
    
    5.7
    
    
    
    15,997
    
    
    
    7.2Commercial real estate loans:Fixed rate
    
    
    18,629
    
    
    
    8.0
    
    
    
    16,508
    
    
    
    7.8
    
    
    
    16,651
    
    
    
    6.8
    
    
    
    16,447
    
    
    
    7.0
    
    
    
    10,247
    
    
    
    4.6Adjustable rate
    
    
    112,976
    
    
    
    48.5
    
    
    
    95,995
    
    
    
    45.3
    
    
    
    96,094
    
    
    
    39.4
    
    
    
    83,663
    
    
    
    35.3
    
    
    
    76,882
    
    
    
    34.6131,605
    
    
    
    56.5
    
    
    
    112,503
    
    
    
    53.1
    
    
    
    112,745
    
    
    
    46.2
    
    
    
    100,110
    
    
    
    42.3
    
    
    
    87,129
    
    
    
    39.2Construction loans
    
    
    15,211
    
    
    
    6.5
    
    
    
    16,040
    
    
    
    7.6
    
    
    
    23,502
    
    
    
    9.7
    
    
    
    20,593
    
    
    
    8.7
    
    
    
    17,148
    
    
    
    7.7Loans held for sale
    
    
    
    
    
    
    
    
    
    
    338
    
    
    
    0.2
    
    
    
    2,579
    
    
    
    1.1
    
    
    
    4,156
    
    
    
    1.8
    
    
    
    
    
    
    
    Commercial loans
    
    
    16,369
    
    
    
    7.1
    
    
    
    14,805
    
    
    
    7.0
    
    
    
    32,017
    
    
    
    13.2
    
    
    
    18,549
    
    
    
    7.8
    
    
    
    22,602
    
    
    
    10.2Consumer loans
    
    
    699
    
    
    
    0.3
    
    
    
    564
    
    
    
    0.3
    
    
    
    654
    
    
    
    0.3
    
    
    
    991
    
    
    
    0.4
    
    
    
    1,243
    
    
    
    0.6Total loans
    
    
    232,810
    
    
    
    100.0
    %
    
    
    211,503
    
    
    
    100.0
    %
    
    
    243,127
    
    
    
    100.0
    %
    
    
    236,397
    
    
    
    100.0
    %
    
    
    222,045
    
    
    
    100.0
    %Allowance for loan losses
    
    
    4,140
    
    
    
    
    
    
    
    4,220
    
    
    
    
    
    
    
    4,167
    
    
    
    
    
    
    
    4,070
    
    
    
    
    
    
    
    3,685Loans, net
    
    $
    228,670
    
    
    
    
    
    
    $
    207,283
    
    
    
    
    
    
    $
    238,960
    
    
    
    
    
    
    $
    232,327
    
    
    
    
    
    
    $
    218,360
 Allowance
for Loan Losses The allowance for loan losses is maintained through the provision for loan losses which is a charge
to operations. The allowance balance reflects managements assessment of losses and is based on a
review of the risk characteristics of the loan portfolio. The Company considers many factors in
determining the adequacy of the allowance for loan losses. Collateral value on a loan-by-loan
basis, trends of loan delinquencies on a portfolio segment level, risk classification identified in
the Companys regular review of individual loans, and economic conditions are primary factors in
establishing the allowance. The allowance for loan losses reflects all information available at the
end of each year. The Company considers the current year end 2004 level of the allowance for loan
losses to be appropriate. The allowance as a percentage of total loans was 1.8% at December 31,
2004 and 2.0% at December 31, 2003. See Note 1 to the financial statements for the accounting
policy related to the allowance for loan losses. Impaired loans are commercial, commercial real estate and individually significant residential
mortgage loans for which it is probable that the Company will not be able to collect all amounts
due according to the contractual terms of the loan agreement. Impaired loans are not the same as
non-accrual loans, although the two categories overlap. Non-accrual loans include impaired loans
and are those on which the accrual of interest is discontinued when principal or interest has
become contractually past due 90 days. The Company may choose to place a loan on non-accrual status
due to payment delinquency or the uncertainty of collectibility, while not classifying the loan as
impaired, if (i) it is probable that the Company will collect all amounts due in accordance with
the contractual terms of the loan or (ii) the loan is not a commercial, commercial real estate or
an individually significant residential mortgage loan. Factors considered by management in
determining impairment include payment status and collateral value. The amount of impairment is
determined by the difference between the present value of the expected cash flows related to the
loan, using the original contractual interest rate, and its recorded value, or, as a practical
expedient in the case of collateral dependent loans, the difference between the fair value of the
collateral and the recorded amount of the loan. When foreclosure is probable, impairment is based
on the fair value of the collateral. 10




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##### Table of Contents



The Company maintained a low level of risk assets and had minimal delinquencies during the year
2004. As a result, there was no charge to the provision for loan losses in the year 2004 or 2003.
During 2004, the Bank recognized $253 thousand of the interim distribution from a prior year legal
judgment as a recovery to the allowance for loan losses on amounts previously charged off. In
conjunction with this, the Bank also recorded a credit (negative) provision for loan losses of $300
thousand. The Company had net recoveries of $220 thousand in 2004 and $53 thousand in 2003. The following table summarizes changes in the allowance for loan losses for the years ended
December 31: 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in Thousands)Balance at beginning of year
    
    $
    4,220
    
    
    $
    4,167
    
    
    $
    4,070
    
    
    $
    3,685
    
    
    $
    3,381Charge-offs by loan type:Residential mortgage
    
    
    (25
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    Commercial real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27
    )Consumer
    
    
    (20
    )
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Total charge-offs
    
    
    (45
    )
    
    
    
    
    
    
    (1
    )
    
    
    (3
    )
    
    
    (28
    )Recoveries by loan type:Residential mortgage
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    2
    
    
    
    6Commercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Commercial real estate
    
    
    254
    
    
    
    16
    
    
    
    89
    
    
    
    201
    
    
    
    62Consumer
    
    
    11
    
    
    
    6
    
    
    
    9
    
    
    
    10
    
    
    
    9Total recoveries
    
    
    265
    
    
    
    53
    
    
    
    98
    
    
    
    213
    
    
    
    82Net recoveries
    
    
    220
    
    
    
    53
    
    
    
    97
    
    
    
    210
    
    
    
    54Provision (credit) for loan losses
    
    
    (300
    )
    
    
    
    
    
    
    
    
    
    
    175
    
    
    
    250Ending balance
    
    $
    4,140
    
    
    $
    4,220
    
    
    $
    4,167
    
    
    $
    4,070
    
    
    $
    3,685Ratio of net recoveries to average loans outstanding
during the period
    
    
    0.10
    %
    
    
    0.02
    %
    
    
    0.04
    %
    
    
    0.09
    %
    
    
    0.03
    %
 The following table sets forth the breakdown of the allowance for loan losses by loan category for
the years ended December 31. The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to absorb losses in any
category. 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Percent
    
    
    
    
    
    
    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
    
    $
    3,408
    
    
    
    70.1
    %
    
    $
    3,175
    
    
    
    67.7
    %
    
    $
    3,525
    
    
    
    69.1
    %
    
    $
    3,251
    
    
    
    58.8
    %
    
    $
    2,711
    
    
    
    57.1
    %Residential mortgage and home equity
    
    
    273
    
    
    
    29.6
    
    
    
    270
    
    
    
    32.0
    
    
    
    314
    
    
    
    30.6
    
    
    
    397
    
    
    
    40.8
    
    
    
    436
    
    
    
    42.3Consumer
    
    
    30
    
    
    
    0.3
    
    
    
    26
    
    
    
    0.3
    
    
    
    29
    
    
    
    0.3
    
    
    
    41
    
    
    
    0.4
    
    
    
    49
    
    
    
    0.6Unallocated
    
    
    429
    
    
    
    N/A
    
    
    
    749
    
    
    
    N/A
    
    
    
    299
    
    
    
    N/A
    
    
    
    381
    
    
    
    N/A
    
    
    
    489
    
    
    
    N/A$
    4,140
    
    
    
    100.0
    %
    
    $
    4,220
    
    
    
    100.0
    %
    
    $
    4,167
    
    
    
    100.0
    %
    
    $
    4,070
    
    
    
    100.0
    %
    
    $
    3,685
    
    
    
    100.0
    %
 In determining the adequacy of the allowance for loan losses, the Company aggregates estimated
credit loss on individual loans, pools of loans and other pools of risk having geographic, industry
or other common exposures where inherent losses are identified or anticipated. All loans classified as Substandard or Doubtful are evaluated for collectibility and an
allocation is made based on an assessment of the net realizable value of any collateral. The Company categorizes each commercial loan into different pools of risk. Each risk level
allocation factor has been determined based upon the Companys review of common practices within
the industry, its estimate of expected loss for loans with similar credit characteristics based
upon historical experience and migration analysis, the losses experienced by the Company in the
most recent 36 months, together with the Companys assessment of economic conditions and other
relevant factors that may have an impact on or may affect repayment of loans in these pools. Residential mortgages, home equity loans, equity lines of credit, second mortgages and all other
small consumer loans are considered in the aggregate and an allocation factor is assessed based
upon the Companys most recent 24-month historical loss experience together with an assessment of
future economic trends, conditions and other relevant factors that may have an impact on repayment
of the loans in these pools. On a quarterly basis, the Company evaluates all allocation factors for appropriateness, considering
(i) significant changes in the nature and volume of the loan portfolio, (ii) the Companys
assessment of local and national economic business conditions, and (iii) any other relevant factor
that it considers may have an impact on loan portfolio risk. 11




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##### Table of Contents



Based upon these evaluations, changes to the reserve provision may be made to maintain the
overall level of the reserve at a level that the Company deems appropriate and adequate to cover
the estimated credit losses inherent in the Companys loan portfolio including unfunded binding
commitments to lend. Potential
Problem Loans The Company has a loan review and grading system. During the loan review process, deteriorating
conditions of certain loans come to managements attention in which erosion of the borrowers
ability to comply with the original terms of the loan agreement could potentially result in the
classification of the loan as a risk asset. This may result from deteriorating conditions such as
cash flows, collateral values or creditworthiness of the borrower. There were no potential problem
loans identified at December 31, 2004. At December 31, 2003, there were $2.5 million identified as
potential problem loans. Risk
Assets Risk assets consist of non-performing loans, OREO, and restructured loans. The following paragraphs
define each of these categories. The components of risk assets at December 31, for the years
indicated are as follows: 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in Thousands)Risk assets:Non-performing loans:Residential real estate
    
    $
    
    
    
    $
    
    
    
    $
    1
    
    
    $
    10
    
    
    $
    10Commercial real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    730
    
    
    
    Commercial business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    211
    
    
    
    Total non-performing loans
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    951
    
    
    
    10Other real estate owned:Land
    
    
    34
    
    
    
    47
    
    
    
    57
    
    
    
    67
    
    
    
    77OREO valuation allowance
    
    
    (34
    )
    
    
    (45
    )
    
    
    (45
    )
    
    
    (45
    )
    
    
    (45
    )Total other real estate owned
    
    
    
    
    
    
    2
    
    
    
    12
    
    
    
    22
    
    
    
    32Total risk assets
    
    $
    
    
    
    $
    2
    
    
    $
    13
    
    
    $
    973
    
    
    $
    42Risk assets as a percent of total loans and OREO
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.4
    %
    
    
    0.0
    %Risk assets as a percent of total assets
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    0.0
    %
 Non-performing loans consist of both (i) loans 90 days or more past due, and (ii) loans placed on a
non-accrual status because full collection of the principal balance is in doubt. Non-performing
loans at December 31, 2004 and 2003 were zero. The Company actively monitors risk assets. The Company attempts to work with delinquent borrowers
in order to bring loans current. If the borrower is not able to bring the loan current, the Company
commences collection efforts. Valuation of property at foreclosure, and periodically thereafter, is
based upon appraisals and managements best estimates of fair value less selling costs. The
Companys policy is to sell such property as quickly as possible at fair value. Interest
Bearing Liabilities The Companys earning assets are primarily funded with deposits, securities sold under agreements
to repurchase, FHLB advances and stockholders equity. The Company manages its interest bearing
liabilities to maintain a stable source of funds while providing competitively priced deposit
accounts. Interest bearing deposits include regular savings accounts, NOW and Super NOW accounts,
money market accounts, and certificates of deposit. In 2004 total average interest bearing liabilities were $411.5 million which was a $43.6 million or
11.9% increase from $367.9 million in 2003. Average total interest bearing deposits of $273.0
million comprised 66.3% of interest bearing liabilities in 2004 while in 2003 such deposits
totaling $265.6 million comprised 72.2% of interest bearing liabilities. Changing interest rates can affect the mix and level of various deposit categories. The lower
average interest rate paid on certificates of deposit and money market accounts had an impact on
the overall interest rate paid on deposits and caused a decrease of 21 basis points in 2004 and 65
basis points in 2003. The average balance of money market investment accounts increased by $11.2
million to $80.7 million in 2004, and by $10.5 million to $69.5 million in 2003.The average balance
of NOW and Super NOW accounts increased by $1.4 million to $37.6 million in 2004 and by $2.6
million to $36.2 million in 2003. The average balance of certificates of deposit decreased by $6.1
million to $109.0 million in 2004 and decreased by $8.6 million to $115.1 million in 2003. Average borrowed funds in 2004, 2003 and 2002 were $138.6 million, $102.3 million and $107.0
million, respectively, including advances from the FHLB and other borrowed funds. The increase of
$36.3 million in 2004 resulted from the utilization of available credit in a low interest rate
environment. 12




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##### Table of Contents



Deposits Total deposits increased $26.6 million or 9.7% during 2004 to $299.1 million at December 31, 2004
from $272.5 million at December 31, 2003. Certificates of deposit had the largest increase of $15.5
million or 20.8%. Also increasing were money market investment accounts, NOW accounts and
retirement accounts by $6.7 million, $2.0 million and $1.4 million, respectively, in 2004. Demand
deposits and savings accounts increased slightly by $687 thousand and $345 thousand, respectively,
during 2004. For more information, see Note 6 to the Consolidated Financial Statements. Borrowed Funds Total borrowed funds increased $23.9 million or 17.9% during 2004 to $157.3 million from $133.4
million at December 31, 2004 and 2003, respectively. FHLB advances totaled $105.1 million in 2004
versus $78.9 million in 2003, an increase of $26.2 million due to utilization of available credit
in a low interest rate environment. Other borrowed funds are comprised of FHLB short-term advances which totaled $49.0 million and
$52.0, respectively, at December 31, 2004 and 2003, and sales of securities subject to agreements
to repurchase which totaled $3.2 million and $2.5 million, respectively, in 2004 and 2003. See Note
7 to the Consolidated Financial Statements for further information. Results
of OperationsOverview The Companys net earnings amounted to $4.7 million or $1.05 diluted earnings per share, $4.1
million or $0.94 diluted earnings per share and $3.1 million or $0.69 diluted earnings per share
for the years ended December 31, 2004, 2003 and 2002, respectively. The Companys earnings
increased during 2004 by $544 thousand due primarily to the receipt of a $2.5 million payment on a
U.S. Bankruptcy Judges order to make an interim distribution in a case in which the Companys
wholly-owned subsidiary, Lawrence Savings Bank, is a secured creditor. The Bank recognized $253
thousand of the interim distribution payment as a recovery to the allowance for loan losses on
amounts previously charged off and the remainder of this payment received was recorded in
non-interest income. The after-tax impact was approximately $1.6 million, which represents
approximately $0.35 per diluted earnings per share. Net interest-income increased by $1.5 million
to $13.8 million in 2004. These increases to earnings were offset by increases in non-interest
expenses by $0.9 million, see discussion below. Net income increased by $1.0 million in 2003 from
2002 due to a $2.0 million lawsuit judgment collected which was recorded in non-interest income.
The after-tax impact of this payment was approximately $1.3 million and represented approximately

$0.29 per diluted earnings per share. The Companys net interest income, which is the difference between interest earned on assets and
interest paid on liabilities, totaled $13.8 million in 2004, $12.4 million in 2003 and $13.6
million in 2002. The increase in 2004 versus 2003 can be attributed to the purchases of investment
securities funded from Federal Home Loan Bank advances and deposit growth. Net interest-income was
positively impacted by higher yields on investment securities and lower cost of borrowed funds.
These increases to net interest-income were negatively impacted by lower yields on loans. The
Companys net interest margin was 2.91% in 2004 versus 2.90% and 3.20% in 2003 and 2002,
respectively. The increase in 2004 resulted primarily from lower average rates paid on interest
bearing liabilities. The decrease in 2003 resulted primarily from lower average rates earned on
interest earning assets. The Bank recorded a credit provision for loan losses of $300 thousand in 2004 and no provision for
loan losses in 2003 due to the low level of risk assets and minimal delinquent loans. The credit
provision in 2004 was recognized in conjunction with a $253 thousand interim distribution from a
prior year legal judgment which was recorded as a recovery to the allowance for loan losses on
amounts previously charged off. Non-interest income amounted to $3.8 million, $3.6 million and $1.5 million in 2004, 2003 and 2002,
respectively.Excluding the lawsuit judgment collected noted above, the decrease during 2004 was the result of a
decrease in gains on loan sales of $399 thousand due to a lower level of loan sales in 2004.
Partially offsetting this decrease were increases in loan fees of $164 thousand and deposit account
fees of $176 thousand. The increase during 2003 excluding the payment from the lawsuit totaled $115
thousand attributable mainly to income on loan fees of $20 thousand from a loss of $145 thousand in
2002. Deposit fees also increased $48 thousand during 2003. Non-interest expense totaled $10.7 million in 2004, $9.7 million in 2003 and $10.2 million in 2002.
The increase in 2004 is mainly attributed to an increase in salaries and employee benefits expenses
of $584 thousand. Marketing expenses and occupancy and equipment expenses increased by $178
thousand and $120 thousand, respectively, due to increased advertising, promotions and rent and
depreciation expenses associated with the opening of the new Salem, New Hampshire branch. Data
processing expenses increased by $151 thousand due to the installation of new communication lines
for the Banks Wide Area Network. Professional fees decreased slightly in 2004 due to a reduction
in legal expenses. The decline in non-interest expense in 2003 is primarily attributable to a
reduction in professional fees of $163 thousand resulting from lower legal fees, and a reduction in
salaries and employee benefits of $83 thousand resulting from salary reduction initiatives and a
lower headcount in 2003. The Company recognized income tax expense of $2.6 million in 2004, $2.1 million in 2003 and $1.8
million in 2002. The rise in the provision for taxes during 2004 resulted from increases in pre-tax
income by $1.1 million to $7.3 million. The higher provision for taxes in 2003 as compared with
2002 resulted from an increase in income before income taxes to $6.2 million for the year ended
2003 versus $4.9 million in 2002. 13




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##### Table of Contents



Average
Balances, Net Interest Income and Average Interest Rates The table below presents the Companys average balance sheet, net interest income and average
interest rates for the years ended December 31. Average real estate, commercial business, and
consumer loans include non-performing loans. 2004
    
    
    2003
    
    
    2002Average
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    Interest(Dollars in Thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsLoans:Residential real estate
    
    $
    69,252
    
    
    $
    3,629
    
    
    
    5.24
    %
    
    $
    68,150
    
    
    $
    4,027
    
    
    
    5.91
    %
    
    $
    87,122
    
    
    $
    5,848
    
    
    
    6.71
    %Commercial real estate
    
    
    133,832
    
    
    
    8,855
    
    
    
    6.62
    
    
    
    126,950
    
    
    
    9,005
    
    
    
    7.09
    
    
    
    126,083
    
    
    
    9,759
    
    
    
    7.74Commercial business
    
    
    13,989
    
    
    
    832
    
    
    
    5.95
    
    
    
    23,511
    
    
    
    1,282
    
    
    
    5.45
    
    
    
    20,918
    
    
    
    1,256
    
    
    
    6.00Consumer
    
    
    630
    
    
    
    43
    
    
    
    6.83
    
    
    
    543
    
    
    
    42
    
    
    
    7.73
    
    
    
    905
    
    
    
    69
    
    
    
    7.62Total loans
    
    
    217,703
    
    
    
    13,359
    
    
    
    6.14
    
    
    
    219,154
    
    
    
    14,356
    
    
    
    6.55
    
    
    
    235,028
    
    
    
    16,932
    
    
    
    7.20Investment securities:U.S. Treasury and Government
Agency obligations
    
    
    182,658
    
    
    
    6,311
    
    
    
    3.46
    
    
    
    122,238
    
    
    
    3,964
    
    
    
    3.24
    
    
    
    105,438
    
    
    
    4,763
    
    
    
    4.52Other bonds and equity securities
    
    
    30,653
    
    
    
    1,155
    
    
    
    3.77
    
    
    
    39,698
    
    
    
    1,580
    
    
    
    3.98
    
    
    
    57,228
    
    
    
    2,275
    
    
    
    3.98Mortgage-backed securities
    
    
    40,775
    
    
    
    1,476
    
    
    
    3.62
    
    
    
    37,746
    
    
    
    1,362
    
    
    
    3.61
    
    
    
    18,715
    
    
    
    1,040
    
    
    
    5.56Short-term investments
    
    
    2,324
    
    
    
    30
    
    
    
    1.29
    
    
    
    6,843
    
    
    
    72
    
    
    
    1.05
    
    
    
    8,351
    
    
    
    128
    
    
    
    1.53Total investment securities
    
    
    256,410
    
    
    
    8,972
    
    
    
    3.50
    
    
    
    206,525
    
    
    
    6,978
    
    
    
    3.38
    
    
    
    189,732
    
    
    
    8,206
    
    
    
    4.33Total interest earning assets
    
    
    474,113
    
    
    
    22,331
    
    
    
    4.71
    %
    
    
    425,679
    
    
    
    21,334
    
    
    
    5.01
    %
    
    
    424,760
    
    
    
    25,138
    
    
    
    5.92
    %Allowance for loan losses
    
    
    (4,204
    )
    
    
    
    
    
    
    
    
    
    
    (4,247
    )
    
    
    
    
    
    
    
    
    
    
    (4,131
    )Cash and due from banks
    
    
    7,773
    
    
    
    
    
    
    
    
    
    
    
    7,450
    
    
    
    
    
    
    
    
    
    
    
    7,132Other real estate owned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    18Other assets
    
    
    9,588
    
    
    
    
    
    
    
    
    
    
    
    9,604
    
    
    
    
    
    
    
    
    
    
    
    11,841Total assets
    
    $
    487,270
    
    
    
    
    
    
    
    
    
    
    $
    438,494
    
    
    
    
    
    
    
    
    
    
    $
    439,620Liabilities
and Stockholders EquityDeposits:Regular savings accounts
    
    $
    45,696
    
    
    $
    159
    
    
    
    0.35
    %
    
    $
    44,842
    
    
    $
    196
    
    
    
    0.44
    %
    
    $
    45,102
    
    
    $
    389
    
    
    
    0.86
    %NOW and Super NOW accounts
    
    
    37,560
    
    
    
    42
    
    
    
    0.11
    
    
    
    36,175
    
    
    
    44
    
    
    
    0.12
    
    
    
    33,596
    
    
    
    86
    
    
    
    0.26Money market accounts
    
    
    80,681
    
    
    
    980
    
    
    
    1.21
    
    
    
    69,498
    
    
    
    900
    
    
    
    1.30
    
    
    
    59,011
    
    
    
    1,097
    
    
    
    1.86Certificates of deposit
    
    
    109,044
    
    
    
    2,519
    
    
    
    2.31
    
    
    
    115,121
    
    
    
    3,036
    
    
    
    2.64
    
    
    
    123,673
    
    
    
    4,232
    
    
    
    3.42Total interest bearing deposits
    
    
    272,981
    
    
    
    3,700
    
    
    
    1.36
    
    
    
    265,636
    
    
    
    4,176
    
    
    
    1.57
    
    
    
    261,382
    
    
    
    5,804
    
    
    
    2.22Borrowed funds
    
    
    138,554
    
    
    
    4,820
    
    
    
    3.48
    
    
    
    102,294
    
    
    
    4,801
    
    
    
    4.69
    
    
    
    107,001
    
    
    
    5,761
    
    
    
    5.38Total interest bearing liabilities
    
    
    411,535
    
    
    
    8,520
    
    
    
    2.07
    %
    
    
    367,930
    
    
    
    8,977
    
    
    
    2.44
    %
    
    
    368,383
    
    
    
    11,565
    
    
    
    3.14
    %Non-interest bearing deposits
    
    
    15,884
    
    
    
    
    
    
    
    
    
    
    
    13,727
    
    
    
    
    
    
    
    
    
    
    
    13,515Other liabilities
    
    
    3,673
    
    
    
    
    
    
    
    
    
    
    
    3,510
    
    
    
    
    
    
    
    
    
    
    
    3,488Total liabilities
    
    
    431,092
    
    
    
    
    
    
    
    
    
    
    
    385,167
    
    
    
    
    
    
    
    
    
    
    
    385,386Stockholders equity
    
    
    56,178
    
    
    
    
    
    
    
    
    
    
    
    53,327
    
    
    
    
    
    
    
    
    
    
    
    54,234Total liabilities and
stockholders equity
    
    $
    487,270
    
    
    
    
    
    
    
    
    
    
    $
    438,494
    
    
    
    
    
    
    
    
    
    
    $
    439,620Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.64
    %
    
    
    
    
    
    
    
    
    
    
    2.57
    %
    
    
    
    
    
    
    
    
    
    
    2.78
    %Net interest income
    
    
    
    
    
    $
    13,811
    
    
    
    
    
    
    
    
    
    
    $
    12,357
    
    
    
    
    
    
    
    
    
    
    $
    13,573Net interest margin on average earning assets
    
    
    
    
    
    
    
    
    
    
    2.91
    %
    
    
    
    
    
    
    
    
    
    
    2.90
    %
    
    
    
    
    
    
    
    
    
    
    3.20
    %
 14




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##### Table of Contents



Rate-Volume
Analysis The effect on net interest income of changes in interest rates and in the amounts of interest
earning assets and interest bearing liabilities is shown in the following table. Information is
provided on changes for the years indicated and is attributable to (i) changes in volume (change in
average balance multiplied by prior year rate), (ii) changes in interest rate (change in rate
multiplied by prior year average balance) and (iii) the combined effects of changes in interest
rates and volume (change in rate multiplied by change in average balance). 2004 vs. 2003
    
    
    2003 vs. 2002Total
    
    
    
    
    
    
    
    
    
    
    Rate/
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    Rate/Change
    
    
    Volume
    
    
    Rate
    
    
    Volume
    
    
    Change
    
    
    Volume
    
    
    Rate
    
    
    Volume(In Thousands)Interest
Income :Loans:Residential real estate
    
    $
    (398
    )
    
    $
    65
    
    
    $
    (456
    )
    
    $
    (7
    )
    
    $
    (1,821
    )
    
    $
    (1,273
    )
    
    $
    (700
    )
    
    $
    152Commercial real estate
    
    
    (150
    )
    
    
    488
    
    
    
    (605
    )
    
    
    (33
    )
    
    
    (754
    )
    
    
    67
    
    
    
    (815
    )
    
    
    (6
    )Commercial business
    
    
    (450
    )
    
    
    (519
    )
    
    
    116
    
    
    
    (47
    )
    
    
    26
    
    
    
    156
    
    
    
    (115
    )
    
    
    (15
    )Consumer
    
    
    1
    
    
    
    7
    
    
    
    (5
    )
    
    
    (1
    )
    
    
    (27
    )
    
    
    (28
    )
    
    
    1
    
    
    
    Total loans
    
    
    (997
    )
    
    
    41
    
    
    
    (950
    )
    
    
    (88
    )
    
    
    (2,576
    )
    
    
    (1,078
    )
    
    
    (1,629
    )
    
    
    131Investment securities:U.S. Treasury and Government Agency obligations
    
    
    2,347
    
    
    
    1,959
    
    
    
    259
    
    
    
    129
    
    
    
    (799
    )
    
    
    759
    
    
    
    (1,344
    )
    
    
    (214
    )Other bonds and equity securities
    
    
    (425
    )
    
    
    (360
    )
    
    
    (84
    )
    
    
    19
    
    
    
    (695
    )
    
    
    (697
    )
    
    
    3
    
    
    
    (1
    )Mortgage-backed securities
    
    
    114
    
    
    
    109
    
    
    
    4
    
    
    
    1
    
    
    
    322
    
    
    
    1,058
    
    
    
    (365
    )
    
    
    (371
    )Short-term investments
    
    
    (42
    )
    
    
    (48
    )
    
    
    16
    
    
    
    (10
    )
    
    
    (56
    )
    
    
    (23
    )
    
    
    (40
    )
    
    
    7Total investments
    
    
    1,994
    
    
    
    1,660
    
    
    
    195
    
    
    
    139
    
    
    
    (1,228
    )
    
    
    1,097
    
    
    
    (1,746
    )
    
    
    (579
    )Total interest income
    
    
    997
    
    
    
    1,701
    
    
    
    (755
    )
    
    
    51
    
    
    
    (3,804
    )
    
    
    19
    
    
    
    (3,375
    )
    
    
    (448
    )Interest
Expense :Deposits:Regular savings accounts
    
    
    (37
    )
    
    
    4
    
    
    
    (40
    )
    
    
    (1
    )
    
    
    (193
    )
    
    
    (2
    )
    
    
    (192
    )
    
    
    1NOW and Super NOW accounts
    
    
    (2
    )
    
    
    2
    
    
    
    (4
    )
    
    
    
    
    
    
    (42
    )
    
    
    7
    
    
    
    (45
    )
    
    
    (4
    )Money market accounts
    
    
    80
    
    
    
    145
    
    
    
    (56
    )
    
    
    (9
    )
    
    
    (197
    )
    
    
    195
    
    
    
    (333
    )
    
    
    (59
    )Certificates of deposit
    
    
    (517
    )
    
    
    (160
    )
    
    
    (377
    )
    
    
    20
    
    
    
    (1,196
    )
    
    
    (293
    )
    
    
    (970
    )
    
    
    67Total interest bearing deposits
    
    
    (476
    )
    
    
    (9
    )
    
    
    (477
    )
    
    
    10
    
    
    
    (1,628
    )
    
    
    (93
    )
    
    
    (1,540
    )
    
    
    5Borrowed funds
    
    
    19
    
    
    
    1,702
    
    
    
    (1,242
    )
    
    
    (441
    )
    
    
    (960
    )
    
    
    (253
    )
    
    
    (739
    )
    
    
    32Total interest expense
    
    
    (457
    )
    
    
    1,693
    
    
    
    (1,719
    )
    
    
    (431
    )
    
    
    (2,588
    )
    
    
    (346
    )
    
    
    (2,279
    )
    
    
    37Net interest income
    
    $
    1,454
    
    
    $
    8
    
    
    $
    964
    
    
    $
    482
    
    
    $
    (1,216
    )
    
    $
    365
    
    
    $
    (1,096
    )
    
    $
    (485
    )
 Net
Interest Income Net interest income is the difference between the interest income earned on earning assets and the
interest expense paid on interest bearing liabilities. Interest income and interest expense are
affected by changes in earning assets and interest bearing liability balances in addition to
changes in interest rates. The Companys net interest income was $13.8 million in 2004, $12.4 million in 2003 and $13.6
million in 2002. Interest income from earning assets was $22.3 million, $21.3 million and $25.1
million in 2004, 2003 and 2002, respectively. The rise in interest income during 2004 compared to
2003 was due primarily to increases in volume of investment securities and loans. Also contributing
to the increase were higher interest rates earned on investment securities. The reduction in interest income during 2003 compared to 2002 was due to a decrease in rates earned
on investment securities and loans coupled with a decrease in loan volume. Interest expense on interest bearing deposits was $3.7 million in 2004, compared to $4.2 million in
2003 and $5.8 million in 2002. Average deposit balances increased during 2004 from 2003 and 2002.
The primary increase during 2004 was in money market investment accounts. NOW accounts and regular
savings accounts increased slightly and were partially offset by decreases in certificates of
deposit. Interest expense continued to decline during 2004 attributable mainly to the reduction of all
deposit rates, coupled with the decrease in volume of the certificates of deposit. The primary
increase in 2003 was in money market investment accounts. NOW accounts also increased and were
partially offset by decreases in certificates of deposit and regular savings accounts. Interest
expense declined during 2003 attributable mainly to the reduction of all deposit rates. Average
rates paid on certificates of deposit decreased to 2.31% during 2004 from 2.64% in 2003 resulting
in a net decrease of $517 thousand in interest expense in 2004. Average rates paid on money market
investment accounts declined to 1.21% in 2004 from 1.30% in 2003 reducing interest expense by $56
thousand offset by an increase to interest expense of $145 thousand due to increased volume.
Average rates paid on certificates of deposit decreased to 2.64% during 2003 from 3.42 % in 2002
resulting in a net decrease of $1.2 million in interest expense during 2003. Average rates paid on
money 15




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##### Table of Contents



market accounts decreased to 1.30% in 2003 from 1.86% in 2002 which resulted in $197 thousand
net decrease in interest expense. Interest expense on borrowed funds remained stable in 2004 and
decreased to $4.8 million in 2003 and $5.8 million in 2002. The net decrease in interest expense on
borrowed funds of $960 thousand in 2003 resulted from a reduction in rates paid coupled with a
decline in the average balances outstanding. Interest expense on total interest bearing liabilities
totaled $8.5 million, $9.0 million and $11.6 million during 2004, 2003 and 2002, respectively. Over the past three years, the Company has been operating in a declining interest rate environment.
The result of this environment has been lower yields in assets and a lower cost of funds. The
average yield on earning assets in 2004 declined 30 basis points to 4.71% and in 2003 and 2002,
respectively, was down 91 basis points and 108 basis points to 5.01% in 2003 and 5.92% in 2002. The
average rate paid on interest bearing liabilities in 2004 was 2.07%, or a decrease of 37 basis
points, in 2003 was 2.44% and in 2002 was 3.14%. The net interest rate spread in 2004 was 2.64%, a
7 basis point increase from 2003 in which the net interest rate spread was 2.57% down 21 basis
points from 2.78% in 2002. In an environment of declining asset yields, management strives to
control the cost of funds and maintain net-interest margin. The Companys net-interest margin
increased to 2.91% in 2004 from 2.90% and 3.20% in 2003 and 2002, respectively. Provision for Loan Losses The Company recognized a credit provision for loan losses in the amount of $300 thousand in 2004
due to the $253 thousand recovery to the allowance for loan losses and the continued low level of
non-performing loans. The Company made no provision for loan losses in 2003 and 2002. The absence
of a provision for loan losses in 2003 and 2002 was due to the overall asset quality of the Company
and low level of delinquent loans. Non-Interest Income Non-interest income increased 6.0% and totaled $3.8 million versus $3.6 million and $1.5 million
for the years ended 2004, 2003 and 2002, respectively. In 2004 and 2003, the increase is primarily
due to the lawsuit judgment collected amounting to $2.3 million and $2.0 million in 2004 and 2003,
respectively. Excluding the lawsuit, non-interest income decreased $55 thousand during 2004. Loan
servicing fees increased to $184 thousand from $20 thousand in 2003 mainly attributable to the
recovery of fair values on MSR. See Note 4 in the Consolidated Financial Statements on Mortgage
Servicing Rights. Deposit account fees increased to $889 thousand in 2004 from $713 thousand for the year 2003.
Partially offsetting these increases were a reduction in gains on the sale of mortgage loans
totaling $399 thousand, loss on sale of investment securities of $14 thousand and a decrease of $10
thousand in other income. Excluding the lawsuit, non-interest income increased $115 thousand during 2003. Loan servicing fees
increased to $20 thousand from a loss of $145 thousand in 2002 mainly attributable to $186 thousand
in commercial loan prepayments and the recovery of fair values on MSR. Deposit account fees
increased to $713 thousand in 2003 from $665 thousand for the year 2002. Partially offsetting these
increases were a reduction in gains on the sale of mortgage loans totaling $62 thousand, loss on
sale of investment securities of $14 thousand and a decrease of $22 thousand in other income. Non-Interest Expense Non-interest expense increased to $10.7 million in 2004, from $9.7 million in 2003 and $10.2
million in 2002. The increase in 2004 was attributable to salaries and benefits increasing by $584
thousand, occupancy and equipment increasing $120 thousand and marketing expenses increasing $178
thousand due to increased rent and depreciation expenses and advertising and promotion expenses
related to the opening of the new Salem, New Hampshire branch. Data processing expenses increased
$151 thousand due to the installation of new communication lines for the Banks Wide Area Network. The decrease in 2003 was attributable to a reduction of $163 thousand in professional fees
resulting from lower legal fees and a reduction of $83 thousand in salaries and employee benefits
resulting from the salary reduction initiatives and a lower headcount. Salaries and employee benefits expense totaled $6.5 million in 2004, $5.9 million in 2003 and $6.0
million in 2002. Full-time equivalent employees were 99 at December 31, 2004, and 2003 and 105 at December 31, 2002.
In 2004, the increase was the result of normal merit raises, increases in medical & dental premiums
and reestablishing salary reduction initiatives taken away in 2003. The decrease in 2003 relates to
several salary reduction initiatives instituted during 2003 as a result of the net-interest margin
declining during 2003. The Company continually evaluates staffing levels in order to control
salaries and employee benefits while managing business volumes. Occupancy and equipment expenses increased to $872 thousand in 2004, compared to $752 thousand in
2003 and $790 thousand in 2002 due to the opening of a new branch in Salem, NH in 2004. Data
processing expenses increased to $878 thousand in 2004, compared to $727 thousand in 2003 and $749
thousand in 2002. This includes the Companys service contract to provide on-line deposit
accounting, loan accounting and item processing services. In which, the Bank installed new
communication lines for its Wide Area Network (WAN). Insurance expenses totaled $157 thousand,
$151 thousand and $153 thousand in 2004, 2003 and 2002, respectively, and other expenses increased
to $1.6 million in 2004, as compared to $1.5 million in 2003 and $1.7 million in 2002. Income Taxes The Company reported income tax expense of $2.6 million in 2004, $2.1 million in 2003 and $1.8
million in 2002. The effective income tax rate for the year 2004 was 35.7% and for 2003 was 33.5%
compared to 36.9% in 2002. The decrease in the effective income tax rate  16




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##### Table of Contents



for 2004 and 2003 from 2002 is due to change in estimates for tax contingencies. See Note 8 to
the Consolidated Financial Statements for further information regarding income taxes. Liquidity Managing liquidity involves planning to meet anticipated funding needs at a reasonable cost, as
well as contingency plans to meet unanticipated funding needs or a loss of funding sources. The
following factors are considered in managing liquidity; marketability of assets, the sources and
stability of funding and the level of unfunded commitments. The Companys primary source of funds
is dividends from its Bank subsidiary. The Banks loans and investments are primarily funded by
deposits, Federal Home Loan Bank advances, securities sold under agreements to repurchase and
stockholders equity. The investment portfolio is one of the primary sources of liquidity for the Bank. Maturities of
securities provide a flow of funds which are available for cash needs such as loan originations and
net deposit outflows. In addition, the investment portfolio consists of high quality, and,
therefore, readily marketable, U.S. Treasury and Government Agency obligations. At December 31,
2004, the Banks investment securities and mortgage-backed securities available for sale totaled
$63.0 million which is available to meet the Banks liquidity needs. Loan maturities and amortization as well as deposit growth provide for a constant flow of funds. In
addition, the Bank has two overnight lines of credit totaling $11.8 million to meet short-term
liquidity needs. The Bank did not utilize these overnight lines at December 31, 2004 and had the
full $11.8 million available. The liquidity position of the Company is managed by the Asset/Liability Management Committee
(ALCO). The duties of ALCO are to periodically review the Companys level of liquidity under
prescribed policies and procedures. It is the responsibility of ALCO to report to the Board of
Directors on a regular basis the Companys liquidity position as it relates to these policies and
procedures. At December 31, 2004, the Companys liquidity position was above policy guidelines.
Management believes that the Bank has adequate liquidity to meet current and future liquidity
demands. Contractual Obligations And Commitments The company enters into off-balance sheet contractual obligations and commitments in the normal
course of business. The Company has contractual obligations such as payments on FHLB advances,
operating lease obligations and customer repurchase agreements. The Company has commitments in the
form of financial instruments that are for loan originations, lines of credit, letters of credit
and to sell mortgage loans. These commitments have various expiration dates. The following table
summarizes the expiration dates of these commitments at December 31, 2004. Payments
Due  By PeriodLess than
    
    
    One to
    
    
    Four to
    
    
    AfterContractual Obligations
    
    Total
    
    
    One Year
    
    
    Three Years
    
    
    Five Years
    
    
    Five Years(In Thousands)FHLB Advances
    
    $
    105,102
    
    
    $
    32,000
    
    
    $
    40,000
    
    
    $
    224
    
    
    $
    32,878FHLB short-term borrowings
    
    
    49,000
    
    
    
    49,000
    
    
    
    
    
    
    
    
    
    
    
    Lease Obligations
    
    
    1,109
    
    
    
    201
    
    
    
    404
    
    
    
    296
    
    
    
    208Data processing vendor
    
    
    6,134
    
    
    
    927
    
    
    
    1,947
    
    
    
    2,126
    
    
    
    1,134Employee benefit
contributions (1)
    
    
    
    
    
    
    Customer Repurchase
Agreements
    
    
    3,161
    
    
    
    3,161
    
    
    
    
    
    
    
    
    
    
    
    Total Contractual Cash
Obligations
    
    $
    164,506
    
    
    $
    85,289
    
    
    $
    42,351
    
    
    $
    2,646
    
    
    $
    34,220
   1)
    
    Employee benefit contributions include expected contributions to the Companys
defined pension benefit plan, post retirement plan and supplemental executive retirement
plans. Expected contributions for the defined pension benefit plan have been included only
through the plan year November 1, 2004 through October 31, 2005. Contributions beyond the
plan year can not be quantified as contributions will be determined based upon the return on the investments in the plan. Expected contributions for the post
retirement plan and the supplemental executive retirement plan can not be quantified as the
level of retirees is unknown, interest rates and average salary amounts have not yet been
determined. 17




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##### Table of Contents



Amount
of Commitment Expiring  By PeriodLess than
    
    
    One to
    
    
    Four to
    
    
    AfterCommitments
    
    Total
    
    
    One Year
    
    
    Three Years
    
    
    Five Years
    
    
    Five Years(In Thousands)Loan Originations
    
    $
    23,444
    
    
    $
    23,444
    
    
    $
    
    
    
    $
    
    
    
    $
    Lines of Credit
    
    
    45,315
    
    
    
    14,395
    
    
    
    11,491
    
    
    
    11,601
    
    
    
    7,828Letters of Credit
    
    
    1,393
    
    
    
    1,393
    
    
    
    
    
    
    
    
    
    
    
    Sell mortgage Loans
    
    
    300
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    Total commitments
    
    $
    70,452
    
    
    $
    39,532
    
    
    $
    11,491
    
    
    $
    11,601
    
    
    $
    7,828
 The Corporation has no off-balance sheet arrangements except those discussed in the commitment
table in the Liquidity section and Note 12 of the Consolidated Financial Statements. Capital Adequacy The Company and the Bank are required to maintain a leverage capital ratio of 5% and risk-based
capital ratios of at least 10% in order to be categorized as well capitalized in accordance with
definitions in regulatory guidelines promulgated by the FDIC and FRB. At December 31, 2004 and
2003, the Companys and the Banks leverage and risk-based capital ratios exceeded the required
levels for the category of well-capitalized as defined by their respective regulatory agencies. The Company and the Bank may not declare or pay cash dividends on their outstanding common stock if
the effect thereof would cause its stockholders equity to be reduced below applicable capital
requirements or if such declaration and payments would otherwise violate regulatory requirements.
See note 9 to the Consolidated Financial Statements for further information regarding capital
adequacy. On July 25, 2002, the Board of Directors of the Company adopted a stock repurchase program (the
Repurchase Program) authorizing the Company to repurchase up to five percent of its common stock
outstanding as of June 30, 2002 for cash. As of December 31, 2004 the number of shares repurchased
and included as Treasury Stock was 219,300, which had an average purchase price of $12.57. The
Company did not purchase shares of Treasury Stock during 2004. The Companys book value per share
was $13.33 at December 31, 2004. The book value per share increased from $12.99 at December 31,
2003 due to net income of $4.7 million and exercise of stock options of $806 thousand. Offsetting
these increases were the declaration of dividends $2.2 million, and a decrease in market value of
investment securities available for sale (net of taxes) in the amount of $414 thousand. Asset/Liability Management Managing interest rate risk is fundamental to banking. The Company has continued to manage its
liquidity, capital, and GAP position so as to control its exposure to interest rate risk. As of
December 31, 2004, the Company had interest rate sensitive assets which repriced or matured within
one year of $201.9 million and interest rate sensitive liabilities which repriced or matured within
one year of $232.8 million. As of December 31, 2003, the Company had interest rate sensitive assets
which matured or repriced within one year of $212.7 million and interest rate sensitive liabilities
which repriced or matured within one year of $215.7 million. Interest Rate Sensitivity The Company actively manages its interest rate sensitivity position. The objectives of interest
rate risk management are to control exposure of net interest income to risks associated with
interest rate movements and to achieve a stable and rising flow of net interest income. The ALCO
using policies approved by the Board of Directors, is responsible for managing the Banks rate
sensitivity position. The asset/liability management policy establishes guidelines for acceptable exposure to interest
rate risk, liquidity, and capital. The objective of ALCO is to manage earning assets and liabilities to produce results which
are consistent with the Companys policy for net interest income, liquidity and capital and
identify acceptable levels of growth, risk and profitability. ALCO establishes and monitors
origination and pricing strategies consistent with ALCO policy. ALCO meets regularly to review the
current economic environment, income simulation model and GAP analysis and implements appropriate
changes in strategy that will manage the Companys exposure to interest rate risk, liquidity and
capital. ALCO manages the Companys interest rate risk using both income simulation and GAP analysis. Income
simulation is used to quantify interest rate risk inherent in the Companys consolidated balance
sheet by showing the effect of a change in net interest income over a 24 month period. The income
simulation model uses parallel interest rate shocks of up 200 basis points (bp) or down 100 basis
points (bp) for earning assets and liabilities in the first year of the model. Interest rates are
not shocked in the second year of the model. The composition of the Companys consolidated balance
sheet at December 31, 2004 remains relatively well matched over the 24 month horizon with a slight
bias towards liability sensitivity in the first year. The simulation takes into account the dates
for repricing, maturing, prepaying and call options assumptions of various financial categories
which may vary under different interest rate scenarios. Prepayment speeds are estimates for the
loans and are adjusted according to the degree of rate changes. Call options and prepayment speeds
for investment securities are estimates using industry standards for pricing and prepayment
assumptions. The assumptions of financial instrument categories are reviewed before each simulation
by ALCO in light of current economic trends. As of December 31, 18




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##### Table of Contents



2004, the income simulation model indicated some negative exposure of net interest income to
rising interest rates to a degree that remains within tolerance levels established by the Companys
policy. The interest rate scenario used does not necessarily reflect ALCOs view of the most
likely change in interest rates over the models period. Furthermore, the model assumes a static
consolidated balance sheet. These results do not reflect the anticipated future net interest income
of the Company for the same periods. The following table summarizes the net interest income for the 24 month period of the Companys
consolidated balance sheet for earning assets and liabilities for the years ended December 31; Net Interest Income Simulation Model Results: Interest Rate ShockDown
    
    
    Up2004
    
    Flat Rates
    
    
    100 bp
    
    
    200 bp(Dollars in Thousands)Year One
    
    $
    14,090
    
    
    $
    14,380
    
    
    $
    13,535Year Two
    
    
    14,309
    
    
    
    14,574
    
    
    
    13,258Total net interest income for 2 year period
    
    $
    28,399
    
    
    $
    28,954
    
    
    $
    26,793
 Interest Rate ShockDown
    
    
    Up2003
    
    Flat Rates
    
    
    100 bp
    
    
    200 bp(Dollars in Thousands)Year One
    
    $
    13,246
    
    
    $
    13,538
    
    
    $
    12,902Year Two
    
    
    12,122
    
    
    
    12,201
    
    
    
    11,994Total net interest income for 2 year period
    
    $
    25,368
    
    
    $
    25,739
    
    
    $
    24,896
 The income simulation model reflects negative exposure to net interest income in a rising interest
rate environment from flat rates to up 200 bp, which would result from shorter liabilities due to
short-term borrowings from FHLB. Margins would narrow as deposits and borrowings are faster to
reprice to higher interest rates. The Companys primary measure of interest rate risk is GAP
analysis. GAP measurement attempts to analyze any mismatches in the timing of interest rate
repricing between assets and liabilities. It identifies those balance sheet sensitivity areas which
are vulnerable to unfavorable interest rate movements. As a tool of asset/liability management, the
GAP position is compared with potential changes in interest rate levels in an attempt to measure
the favorable and unfavorable effect such changes would have on net interest income. For example,
when the GAP is positive, (i.e., assets reprice faster than liabilities) a rise in interest rates
will increase net interest income; and, conversely, if the GAP is negative, a rise in interest
rates will decrease net interest income. The accuracy of this measure is limited by unpredictable
loan prepayments and the lags in the interest rate indices used for repricing variable rate loans
or investment securities. The Companys one-year cumulative GAP to total assets decreased from less than 1% at December,
2003, to less than 6% at December, 2004. The following table shows the interest rate sensitivity
gap position as of December 31, 2004. The table excludes non-performing loans and assumes that all
deposits except savings and NOWs will be withdrawn within the legal time period for withdrawal.
This withdrawal of deposit assumption is not likely to occur. 19




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##### Table of Contents



Rate Sensitivity GAP PositionPosition/VolumeTime interval from December 31, 2004
    
    0-3 Mo.
    
    
    4-6 Mo.
    
    
    7-12 Mo.
    
    
    13-36 Mo.
    
    
    37-60 Mo.
    
    
    +60 Mo.(Dollars in Thousands)Earning
Assets:Investment securities held to maturity
    
    $
    29,887
    
    
    $
    10,462
    
    
    $
    12,109
    
    
    $
    105,793
    
    
    $
    33,967
    
    
    $
    8,046Investments securities available for sale
    
    
    17,274
    
    
    
    11,329
    
    
    
    2,637
    
    
    
    17,852
    
    
    
    7,723
    
    
    
    6,056Federal Home Loan Bank Stock and other earning assets
    
    
    8,934
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    168Fixed rate mortgages loans
    
    
    2,529
    
    
    
    2,057
    
    
    
    3,840
    
    
    
    11,640
    
    
    
    7,406
    
    
    
    9,123Adjustable rate mortgages loans
    
    
    8,868
    
    
    
    2,230
    
    
    
    5,593
    
    
    
    9,058
    
    
    
    6,582
    
    
    
    Consumer loans
    
    
    371
    
    
    
    34
    
    
    
    136
    
    
    
    115
    
    
    
    5
    
    
    
    38Fixed rate commercial real estate loans
    
    
    1,063
    
    
    
    344
    
    
    
    700
    
    
    
    5,322
    
    
    
    4,584
    
    
    
    6,616Adjustable rate commercial real estate loans
    
    
    29,077
    
    
    
    7,435
    
    
    
    14,759
    
    
    
    47,068
    
    
    
    14,637
    
    
    
    Construction loans
    
    
    15,211
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fixed rate commercial business loans
    
    
    3,134
    
    
    
    519
    
    
    
    830
    
    
    
    1,153
    
    
    
    170
    
    
    
    Adjustable rate commercial business loans
    
    
    10,563
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total earning assets
    
    
    126,911
    
    
    
    34,410
    
    
    
    40,604
    
    
    
    198,001
    
    
    
    75,074
    
    
    
    30,047Interest Bearing Liabilities:Savings and escrow accounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,179NOW and Super Now accounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,061Money market accounts
    
    
    82,877
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Certificates of deposit and retirement accounts
    
    
    20,714
    
    
    
    20,851
    
    
    
    24,028
    
    
    
    44,589
    
    
    
    8,516
    
    
    
    FHLB advances and other borrowed funds
    
    
    78,191
    
    
    
    6,030
    
    
    
    62
    
    
    
    40,266
    
    
    
    298
    
    
    
    32,416Total interest bearing liabilities
    
    
    181,782
    
    
    
    26,881
    
    
    
    24,090
    
    
    
    84,855
    
    
    
    8,814
    
    
    
    115,656Interest Sensitivity Gap
    
    $
    (54,871
    )
    
    $
    7,529
    
    
    $
    16,514
    
    
    $
    113,146
    
    
    $
    66,260
    
    
    $
    (85,609
    )Cumulative GAP
    
    $
    (54,871
    )
    
    $
    (47,342
    )
    
    $
    (30,828
    )
    
    $
    82,318
    
    
    $
    148,578
    
    
    $
    62,969Cumulative GAP as a percent of total assets
    
    
    (11
    )%
    
    
    (9
    )%
    
    
    (6
    )%
    
    
    16
    %
    
    
    29
    %
    
    
    12
    %
 Recent Accounting Developments The Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) Issue 03-1:
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments In
November 2003 and March 2004, the FASBs EITF issued a
consensus on EITF Issue 03-1. EITF 03-1 contains new guidance on
other-than-temporary impairments of investment securities. The guidance dictates when impairment is
deemed to exist, provides guidance on determining if impairment is other than temporary, and
directs how to calculate impairment loss. Issue 03-1 also details
expanded annual disclosure rules. In September 2004, the FASBs EITF
issued EITF Issue No. 03-1-1 Effective Date of Paragraphs
10-20 of EITF Issue 03-1 The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments, which delays the effective date for the measurement
and recognition guidance contained in paragraphs 10-20 of EITF 03-1 to be concurrent with the final
issuance of EITF 03-1-a Implementation Guidance for the Application of Paragraph 16 of EITF 03-1
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF
03-1-a is currently being debated by the FASB in regards to final guidance and effective date with
a comment period that ended October 29, 2004. EITF 03-1, as issued, was originally effective for
periods beginning after June 15, 2004 and the disclosure requirements of this consensus remain in
effect. The adoption of the original EITF 03-1 (excluding paragraphs 10-20) did not have a material
impact on the Companys financial position or results of operations. Statement of Position 03-3 (SOP 03-3): Accounting for Certain Loans or Debt Securities Acquired
in a Transfer in December 2003, the American Institute of Certified Public Accountants (AICPA)
issued SOP 03-3. SOP 03-3 requires loans acquired through a transfer, such as a business
combination, where there are differences in expected cash flows and contractual cash flows due in
part to credit quality be recognized at their fair value. The yield that may be accreted is limited to the excess of the investors estimate of undiscounted expected principal, interest and other cash flows over the investors initial
investment in the loan. The excess of contractual cash flows over expected cash flows is not to be recognized as an adjustment of yield, loss accrual, or valuation
allowance. Valuation allowances can not be created nor carried over in the initial accounting for
loans acquired in a transfer of loans with evidence of deterioration of credit quality since
origination. However, valuation allowances for non-impaired loans acquired in a business
combination can be carried over. This SOP is effective for loans acquired in fiscal years beginning
after December 15, 2004, with early adoption encouraged. The Company does not believe the adoption
of SOP 03-3 will have a material impact on the Companys financial position or results of
operations. SFAS No. 123 (revised 2004) (SFAS 123R), Share-Based Payment In December 2004, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123
(revised 2004). SFAS No. 123R replaces SFAS No. 123 Accounting for Stock-Based Compensation and
supersedes Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees. SFAS No. 123R will require that the compensation cost relating to share-based payment
transactions be recognized in the Companys financial statements, eliminating pro forma disclosure
as an alternative. That cost will be measured based on the grant-date fair value of the equity or
liability instruments issued. SFAS No. 123R is effective for public entities as of the first
interim or annual period that begins after June 15, 2005. The impact of the Company adopting such
accounting can be seen in Note 1, Stock-Based Compensation of the Notes to Consolidated Financial
Statements. The Company does believe the adoption of SFAS 123R will have an impact to the Company
and estimates the 2005 gross compensation expense related to share-based payment transactions to be
recognized will be approximately $61 thousand for the six months of 2005 for which SFAS 123R will
be effective. For years 2006 and beyond, a full year of compensation expense will be recognized.  20




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##### Table of Contents



FIN No. 46 Consolidation of Variable Interest Entities  an Interpretation of Accounting
Research Bulletin No. 51 In January 2003, the FASB issued FIN No. 46. FIN 46 established
accounting guidance for consolidation of variable interest entities (VIE) that function to
support the activities of the primary beneficiary. The primary beneficiary of a VIE is the entity
that absorbs a majority of the VIEs expected losses, receives a majority of the VIEs expected
residual returns, or both, as a result of ownership, controlling interest, contractual relationship
or other business relationship with a VIE. Prior to the implementation of FIN 46, VIEs were
generally consolidated by an enterprise when the enterprise had a controlling financial interest
through ownership of a majority of voting interest in the entity. The Company adopted FIN No. 46 as
of February 1, 2003 for all arrangements entered into after January 31, 2003. The Company does not
believe the adoption of FIN No. 46 will have a material impact on the Companys financial position
or results of operations. Impact
of Inflation and Changing Prices The Companys asset and liability structure is substantially different from that of an industrial
company in that virtually all assets and liabilities of the Company are monetary in nature.
Management believes the impact of inflation on financial results depends upon the Companys ability
to react to changes in interest rates and by such reaction reduce the inflationary impact on
performance. Interest rates do not necessarily move in the same direction, or at the same
magnitude, as the prices of other goods and services. As discussed previously, management seeks to
manage the relationship between interest-sensitive assets and liabilities in order to protect
against wide net interest income fluctuations, including those resulting from inflation. Various information shown elsewhere in this Annual Report will assist in the understanding of how
well the Company is positioned to react to changing interest rates and inflationary trends. In
particular, the summary of net interest income, the maturity distributions, the compositions of the
loan and security portfolios and the data on the interest rate sensitivity of loans and deposits
should be considered. 21




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##### Table of Contents



Report
of Management Responsibility The management of LSB Corporation (the Corporation or the Company) is responsible for the
preparation and integrity of the Consolidated Financial Statements and other financial information
contained in this annual report. The Consolidated Financial Statements have been prepared in
conformity with U.S. generally accepted accounting principles and prevailing practices of the
banking industry and, accordingly, include amounts based on managements best estimates and
judgments. Management has established and is responsible for maintaining internal accounting controls designed
to provide reasonable assurance as to the integrity and reliability of the Consolidated Financial
Statements, the protection of assets, and the prevention and detection of irregularities. The
concept of reasonable assurance recognizes that the cost of a system of internal accounting
controls should not exceed the benefits derived. The internal accounting control system is
augmented by written policies and guidelines, careful selection and training of qualified
personnel, a written program of internal audits, appropriate review by management, and a written
code of professional conduct for directors and officers. The Corporations Board of Directors has an Audit Committee composed solely of independent
directors. The Committee meets periodically with management, the internal auditors and KPMG LLP
(KPMG) to review the work of each and to inquire of each as to their assessment of the
performance of the others in their work relating to the Companys Consolidated Financial
Statements. Both the independent registered public accounting firm and internal auditors have, at
all times, the right of full access to the Audit Committee, without management present, to discuss
any matter they believe should be brought to the attention of the Audit Committee. Management recognizes that there are inherent limitations in the effectiveness of any internal
control system. However, management believes that as of December 31, 2004 the Companys internal
accounting controls provide reasonable assurance as to the integrity and reliability of the
Consolidated Financial Statements and related financial information. The independent registered public accounting firm, KPMG, is appointed by the Audit Committee.
KPMGs audits include reviews and tests of the Companys internal controls to the extent they
believe necessary to determine and conduct the audit procedures that support their report. Members
of that firm also have the right of full access to each member of management in conducting their
audits. The report of KPMG appears on the next page. -s- Paul A. Miller
    

-s- John E. SharlandPaul A. Miller
    
    John E. SharlandPresident and
    
    Senior Vice President andChief Executive Officer
    
    Chief Financial Officer
 December 31, 2004 22




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##### Table of Contents



Report
of Independent Registered Public Accounting Firm The Board of Directors and Stockholders
LSB Corporation: We have audited the accompanying consolidated balance sheets of LSB Corporation (the Company) and
subsidiary as of December 31, 2004 and 2003, and the related consolidated statements of operations,
changes in stockholders equity and cash flows for each of the years in the three-year period ended
December 31, 2004. These consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of LSB Corporation and subsidiary as of December 31, 2004
and 2003, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. (KPMG LLP) Boston, Massachusetts
March 28, 2005 23




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##### Table of Contents



Consolidated Balance Sheets December 31,
    
    2004
    
    
    2003(In Thousands)Assets:Cash and due from banks
    
    $
    7,193
    
    
    $
    7,872Fed funds sold
    
    
    209
    
    
    
    889Total cash and cash equivalents
    
    
    7,402
    
    
    
    8,761Investment securities held to maturity
market value of $198,716 in 2004 and $184,592 in 2003 (notes 2 and 7)
    
    
    200,264
    
    
    
    184,286Investment securities available for sale
amortized cost of $63,706 in 2004 and $48,571 in 2003 (notes 2 and 7)
    
    
    63,039
    
    
    
    48,592Federal Home Loan Bank stock, at cost (note 3)
    
    
    7,887
    
    
    
    6,593Loans, net of allowance for loan losses of $4,140 in 2004
and $4,220 in 2003 (notes 4 and 7)
    
    
    228,670
    
    
    
    207,283Bank premises and equipment (note 5)
    
    
    3,486
    
    
    
    2,875Accrued interest receivable
    
    
    2,894
    
    
    
    2,552Deferred income tax asset (note 8)
    
    
    3,067
    
    
    
    3,519Other assets
    
    
    1,768
    
    
    
    1,647Total assets
    
    $
    518,477
    
    
    $
    466,108Liabilities And Stockholders Equity:Liabilities:Interest bearing deposits (note 6)
    
    $
    284,309
    
    
    $
    258,430Non-interest bearing deposits (note 6)
    
    
    14,797
    
    
    
    14,110Federal Home Loan Bank advances (note 7)
    
    
    105,102
    
    
    
    78,866Other borrowed funds (note 7)
    
    
    52,161
    
    
    
    54,486Advance payments by borrowers for taxes and insurance
    
    
    506
    
    
    
    450Other liabilities
    
    
    3,764
    
    
    
    4,764Total liabilities
    
    
    460,639
    
    
    
    411,106Commitments and contingencies (notes 5, 11 and 12):Stockholders equity (notes 9 and 10):Preferred stock, $.10 par value; 5,000,000
shares authorized, none issued
    
    
    
    
    
    
    Common stock, $.10 par value; 20,000,000
shares authorized; 4,556,742 and 4,454,262 shares issued
in 2004 and 2003, respectively, 4,337,442 and 4,234,962
shares outstanding in 2004 and 2003, respectively
    
    
    456
    
    
    
    445Additional paid-in capital
    
    
    59,145
    
    
    
    58,350Retained earnings (Accumulated deficit)
    
    
    1,389
    
    
    
    (1,055
    )Treasury stock, at cost (219,300 shares in 2004 and 2003, respectively)
    
    
    (2,758
    )
    
    
    (2,758
    )Accumulated other comprehensive (loss) income
    
    
    (394
    )
    
    
    20Total stockholders equity
    
    
    57,838
    
    
    
    55,002Total liabilities and stockholders equity
    
    $
    518,477
    
    
    $
    466,108
 The accompanying notes are an integral part of these consolidated financial
statements. 24




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##### Table of Contents



Consolidated Statements of Operations Year Ended December 31,
    
    2004
    
    
    2003
    
    
    2002(In Thousands, Except Share Data)Interest and dividend income:Loans
    
    $
    13,359
    
    
    $
    14,356
    
    
    $
    16,932Investment securities held to maturity
    
    
    6,834
    
    
    
    4,938
    
    
    
    6,056Investment securities available for sale
    
    
    1,899
    
    
    
    1,785
    
    
    
    1,817Federal Home Loan Bank stock
    
    
    209
    
    
    
    183
    
    
    
    205Other interest income
    
    
    30
    
    
    
    72
    
    
    
    128Total interest and dividend income
    
    
    22,331
    
    
    
    21,334
    
    
    
    25,138Interest expense:Deposits (note 6)
    
    
    3,700
    
    
    
    4,176
    
    
    
    5,804Borrowed funds
    
    
    4,229
    
    
    
    4,583
    
    
    
    5,458Securities sold under agreements to repurchase
    
    
    15
    
    
    
    17
    
    
    
    20Short-term and other borrowed funds
    
    
    576
    
    
    
    201
    
    
    
    283Total interest expense
    
    
    8,520
    
    
    
    8,977
    
    
    
    11,565Net interest income
    
    
    13,811
    
    
    
    12,357
    
    
    
    13,573Credit for loan recoveries (note 4)
    
    
    (300
    )
    
    
    
    
    
    
    Net interest income after credit for loan recoveries
    
    
    14,111
    
    
    
    12,357
    
    
    
    13,573Non-interest income:Deposit account fees
    
    
    889
    
    
    
    713
    
    
    
    665Loan servicing fees, net
    
    
    184
    
    
    
    20
    
    
    
    (145
    )Gains on sales of mortgage loans, net
    
    
    68
    
    
    
    467
    
    
    
    529Loss on sale of investment securities
    
    
    
    
    
    
    (14
    )
    
    
    Lawsuit judgment collected (note 11)
    
    
    2,280
    
    
    
    1,996
    
    
    
    Other income
    
    
    412
    
    
    
    422
    
    
    
    444Total non-interest income
    
    
    3,833
    
    
    
    3,604
    
    
    
    1,493Non-interest expense:Salaries and employee benefits
    
    
    6,507
    
    
    
    5,923
    
    
    
    6,006Occupancy and equipment expense
    
    
    872
    
    
    
    752
    
    
    
    790Data processing expense
    
    
    878
    
    
    
    727
    
    
    
    749Professional expense
    
    
    623
    
    
    
    643
    
    
    
    806Insurance expense
    
    
    157
    
    
    
    151
    
    
    
    153Other expense
    
    
    1,627
    
    
    
    1,542
    
    
    
    1,651Total non-interest expense
    
    
    10,664
    
    
    
    9,738
    
    
    
    10,155Income before income tax expense
    
    
    7,280
    
    
    
    6,223
    
    
    
    4,911Income tax expense (note 8)
    
    
    2,600
    
    
    
    2,087
    
    
    
    1,811Net income
    
    $
    4,680
    
    
    $
    4,136
    
    
    $
    3,100Average shares outstanding
    
    
    4,302,729
    
    
    
    4,215,944
    
    
    
    4,348,085Common stock equivalents
    
    
    163,848
    
    
    
    175,868
    
    
    
    170,564Average diluted shares outstanding
    
    
    4,466,577
    
    
    
    4,391,812
    
    
    
    4,518,649Basic earnings per share
    
    $
    1.09
    
    
    $
    0.98
    
    
    $
    0.71Diluted earnings per share
    
    $
    1.05
    
    
    $
    0.94
    
    
    $
    0.69
 The accompanying notes are an integral part of these consolidated financial statements. 25




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##### Table of Contents



Consolidated Statements of Changes in Stockholders Equity
 AccumulatedAdditional
    
    
    Retained Earnings
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Paid-in
    
    
    (Accumulated
    
    
    Treasury
    
    
    Comprehensive
    
    

StockholdersStock
    
    
    Capital
    
    
    Deficit)
    
    
    Stock
    
    
    Income (Loss)
    
    
    Equity(In Thousands)Balance at December 31, 2001
    
    $
    438
    
    
    $
    57,813
    
    
    $
    (4,348
    )
    
    $
    
    
    
    $
    189
    
    
    $
    54,092Net income
    
    
    
    
    
    
    
    
    
    
    3,100
    
    
    
    
    
    
    
    
    
    
    
    3,100Other comprehensive income
unrealized gain (loss) on securities
available for sale (tax effect $253)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    490
    
    
    
    490Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,590Exercise of stock options and tax benefits
    
    
    1
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,736
    )
    
    
    
    
    
    
    (1,736
    )Dividends declared and paid ($0. 44 per share)
    
    
    
    
    
    
    
    
    
    
    (1,920
    )
    
    
    
    
    
    
    
    
    
    
    (1,920
    )Balance at December 31, 2002
    
    
    439
    
    
    
    57,845
    
    
    
    (3,168
    )
    
    
    (1,736
    )
    
    
    679
    
    
    
    54,059Net income
    
    
    
    
    
    
    
    
    
    
    4,136
    
    
    
    
    
    
    
    
    
    
    
    4,136Other comprehensive income
unrealized gain (loss) on securities
available for sale (tax effect $338)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (659
    )
    
    
    (659
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,447Exercise of stock options and tax benefits
    
    
    6
    
    
    
    505
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    511Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,022
    )
    
    
    
    
    
    
    (1,022
    )Dividends declared and paid ($0.48 per share)
    
    
    
    
    
    
    
    
    
    
    (2,023
    )
    
    
    
    
    
    
    
    
    
    
    (2,023
    )Balance at December 31, 2003
    
    
    445
    
    
    
    58,350
    
    
    
    (1,055
    )
    
    
    (2,758
    )
    
    
    20
    
    
    
    55,002Net income
    
    
    
    
    
    
    
    
    
    
    4,680
    
    
    
    
    
    
    
    
    
    
    
    4,680Other comprehensive income
unrealized gain (loss) on securities
available for sale (tax effect $274)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (414
    )
    
    
    (414
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,266Exercise of stock options and tax benefits
    
    
    11
    
    
    
    795
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    806Dividends declared and paid ($0.52 per share)
    
    
    
    
    
    
    
    
    
    
    (2,236
    )
    
    
    
    
    
    
    
    
    
    
    (2,236
    )Balance at December 31, 2004
    
    $
    456
    
    
    $
    59,145
    
    
    $
    1,389
    
    
    $
    (2,758
    )
    
    $
    (394
    )
    
    $
    57,838
 Disclosure of reclassification amount:
    
    2004
    
    
    2003
    
    
    2002(In Thousands)Gross unrealized (depreciation) appreciation
arising during the period
    
    $
    (688
    )
    
    $
    (1,011
    )
    
    $
    743Tax effect
    
    
    274
    
    
    
    343
    
    
    
    (253
    )Unrealized holding (depreciation) appreciation net of tax
    
    
    (414
    )
    
    
    (668
    )
    
    
    490Less: reclassification adjustment for gains (losses)
included in net income
    
    
    
    
    
    
    (14
    )
    
    
    Tax effect
    
    
    
    
    
    
    5
    
    
    
    Unrealized (depreciation) appreciation on securities,
net of reclassification
    
    $
    (414
    )
    
    $
    (659
    )
    
    
    490
 The accompanying notes are an integral part of these consolidated financial statements. 26




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##### Table of Contents



Consolidated Statements of Cash Flows
 Year Ended December 31,
    
    2004
    
    
    2003
    
    
    2002(In Thousands)Cash flows from operating activities:Net income
    
    $
    4,680
    
    
    $
    4,136
    
    
    $
    3,100Adjustments to reconcile net income to net cash provided by operating activities:Credit for loan recoveries
    
    
    (300
    )
    
    
    
    
    
    
    Gains on sales of mortgage loans
    
    
    (68
    )
    
    
    (467
    )
    
    
    (529
    )Loss on sale of investment securities available for sale
    
    
    
    
    
    
    14
    
    
    
    Net amortization of investment securities
    
    
    1,725
    
    
    
    2,117
    
    
    
    1,426Depreciation of premises and equipment and other assets
    
    
    430
    
    
    
    398
    
    
    
    454Loans originated for sale
    
    
    (3,883
    )
    
    
    (21,139
    )
    
    
    (35,415
    )Proceeds from sales of mortgage loans
    
    
    4,289
    
    
    
    23,847
    

    
    
    37,521(Increase) decrease in accrued interest receivable
    
    
    (342
    )
    
    
    (93
    )
    
    
    145Deferred income tax expense
    
    
    726
    
    
    
    516
    
    
    
    1,798(Increase) decrease in other assets
    
    
    (121
    )
    
    
    204
    
    
    
    (299
    )Increase (decrease) in advance payments by borrowers
    
    
    56
    
    
    
    (68
    )
    
    
    (55
    )(Decrease) increase in other liabilities
    
    
    (1,000
    )
    
    
    1,263
    
    
    
    (552
    )Net cash provided by operating activities
    
    
    6,192
    
    
    
    10,728
    
    
    
    7,594Cash flows from investing activities:Proceeds from maturities of investment securities held to maturity
    
    
    23,500
    
    
    
    171,500
    
    
    
    337,318Proceeds from maturities of investment securities available for sale
    
    
    25,585
    
    
    
    12,000
    
    
    
    5,493Purchases of investment securities held to maturity
    
    
    (60,422
    )
    
    
    (248,915
    )
    
    
    (351,927
    )Purchases of investment securities available for sale
    
    
    (45,195
    )
    

    
    (16,712
    )
    
    
    (31,194
    )Purchase of mutual funds available for sale
    
    
    
    
    
    
    (1,000
    )
    
    
    Purchases of mortgage-backed securities held to maturity
    
    
    
    
    
    
    (38,118
    )
    
    
    (2,967
    )Purchases of mortgage-backed securities available for sale
    
    
    
    
    
    
    (14,775
    )
    
    
    Proceeds from sales of mortgage-backed securities available for sale
    
    
    
    
    
    
    5,684
    
    
    
    Principal payments of securities held to maturity
    
    
    19,526
    
    
    
    43,209
    
    
    
    38,283Principal payments of securities available for sale
    
    
    4,168
    
    
    
    17,519
    
    
    
    11,670Purchases of Federal Home Loan Bank stock
    
    
    (1,294
    )
    
    
    (643
    )
    
    
    (Increase) decrease in loans, net
    
    
    (21,425
    )
    
    
    29,436
    
    
    
    (8,210
    )Proceeds from sales of Bank premises and equipment
    
    
    4
    
    
    
    
    
    
    
    Purchases of Bank premises and equipment
    
    
    (1,045
    )
    
    
    (223
    )
    
    
    (337
    )Net cash used in investing activities
    
    
    (56,598
    )
    
    
    (41,038
    )
    
    
    (1,871
    )Cash flows from financing activities:Net increase (decrease) in deposits
    
    
    26,566
    
    
    
    (6,925
    )
    
    
    11,015Additions to Federal Home Loan Bank advances
    
    
    58,346
    
    
    
    
    
    
    
    11,000Payments on Federal Home Loan Bank advances
    
    
    (32,110
    )
    
    
    (15,371
    )
    
    
    (19,755
    )Net increase (decrease) in agreements to repurchase securities
    
    
    675
    
    
    
    (1,464
    )
    
    
    (270
    )(Decrease) increase in other borrowed funds
    
    
    (3,000
    )
    
    
    48,596
    
    
    
    (483
    )Dividends paid
    
    
    (2,236
    )
    
    
    (2,023
    )
    
    
    (1,920
    )Treasury stock purchased
    
    
    
    
    
    
    (1,022
    )
    
    
    (1,736
    )Proceeds from exercise of stock options
    
    
    806
    
    
    
    511
    
    
    
    33Net cash provided by (used in) financing activities
    
    
    49,047
    
    
    
    22,302
    
    
    
    (2,116
    )Net (decrease) increase in cash and cash equivalents
    
    
    (1,359
    )
    
    
    (8,008
    )
    
    
    3,607Cash and cash equivalents, beginning of year
    
    
    8,761
    
    
    
    16,769
    
    
    
    13,162Cash and cash equivalents, end of year
    
    $
    7,402
    
    
    $
    8,761
    
    
    $
    16,769Cash paid during the year for:Interest on deposits and borrowed funds
    
    $
    8,445
    
    
    $
    9,039
    
    
    $
    11,632Income taxes
    
    
    2,871
    
    
    
    538
    
    
    
    271Cash received during the year for:Income taxes
    
    
    
    
    
    
    
    
    
    
    133Supplemental Schedule of non-cash activities:Change in valuation of investment securities available for sale
    
    
    (688
    )
    
    
    (1,008
    )
    
    
    743
 The accompanying notes are an integral part of these consolidated financial
statements. 27




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##### Table of Contents



Notes To ConsolidatedFinancial Statements (1)Summary of Significant Accounting Policies: Basis
of Presentation  LSB Corporation (the Corporation or the Company)
is a Massachusetts corporation and the holding company of its wholly-owned subsidiary Lawrence
Savings Bank (the Bank) a state-chartered Massachusetts savings bank. The Corporation was
organized by the Bank on July 1, 2001 to be a bank holding company and to acquire all of the
capital stock of the Bank. The Consolidated Financial Statements presented herein reflect the
accounts of the Corporation and its predecessor, Lawrence Savings Bank. The Corporation is
supervised by the Board of Governors of the Federal Reserve System (FRB), and it is also subject
to the jurisdiction of the Massachusetts Division of Banks, while the Bank is subject to the
regulations of, and periodic examination by, the Federal Deposit Insurance Corporation (FDIC) and
the Massachusetts Division of Banks. The Banks deposits are insured by the Bank Insurance Fund of
the FDIC up to $100,000 per account, as defined by the FDIC, and the Depositors Insurance Fund,
Inc. (DIF) for customer deposit amounts in excess of $100,000. The Consolidated Financial
Statements include the accounts of LSB Corporation and its wholly-owned consolidated subsidiary,
Lawrence Savings Bank, and its wholly-owned subsidiaries, Shawsheen Security Corporation, Shawsheen
Security Corporation II, Pemberton Corporation, and Spruce Wood Realty Trust. All inter-company
balances and transactions have been eliminated in consolidation. The Company has one reportable
operating segment. Certain amounts in prior periods have been reclassified to conform to the
current presentation. The LSB Corporations Consolidated Financial Statements have been prepared in conformity with U.S.
generally accepted accounting principles. Accordingly, management is required to make estimates and
assumptions that affect amounts reported in the balance sheets and statements of operations. Actual
results could differ significantly from those estimates and judgments. Material estimates that are
particularly susceptible to change relate to the allowance for loan losses, income taxes and
mortgage servicing rights. Cash
and Cash Equivalents  For the purpose of reporting cash
flows, cash and cash equivalents include cash on hand, amounts due from banks and Federal Funds
sold. Generally, Federal Funds are sold with overnight maturities. Investment
and Mortgage-backed Securities  Debt
securities that the Company has the intent and ability to hold to maturity are classified as held
to maturity and reported at amortized cost; debt, mortgage-backed and equity securities that are
bought and held principally for the purpose of selling in the near term are classified as trading
and reported at fair value, with unrealized gains and losses included in earnings; and debt,
mortgage-backed and equity securities not classified as either held to maturity or trading are
classified as available for sale and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as other comprehensive income, net of estimated income taxes. Premiums and discounts on debt and mortgage-backed securities are amortized or accreted into income
by use of the interest method. If a decline in fair value below the amortized cost basis of a debt
or mortgage-backed security is judged to be other than temporary, the cost basis of the investment
is written down to fair value and the amount of the write-down is included as a charge to earnings.
Gains and losses on the sale of debt and mortgage-backed securities are recognized at the time of
sale on a specific identification basis. Equity
Securities  Includes Northeast Retirement Services (NRS)
stock. NRS stock is closely held and not publicly traded and is carried at cost. Dividend income is
recorded when dividends are declared. Interest
on Loans  Interest on loans is accrued as earned. Loans on
which the accrual of interest has been discontinued are designated as non-accrual loans. It is
managements policy to discontinue the accrual of interest on a loan when there is a reasonable
doubt as to its collectibility. Interest on loans 90 days or more contractually delinquent is
generally excluded from interest income. When a loan is placed on non-accrual status, all interest
previously accrued but not collected is reversed against current period interest income. Interest
accruals are resumed on loans that have been 90 days or more past due only when they are brought
fully current with respect to interest and principal and when, in the judgment of management, the
loans are expected to be fully collectible as to both principal and interest. Loan
Fees  Loan origination fees, net of direct loan acquisitions
costs, are deferred and recognized over the contractual life of the loan as an adjustment of the
loans yield using a basis, which approximates the interest method. Amortization of loan fees is
discontinued once a loan is designated as non-accrual status. When loans are sold or paid-off, the
unamortized portion of net fees and costs is credited to income. Mortgage
Banking Activities   Loans held for sale are valued at the lower
of their amortized cost or market value. The Bank, from time-to-time, enters into forward
commitments to sell loans or mortgage-backed securities for the purpose of reducing interest rate
risk associated with the origination of loans for sale. Gains or losses on sales of loans are
recognized to the extent that the sale proceeds exceed or are less than the carrying amount of the
loans. Gains and losses are determined using the specific identification method. 28




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##### Table of Contents



When loans are sold with servicing rights retained, the Bank allocates the carrying amount of
the loans between the underlying asset sold and the rights retained, based on their relative fair
values. The resulting mortgage servicing rights are amortized over the period of estimated net
servicing income using a method which approximates the interest method. Actual prepayment
experience is reviewed periodically. When actual prepayments exceed estimated prepayments, the
balance of the mortgage servicing rights is adjusted accordingly. Periodically, the mortgage
servicing rights are assessed for impairment based on the fair value of such rights using market
prices. Transfers
and Servicing of Assets and Extinguishments of Liabilities  The Company accounts and reports for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent application of a financial
components approach that focuses on control. This approach distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings. After a transfer of financial
assets, the Company recognizes all financial and servicing assets it controls and liabilities it
has incurred and derecognizes financial assets it no longer controls and liabilities that have been
extinguished. This financial components approach focuses on the assets and liabilities that exist
after the transfer. Many of these assets and liabilities are components of financial assets that
existed prior to the transfer. If a transfer does not meet the criteria for recognition as a sale,
the Company accounts for the transfer as a secured borrowing with a pledge of collateral. Allowance
for Loan Losses  Losses on loans are provided for under
the allowance method of accounting. The allowance is increased by provisions charged to operations
on the basis of many factors including the risk characteristics of the portfolio, current economic
conditions and trends in loan delinquencies and charge-offs. When management believes that the
collection of a loans principal balance is unlikely, the principal amount is charged against the
allowance. Recoveries on loans which have been previously charged off are credited to the allowance
as received. Managements methodology for assessing the appropriateness of the allowance consists of several key
elements, which include a formula allowance, specific allowances for identified problem loans and
an unallocated allowance. The formula allowance is calculated by applying loss factors to outstanding loans, in each case
based on the internal risk grade of such loans. Changes in risk grades affect the amount of the
formula allowance. Loss factors are based on the Banks historical loss experience as well as
regulatory guidelines. Specific allowances are established in cases where management has identified significant conditions
related to a credit such that management believes it probable that a loss has been incurred in
excess of the amount determined by the application of the formula allowance. The unallocated allowance recognizes the model and estimation risk associated with the formula
allowance and specific allowances as well as managements evaluation of various conditions, the
effects of which are not directly measured in the determination of the formula and specific
allowances. The evaluation of the inherent loss with respect to these conditions is subject to a
higher degree of uncertainty because they are not identified with specific problem credits. In addition, various regulatory agencies, including the FDIC and the Massachusetts Division of
Banks, as an integral part of their examination process, periodically review the Banks allowance
for loan losses. Such agencies may require the Bank to recognize additions to the allowance for
loan losses based on judgments different from those of management. Impaired loans are commercial, commercial real estate, and individually significant residential
mortgage loans for which it is probable that the Bank will not be able to collect all amounts due
according to the contractual terms of the loan agreement. Impaired loans, except those loans that
are accounted for at fair value or at lower of cost or fair value, are accounted for at the present
value of the expected future cash flows discounted at the loans effective interest rate. Premises
and Equipment  Premises and equipment are stated at cost less
allowances for depreciation and amortization. Depreciation and amortization are computed
principally on the straight-line method over the estimated useful lives of the assets or the terms
of the leases, if shorter. Other
Real Estate Owned  Other real estate owned
(OREO) is comprised of foreclosed properties where the Bank has formally received title or has
possession of the collateral. Properties are carried at the lower of the investment in the related
loan or the estimated fair value of the property or collateral less selling costs. 29




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##### Table of Contents



Stock
Options  The Corporation measures compensation cost for
stock-based plans using the intrinsic value method. The intrinsic value method measures
compensation cost, if any, as the fair market value of the Companys stock at the grant date over
the exercise price. All options granted have an exercise price equivalent to the fair market value
at the date of grant and, accordingly, no compensation cost has been recorded. Beginning July 1,
2005, the Company will adopt Statement of Financial Standard (SFAS) No. 123 (revised 2004) (SFAS
123R), Share-Based Payment (See discussion which follows in recent accounting developments),
which will require the Company to record compensation measured at the date of grant based on the
fair value of the awards and recognized over its service period. If the fair value based method of
accounting for stock options had been used, the Companys net income and earnings per share would
have been reduced to the proforma amounts for the years ended December 31, and are presented in the
table which follows: 2004
    
    
    2003
    
    
    2002(In Thousands except per share data)Net Income:As Reported
    
    $
    4,680
    
    
    $
    4,136
    
    
    $
    3,100Pro forma
    
    
    4,344
    
    
    
    3,954
    
    
    
    2,867Basic earnings per share:As Reported
    
    $
    1.09
    
    
    $
    0.98
    
    
    $
    0.71Pro forma
    
    
    1.01
    
    
    
    0.94
    
    
    
    0.66Diluted earnings per share:As Reported
    
    $
    1.05
    
    
    $
    0.94
    
    
    $
    0.69Pro forma
    
    
    0.97
    
    
    
    0.90
    
    
    
    0.63
 The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions: 2004
    
    
    2003
    
    
    2002Expected volatility
    
    
    28.93
    %
    
    
    
    
    
    
    Risk-free interest rate
    
    
    3.44
    %
    
    
    
    
    
    
    Expected dividend yield
    
    
    3.08
    %
    
    
    
    
    
    
    Expected life in years
    
    8 years
    
    
    
    
    
    
    
 Pension
Expense  The Bank is a participant in a multiple employer
defined benefit pension plan. Pension expense is recognized on a net periodic pension cost method
over the employees approximate service period. Pension costs are funded in the year of accrual
using the aggregate cost method. Income
Taxes  Deferred tax assets and liabilities are recognized for
estimated future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax basis. Deferred assets
and liabilities are measured using enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax valuation allowances are established and based on managements
judgment as to whether it is more likely than not that all or some portion of the future tax
benefits of prior operating losses will be realized. Earnings
Per Share  Basic EPS is calculated based on the weighted
average number of common shares outstanding during each period. Stock options outstanding,
accounted for under the treasury stock method, have a dilutive effect to the computation of diluted
EPS. Recent Accounting Developments FASB Emerging Issues Task Force (EITF) Issue 03-1: The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments In November 2003 and March 2004, the FASBs
EITF issued a consensus on EITF Issue 03-1. EITF 03-1 contains new guidance on other-than-temporary impairments of investment securities. The guidance
dictates when impairment is deemed to exist, provides guidance on determining if impairment is
other than temporary, and directs how to calculate impairment loss.
Issue 03-1 also details expanded annual disclosure rules. In September 2004,
the FASBs EITF issued EITF Issue No. 03-1-1
Effective Date of Paragraphs 10-20 of EITF Issue 03-1 The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments, which delays the
effective date for the measurement and recognition guidance contained in paragraphs 10-20 of EITF
03-1 to be concurrent with the final issuance of EITF 03-1-a Implementation Guidance for the
Application of Paragraph 16 of EITF 03-1 The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. EITF 03-1-a is currently being debated by the FASB in regards
to final guidance and effective date with a comment period that ended October 29, 2004. EITF 03-1,
as issued, was originally effective for periods beginning after June 15, 2004 and the disclosure
requirements of this consensus remain in effect. The adoption of the original EITF 03-1 (excluding
paragraphs 10-20) did not have a material impact on the Companys financial position or results of
operations. Statement of Position 03-3 (SOP 03-3): Accounting for Certain Loans or Debt Securities Acquired
in a Transfer in December 2003, the American Institute of Certified Public Accountants (AICPA)
issued SOP 03-3. SOP 03-3 requires loans acquired through a transfer, such as a business
combination, where there are differences in expected cash flows and contractual cash flows due in
part to credit quality be recognized at their fair value. The yield that may be accreted is limited to the excess of the investors estimate of undiscounted expected principal, interest and other cash flows over the investors initial
investment in the loan. The excess of contractual cash flows over expected cash flows is not to be recognized as an adjustment of yield, loss accrual, or valuation
allowance. Valuation allowances can not be created nor carried over in the initial accounting for
loans acquired in a transfer of loans with evidence 30




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##### Table of Contents



of deterioration of credit quality since origination. However, valuation allowances for
non-impaired loans acquired in a business combination can be carried over. This SOP is effective
for loans acquired in fiscal years beginning after December 15, 2004, with early adoption
encouraged. The Company does not believe the adoption of SOP 03-3 will have a material impact on
the Companys financial position or results of operations. SFAS No. 123 (revised 2004) (SFAS 123FR), Share-Based Payment In December 2004, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123
(revised 2004). SFAS No. 123R replaces SFAS No. 123 Accounting for Stock-Based Compensation and
supersedes Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees. SFAS No. 123R will require that the compensation cost relating to share-based payment
transactions be recognized in the Companys financial statements, eliminating pro forma disclosure
as an alternative. That cost will be measured based on the grant-date fair value of the equity or
liability instruments issued. SFAS No. 123R is effective for public entities as of the first
interim or annual period that begins after June 15, 2005. The impact of the Company adopting such
accounting can be seen in accounting policies for stock options. The Company does believe the
adoption of SFAS 123R will have a impact to the Company and estimate the 2005 gross compensation
expense related to share-based payment transactions to be recognized will be approximately $61
thousand for the six months of 2005 for which SFAS 123R will be effective. For years 2006 and
beyond, a full year of compensation expense will be recognized. FIN No. 46 Consolidation of Variable Interest Entities  an Interpretation of Accounting Research
Bulletin No. 51 In January 2003, the FASB issued FIN No. 46. FIN 46 established accounting
guidance for consolidation of variable interest entities (VIE) that function to support the
activities of the primary beneficiary. The primary beneficiary of a VIE is the entity that absorbs
a majority of the VIEs expected losses, receives a majority of the VIEs expected residual
returns, or both, as a result of ownership, controlling interest, contractual relationship or other
business relationship with a VIE. Prior to the implementation of FIN 46, VIEs were generally
consolidated by an enterprise when the enterprise had a controlling financial interest through
ownership of a majority of voting interest in the entity. The Company adopted FIN No. 46 as of
February 1, 2003 for all arrangements entered into after January 31, 2003. The Company does not
believe the adoption of FIN No. 46 will have a material impact on the Companys financial position
or results of operations. (2) Investment Securities The amortized cost and market value of investment securities at December 31, follows: 2004
    
    
    2003Amortized
    
    
    Unrealized
    
    
    Market
    
    
    Amortized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gain
    
    
    Loss
    
    
    Value
    
    
    Cost
    
    
    Gain
    
    
    Loss
    
    
    Value(In Thousands)Investment securities held to maturity:Federal Agency
obligations (1)
    
    $
    104,042
    
    
    $
    70
    
    
    $
    (763
    )
    
    $
    103,349
    
    
    $
    94,798
    
    
    $
    1,058
    
    
    $
    (367
    )
    
    $
    95,489Mortgage-backed securities
    
    
    31,193
    
    
    
    140
    
    
    
    (531
    )
    
    
    30,802
    
    
    
    39,467
    
    
    
    188
    
    
    
    (686
    )
    
    
    38,969Asset-backed securities
    
    
    50,829
    
    
    
    51
    
    
    
    (406
    )
    
    
    50,474
    
    
    
    32,735
    
    
    
    204
    
    
    
    (284
    )
    
    
    32,655Corporate obligations
    
    
    12,624
    
    
    
    46
    
    
    
    (146
    )
    
    
    12,524
    
    
    
    15,662
    
    
    
    323
    
    
    
    (133
    )
    
    
    15,852Municipal obligations
    
    
    1,576
    
    
    
    
    
    
    
    (9
    )
    
    
    1,567
    
    
    
    1,624
    
    
    
    3
    
    
    
    
    
    
    
    1,627$
    200,264
    
    
    $
    307
    
    
    $
    (1,855
    )
    
    $
    198,716
    
    
    $
    184,286
    
    
    $
    1,776
    
    
    $
    (1,470
    )
    
    $
    184,592Investment securities
available for sale:US Treasury obligations
    
    $
    5,133
    
    
    $
    
    
    
    $
    (288
    )
    
    $
    4,845
    
    
    $
    5,146
    
    
    $
    
    
    
    $
    (351
    )
    
    $
    4,795Federal Agency
obligations (1)
    
    
    34,977
    
    
    
    15
    
    
    
    (85
    )
    
    
    34,907
    
    
    
    21,015
    
    
    
    464
    
    
    
    
    
    
    
    21,479Mortgage-backed securities
    
    
    4,590
    
    
    
    15
    
    
    
    (23
    )
    
    
    4,582
    
    
    
    6,858
    
    
    
    34
    
    
    
    (30
    )
    
    
    6,862Asset-backed securities
    
    
    14,619
    
    
    
    1
    
    
    
    (168
    )
    
    
    14,452
    
    
    
    8,139
    
    
    
    13
    
    
    
    (61
    )
    
    
    8,091Corporate obligations
    
    
    3,219
    
    
    
    
    
    
    
    (99
    )
    
    
    3,120
    
    
    
    6,245
    
    
    
    81
    
    
    
    (98
    )
    
    
    6,228Mutual funds
    
    
    1,000
    
    
    
    
    
    
    
    (28
    )
    
    
    972
    
    
    
    1,000
    
    
    
    
    
    
    
    (31
    )
    
    
    969Equity securities
    
    
    168
    
    
    
    
    
    
    
    (7
    )
    
    
    161
    
    
    
    168
    
    
    
    
    
    
    
    
    
    
    
    168$
    63,706
    
    
    $
    31
    
    
    $
    (698
    )
    
    $
    63,039
    
    
    $
    48,571
    
    
    $
    592
    
    
    $
    (571
    )
    
    $
    48,592
   (1)
    Federal agency obligations include investment securities issued by Government Sponsored
Enterprises (GSEs) 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. 31




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##### Table of Contents



(2) Investment Securities  (continued) Proceeds from sales, realized gains and losses on investments available for sale for the years
ended December 31, follow: 2004
    
    
    2003
    
    
    2002(In Thousands)Proceeds from sales
    
    $
    
    
    
    $
    5,684
    
    
    $
    Realized gains on sales
    
    
    
    
    
    
    
    
    
    
    Realized losses on sales
    
    
    
    
    
    
    14
    
    
    
    
 Other Than Temporarily Impaired Securities The following table shows the gross unrealized losses and fair value of the Companys investments
with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by
investment category and length of time that individual securities have been in a continuous
unrealized loss position, at December 31, 2004. Less Than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses(In Thousands)US Treasury obligations
    
    $
    
    
    
    $
    
    
    
    $
    4,845
    
    
    $
    (288
    )
    
    $
    4,845
    
    
    $
    (288
    )Federal Agency
obligations
    
    
    72,095
    
    
    
    (391
    )
    
    
    41,043
    
    
    
    (457
    )
    
    
    113,138
    
    
    
    (848
    )Mortgage-backed securities
    
    
    322
    
    
    
    (4
    )
    
    
    26,136
    
    
    
    (550
    )
    
    
    26,458
    
    
    
    (554
    )Asset-backed securities
    
    
    39,732
    
    
    
    (349
    )
    
    
    21,669
    
    
    
    (225
    )
    
    
    61,401
    
    
    
    (574
    )Corporate obligations
    
    
    2,065
    
    
    
    (16
    )
    
    
    8,802
    
    
    
    (229
    )
    
    
    10,867
    
    
    
    (245
    )Municipal obligations
    
    
    1,567
    
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    1,567
    
    
    
    (9
    )Mutual funds
    
    
    
    
    
    
    
    
    
    
    972
    
    
    
    (28
    )
    
    
    972
    
    
    
    (28
    )Equity securities
    
    
    161
    
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    161
    
    
    
    (7
    )Total temporarily impaired
securities
    
    $
    115,942
    
    
    $
    (776
    )
    
    $
    103,467
    
    
    $
    (1,777
    )
    
    $
    219,409
    
    
    $
    (2,553
    )
 U.S. Treasury and Federal Agency Obligations The unrealized losses on the Companys investments in U.S. Treasury obligations and direct
obligations of U.S. government agencies were caused by interest rate increases. Because the Company
has the ability and intent to hold these investments until a recovery of fair value, which may be
at maturity, the Company does not consider these investments to be other-than-temporarily impaired
at December 31, 2004. Mortgage-Backed Securities The unrealized losses on the Companys investment in federal agency mortgage-backed securities were
caused by interest rate increases. The contractual cash flows of these investments are guaranteed
by an agency of the U.S. government. Accordingly, it is expected that the securities would not be
settled at a price less than the amortized cost of the Companys investment. Because the decline in
market value is attributable to changes in interest rates and not credit quality and because the
Company has the ability and intent to hold theses investments until a recovery of fair value, which
may be at maturity, the Company does not consider these investments to be other-than-temporarily
impaired at December 31, 2004. Corporate and Municipal Obligations The unrealized losses on the Companys investments in corporate and municipal obligations were
caused by interest rate increases. Because the company has the ability and intent to hold these
investments until a recovery of fair value, which may be at maturity, the Company does not consider
these investments to be other-than-temporarily impaired at December 31, 2004. Equity Securities and Mutual Funds The unrealized losses on equity securities and mutual funds are a result of specific conditions and
circumstances that are unique to each company represented in the portfolio. When needed, management
diligently monitors its holdings for impairment by reviewing the financial condition of the issuer,
company specific events, industry developments, and general economic conditions. In evaluating the
severity and duration of impairment,
management also reviews corporate financial reports, press releases and other publicly available
information. Based upon this evaluation and the Companys ability and intent to hold these
investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the
Company does not consider these investments to be other-than-temporarily impaired. 32




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##### Table of Contents



The following table is a summary of the contractual maturities of investment securities held to
maturity and available for sale at December 31, 2004. These amounts exclude mutual funds and equity
securities, which have no contractual maturities. Mortgage-backed securities consist of FHLMC,
FNMA, and GNMA certificates. Mortgage-backed and asset-backed securities are shown at their final
contractual maturity date but are expected to have shorter average lives. Held to maturity
    
    
    Available for saleWeighted
    
    
    
    
    
    
    
    
    
    
    WeightedAmortized
    
    
    Market
    
    
    Average
    
    
    Amortized
    
    
    Market
    
    
    AverageDecember 31, 2004
    
    Cost
    
    
    Value
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield(Dollars in Thousands)US Treasury & Agencies obligations:Within 1 year
    
    $
    14,997
    
    
    $
    15,067
    
    
    
    6.01
    %
    
    $
    5,000
    
    
    $
    5,014
    
    
    
    3.83
    %1 to 2 years
    
    
    20,314
    
    
    
    20,131
    
    
    
    2.53
    
    
    
    
    
    
    
    
    
    
    
    2 to 3 years
    
    
    43,220
    
    
    
    42,940
    
    
    
    3.10
    
    
    
    9,992
    
    
    
    9,967
    
    
    
    2.843 to 5 years
    
    
    25,511
    
    
    
    25,211
    
    
    
    2.82
    
    
    
    9,974
    
    
    
    9,916
    
    
    
    3.015 to 10 years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,144
    
    
    
    14,855
    
    
    
    3.23104,042
    
    
    
    103,349
    
    
    
    3.34
    
    
    
    40,110
    
    
    
    39,752
    
    
    
    3.15Mortgage-backed securities:Within 1 year
    
    
    1,058
    
    
    
    1,059
    
    
    
    6.27
    
    
    
    17
    
    
    
    17
    
    
    
    3.612 to 3 years
    
    
    192
    
    
    
    199
    
    
    
    7.05
    
    
    
    
    
    
    
    
    
    
    
    3 to 5 years
    
    
    2,590
    
    
    
    2,598
    
    
    
    4.04
    
    
    
    687
    
    
    
    691
    
    
    
    3.815 to 10 years
    
    
    26,592
    
    
    
    26,179
    
    
    
    3.63
    
    
    
    2,781
    
    
    
    2,758
    
    
    
    3.52After 10 years
    
    
    761
    
    
    
    767
    
    
    
    3.50
    
    
    
    1,105
    
    
    
    1,116
    
    
    
    3.4431,193
    
    
    
    30,802
    
    
    
    3.77
    
    
    
    4,590
    
    
    
    4,582
    
    
    
    3.55Asset-backed securities:2 to 3 years
    
    
    1,123
    
    
    
    1,131
    
    
    
    6.48
    
    
    
    
    
    
    
    
    
    
    
    5 to 10 years
    
    
    3,086
    
    
    
    3,075
    
    
    
    3.57
    
    
    
    
    
    
    
    
    
    
    
    After 10 years
    
    
    46,620
    
    
    
    46,268
    
    
    
    3.82
    
    
    
    14,619
    
    
    
    14,452
    
    
    
    3.6550,829
    
    
    
    50,474
    
    
    
    3.87
    
    
    
    14,619
    
    
    
    14,452
    
    
    
    3.65Corporate obligations:Within 1 year
    
    
    4,011
    
    
    
    4,019
    
    
    
    2.97
    
    
    
    
    
    
    
    
    
    
    
    1 to 2 years
    
    
    720
    
    
    
    758
    
    
    
    8.13
    
    
    
    
    
    
    
    
    
    
    
    2 to 3 years
    
    
    2,080
    
    
    
    2,065
    
    
    
    3.15
    
    
    
    1,000
    
    
    
    994
    
    
    
    1.963 to 5 years
    
    
    5,813
    
    
    
    5,682
    
    
    
    3.22
    
    
    
    2,219
    
    
    
    2,126
    
    
    
    2.8612,624
    
    
    
    12,524
    
    
    
    3.41
    
    
    
    3,219
    
    
    
    3,120
    
    
    
    2.58Municipal obligations:Within 1 year
    
    
    1,576
    
    
    
    1,567
    
    
    
    2.89
    
    
    
    
    
    
    
    
    
    
    
    $
    200,264
    
    
    $
    198,716
    
    
    
    3.54
    %
    
    $
    62,538
    
    
    $
    61,906
    
    
    
    3.27
    %
 Issuers may have the right to call or prepay obligations with or without call or prepayment
penalties. This right may cause actual maturities and yields to differ from the contractual
maturities summarized above. As of December 31, 2004, the Company had callable investment
securities with an amortized cost of $12.1 million and a market value of $12.0 million in the held
to maturity portfolio which are callable during 2005. The callable investment securities in the
available for sale portfolio had an amortized cost and market value of $20.1 million which are also
callable during 2005. (3) Federal Home Loan Bank Stock The Bank is a member of the Federal Home Loan Bank of Boston (FHLB). The Bank is required to own
stock of the FHLB at par. On April 19, 2004, the FHLB implemented a new capital structure and stock
investment requirements for members to comply with the Gramm-Leach-Bliley Act of 1999. There are two components of the minimum stock investment requirements. 1) The Membership Stock
Investment Requirement is equal to 0.35% of Class B Stock for Qualifying Collateral as determined
by the FHLB from the most recently available FDIC Call Report from the Bank. 2) The Activity Based
Stock Investment Requirement is equal to 4.50% of the Banks outstanding advances with the FHLB.
The Bank receives an amount equal to the par value of the FHLB stock when excess stock is redeemed. 33




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##### Table of Contents



(4) Loans The components of the loan portfolio at December 31, follow: 2004
    
    
    2003(In Thousands)Residential real estate
    
    $
    60,057
    
    
    $
    57,017Loans held for sale
    
    
    
    
    
    
    338Home equity
    
    
    8,869
    
    
    
    10,236Construction
    
    
    15,211
    
    
    
    16,040Commercial real estate
    
    
    131,605
    
    
    
    112,503Commercial business
    
    
    16,369
    
    
    
    14,805Consumer
    
    
    699
    
    
    
    564Total loans
    
    
    232,810
    
    
    
    211,503Allowance for loan losses
    
    
    (4,140
    )
    
    
    (4,220
    )$
    228,670
    
    
    $
    207,283
 The amounts above include net deferred loan origination fees and costs totaling $105 thousand at
December 31, 2004 and $81 thousand at December 31, 2003. Mortgage loans serviced by the Company for others amounted to $45.8 million and $57.9 million at
December 31, 2004 and 2003, respectively. There were no non-performing or impaired loans at December 31, 2004 or at December 31, 2003. In the ordinary course of business, the Bank makes loans to its Directors and Officers and their
associates and affiliated companies (related parties) at substantially the same terms and
conditions as those prevailing at the time of origination for comparable transactions with other
borrowers. An analysis of total related party loans for the year ended December 31, 2004 follows: Balance at
    
    
    
    
    
    Balance atJanuary 1, 2004
    
    Additions
    
    Repayments
    
    December 31, 2004(In Thousands)$1,668
    
    $1,235

    
    $823
    
    $2,080
 The activity in the allowance for loan losses for the years ended December 31, follows: 2004
    
    
    2003
    
    
    2002(In Thousands)Balance at beginning of year
    
    $
    4,220
    
    
    $
    4,167
    
    
    $
    4,070Total charge-offs
    
    
    (45
    )
    
    
    
    
    
    
    (1
    )Total recoveries
    
    
    265
    
    
    
    53
    
    
    
    98Net recoveries
    
    
    220
    
    
    
    53
    
    
    
    97Credit for loan recoveries
    
    
    (300
    )
    
    
    
    
    
    
    Balance at end of year
    
    $
    4,140
    
    
    $
    4,220
    
    
    $
    4,167
 The following table summarizes the balances of mortgage service fees at December 31: 2004
    
    
    2003(In Thousands)Balance at beginning of year
    
    $
    488
    
    
    $
    1,015Additions
    
    
    53
    
    
    
    201Amortization
    
    
    (137
    )
    
    
    (728
    )Mortgage servicing rights
    
    
    404
    
    
    
    488Valuation allowance
    
    
    (98
    )
    
    
    (96
    )Balance at end of year
    
    $
    306
    
    
    $
    392
 34




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##### Table of Contents



(4) Loans  (continued) The following table summarizes activity in the mortgage service fees valuation allowance for the
years ended December 31: 2004
    
    
    2003
    
    
    2002(In Thousands)Balance at beginning of year
    
    $
    96
    
    
    $
    377
    
    
    $
    75Provision (recoveries) charged to operations
    
    
    2
    
    
    
    (281
    )
    
    
    302Balance at end of year
    
    $
    98
    
    
    $
    96
    
    
    $
    377
 The following table summarizes activity in the loan servicing fees net for the years ended December 31: 2004
    
    
    2003
    
    
    2002(In Thousands)Service fee income
    
    $
    158
    
    
    $
    216
    
    
    $
    269Amortization of mortgage servicing rights
    
    
    (137
    )
    
    
    (728
    )
    
    
    (269
    )(Provision) recoveries for valuation allowance
    
    
    (2
    )
    
    
    281
    
    
    
    (302
    )Mortgage servicing income (expense)
    
    
    19
    
    
    
    (231
    )
    
    
    (302
    )Late charges and other loan fees
    
    
    165
    
    
    
    251
    
    
    
    157Loan servicing fees, net
    
    $
    184
    
    
    $
    20
    
    
    $
    (145
    )
 (5) Bank
Premises and Equipment The components of premises and equipment at December 31, follow: EstimatedUseful Lives

    
    2004
    
    
    2003(In Thousands)Premises
    
    10  39 years
    
    $
    3,788
    
    
    $
    3,657Equipment
    
    3  5 years
    
    
    2,722
    
    
    
    2,648Leasehold improvements
    
    3  10
years
    (1)
    
    1,038
    
    
    
    4087,548
    
    
    
    6,713Less accumulated depreciation and amortization
    
    
    
    
    
    
    (4,062
    )
    
    
    (3,838
    )$
    3,486
    
    
    $
    2,875
   (1)
    
    Leasehold improvements  Depreciated over term of lease or asset life, whichever is shorter. Depreciation and amortization expense for the years ended December 31, 2004, 2003, and 2002
amounted to $430,000, $398,000, and $454,000, respectively. Rent expense for leased premises for
the years ended December 31, 2004, 2003 and 2002 amounted to $186,000, $152,000 and $152,000,
respectively. The Company is obligated, under non-cancelable leases for premises and equipment, for
minimum payments in future periods of $201,000 for each of the years 2005 and 2006, $203,000 in the
year 2007, $159,000 in the year 2008 and $137,000 in the year 2009. The Company enters into operating leases in which office space is rented to other business at its
Corporate Headquarters. Rental income for the years ended December 31, 2004, 2003 and 2002 amounted
to $181,000, $221,000 and $213,000, respectively. These businesses are obligated under
non-cancelable leases for premises, for minimum payments in future periods of $160,000 in 2005,
$123,000 in 2006, $18,000 in 2007, $17,000 in 2008 and $9,000 in 2009. 6) Deposits The following table shows the components of deposits at December 31, 2004 and 2003 and the range of
interest rates paid as of December 31, 2004. Rates as ofDecember 31,2004
    
    
    2004
    
    
    2003(Dollars in Thousands)Interest bearing accounts:NOW and Super NOW accounts
    
    
    0.10-0.25
    %
    
    $
    38,061
    
    
    $
    36,108Savings accounts
    
    
    0.35
    %
    
    
    44,673
    
    
    
    44,324Money market investment accounts
    
    
    0.25-1.45
    %
    
    
    82,877
    
    
    
    76,148Certificates of deposit
    
    
    1.00-6.25
    %
    
    
    89,649
    
    
    
    74,184Retirement accounts
    
    
    1.00-6.25
    %
    
    
    29,049
    
    
    
    27,666Total interest bearing deposits
    
    
    
    
    
    
    284,309
    
    
    
    258,430Non-interest bearing demand deposit accounts
    
    
    
    
    
    
    14,797
    
    
    
    14,110$
    299,106
    
    
    $
    272,540
 35




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##### Table of Contents



6) Deposits  (continued) The components of interest expense on deposits for the years ended December 31, follow: 2004
    
    
    2003
    
    
    2002(In Thousands)Now and Super NOW accounts
    
    $
    40
    
    
    $
    40
    
    
    $
    81Savings accounts
    
    
    161
    
    
    
    200
    
    
    
    394Money market investment accounts
    
    
    980
    
    
    
    900
    
    
    
    1,097Certificates of deposit
    
    
    1,656
    
    
    
    2,088
    
    
    
    3,109Retirement accounts
    
    
    863
    
    
    
    948
    
    
    
    1,123$
    3,700
    
    
    $
    4,176
    
    
    $
    5,804
 The amount and weighted average interest rate on certificates of deposit, including retirement
accounts, by periods to maturity at December 31, 2004 are summarized as follows: Equal to
    
    
    
    
    
    
    WeightedLess
    
    
    and greater
    
    
    
    
    
    
    Averagethan
    
    
    than
    
    
    
    
    
    
    Interest$100,000
    
    
    $100,000
    
    
    Total
    
    
    Rate(Dollars in Thousands)3 months or less
    
    $
    13,959
    
    
    $
    6,753
    
    
    $
    20,712
    
    
    
    1.76
    %From three to six months
    
    
    15,943
    
    
    
    4,606
    
    
    
    20,549
    
    
    
    1.84From six to twelve months
    
    
    19,852
    
    
    
    4,424
    
    
    
    24,276
    
    
    
    2.14From one to two years
    
    
    21,801
    
    
    
    7,368
    
    
    
    29,169
    
    
    
    3.00From two to three years
    
    
    9,518
    
    
    
    5,815
    
    
    
    15,333
    
    
    
    3.61Three years and thereafter
    
    
    6,079
    
    
    
    2,580
    
    
    
    8,659
    
    
    
    3.45$
    87,152
    
    
    $
    31,546
    
    
    $
    118,698
    
    
    
    2.52
    %
 There were no brokered deposits at December 31, 2004 or at December 31, 2003. (7) Federal
Home Loan Bank Advances and Other Borrowed Funds The FHLB permits member institutions to borrow funds for various purposes. Outstanding advances
at December 31, 2004 are collateralized by a blanket lien against residential mortgages and other
qualifying collateral. Advances outstanding at December 31, follow: 2004
    
    
    2003Weighted Average
    
    
    
    
    
    
    Weighted AverageMaturity
    
    Amount
    
    
    Interest Rate
    
    
    Amount
    
    
    Interest Rate(Dollars in Thousands)2004
    
    $
    
    
    
    
    
    %
    
    $
    20,000
    
    
    
    4.73
    %2005
    
    
    32,000
    
    
    
    2.97
    
    
    
    6,000
    
    
    
    5.912006
    
    
    10,000
    
    
    
    3.34
    
    
    
    5,000
    
    
    
    4.692007
    
    
    30,000
    
    
    
    3.40
    
    
    
    15,000
    
    
    
    4.532009
    
    
    224
    
    
    
    6.42
    
    
    
    240
    
    
    
    6.422010
    
    
    20,000
    
    
    
    6.03
    
    

    
    20,000
    
    
    
    6.032011
    
    
    10,000
    
    
    
    4.93
    
    
    
    10,000
    
    
    
    4.932021
    
    
    2,542
    
    
    
    6.23
    
    
    
    2,626
    
    
    
    6.232024
    
    
    336
    
    
    
    1.07
    
    
    
    
    
    
    
    $
    105,102
    
    
    
    3.98
    %
    
    $
    78,866
    
    
    
    5.19
    %
 Issuers may have the right to call or prepay obligations with or without call or prepayment
penalties. This right may cause actual maturities to differ from the contractual maturities
summarized above. As of December 31, 2004 the Company had callable advances totaling $45.0 million
and amortizing advances totaling $3.1 million. The Company may enter into agreements to repurchase securities sold. These agreements are treated
as secured borrowings and the obligations to repurchase securities sold are reflected as
liabilities and the securities collateralized by the agreements remain as assets. Generally, the
outstanding collateral consists of U.S. Treasury and Government Agency obligations and is held by
third party custodians. Repurchase agreements totaled $3.2 million at December 31, 2004 at a rate
of 0.75%. Repurchase agreements outstanding at December 31, 2003 totaled $2.5 million at a rate of
0.50%. 36




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##### Table of Contents



The components of other borrowed funds at December 31, follows: 2004
    
    
    2003(Dollars In Thousands)FHLB Short-term borrowings
    
    $
    49,000
    
    
    $
    52,000Customer repurchase agreements
    
    
    3,161
    
    
    
    2,486$
    52,161
    
    
    $
    54,486
 Information relating to short-term borrowed funds for the years ended, follows: 2004
    
    
    2003
    
    
    2002Repurchase
    
    
    FHLB
    
    
    Repurchase
    
    
    FHLB
    
    
    Repurchase
    
    
    FHLBAgreements
    
    
    Advances
    
    
    Agreements
    

    
    Advances
    
    
    Agreements
    
    
    Advances(Dollars In Thousands)Outstanding at December 31
    
    $
    3,161
    
    
    $
    49,000
    
    
    $
    2,486
    
    
    $
    52,000
    
    
    $
    3,950
    
    
    $
    Average balance outstanding during the year
    
    
    2,949
    
    
    
    40,160
    
    
    
    2,719
    
    
    
    12,152
    
    
    
    3,254
    
    
    
    41Maximum outstanding at any month end
    
    
    3,946
    
    
    
    55,500
    
    
    
    3,610
    
    
    
    52,000
    
    
    
    5,463
    
    
    
    Weighted average rate at December 31
    
    
    0.75
    %
    
    
    2.27
    %
    
    
    0.50
    %
    
    
    1.10
    %
    
    
    0.75
    %
    
    
    
    %Weighted average rate during the year
    
    
    0.50
    
    
    
    1.43
    
    
    
    0.62
    
    
    
    0.91
    
    
    
    0.58
    
    
    
    2.11
 (8) Income Taxes An analysis of income tax expense for the years ended December 31, follows: 2004
    
    
    2003
    
    
    2002(In Thousands)Current expense (benefit):Federal
    
    $
    1,590
    
    
    $
    1,095
    
    
    $
    (214
    )State
    
    
    284
    
    
    
    476
    
    
    
    227Total current expense
    
    
    1,874
    
    
    
    1,571
    
    
    
    13Deferred expense (benefit):Federal
    
    
    574
    
    
    
    541
    
    
    
    1,791State
    
    
    167
    
    
    
    (24
    )
    
    
    (11
    )Change in valuation reserve
    
    
    (15
    )
    
    
    (1
    )
    
    
    18Total deferred expense
    
    
    726
    
    
    
    516
    
    
    
    1,798Total income tax expense
    
    $
    2,600
    
    
    $
    2,087
    
    
    $
    1,811
 A reconciliation of the difference between the expected federal income tax expense computed by
applying the federal statutory rate of 34% to the amount of actual income tax expense for the years
ended December 31, follows: 2004
    
    
    2003
    
    
    2002(In Thousands)Expected federal income tax expense
    
    $
    2,475
    
    
    $
    2,116
    
    
    $
    1,670Items affecting expected tax:State income tax, net of federal benefit
    
    
    298
    
    
    
    298
    
    
    
    143Change in estimate for tax contingencies
    
    
    (98
    )
    
    
    (300
    )
    
    
    Other
    
    
    (60
    )
    
    
    (26
    )
    
    
    (20
    )Change in valuation reserve
    
    
    (15
    )
    
    
    (1
    )
    
    
    18Total income tax expense
    
    $
    2,600
    
    
    $
    2,087
    
    
    $
    1,811
 37




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##### Table of Contents



(8) Income Taxes  (continued) The tax effects of temporary differences (the difference between financial statement carrying
amounts of existing assets and liabilities and their respective tax basis that give rise to
deferred tax assets and liabilities) for the years ended December 31, follow: 2004
    
    
    2003(In Thousands)Deferred tax assets:Allowance for loan losses
    
    $
    1,576
    
    
    $
    2,464Capital loss carryforward
    
    
    40
    
    
    
    55Unrealized loss on investment securities available for sale
    
    
    273
    
    
    
    Pension costs
    
    
    388
    
    
    
    386Deferred compensation
    
    
    534
    
    
    
    486Loan origination fees
    
    
    10
    
    
    
    10Depreciation
    
    
    329
    
    
    
    318Other
    
    
    238
    
    
    
    193Gross deferred tax asset
    
    
    3,388
    
    
    
    3,912Valuation reserve
    
    
    (40
    )
    
    
    (55
    )Deferred tax asset
    
    
    3,348
    
    
    
    3,857Deferred tax liabilities:Unrealized gains on investment securities available for sale
    
    
    
    
    
    
    (1
    )Other
    
    
    (281
    )
    
    
    (337
    )Gross deferred tax liability
    
    
    (281
    )
    
    
    (338
    )Net deferred income tax asset
    
    $
    3,067
    
    
    $
    3,519
 Capital losses on the sale of securities resulted in capital loss carryforwards. A deferred tax
valuation allowance on capital loss carryforwards is required to reduce the potential deferred tax
asset when it is more likely than not that all or some portion of the potential deferred tax asset
will not be realized due to the lack of sufficient capital gains in the carryforward period. At
December 31, 2004, the Company has $118 thousand of capital loss carryforwards available that
expire between 2004 and 2007. At December 31, 2004, the Bank would need to generate approximately $9.0 million of future net
taxable income to realize the net deferred income tax asset. Management believes that it is more
likely than not that the net deferred income tax asset at December 31, 2004 will be realized based
upon recent operating results. It should be noted, however, that factors beyond Managements control, such as the general state of
the economy and real estate values, can affect future levels of taxable income and that no
assurance can be given that sufficient taxable income will be generated to fully absorb gross
deductible temporary differences. The unrecaptured base year tax reserves as of October 31, 1998 will not be subject to recapture as
long as the institution continues to carry on the business of banking. In addition, the balance of
the pre-1988 bad debt tax reserves continue to be subject to a provision of the current law that
requires recapture in the case of certain excess distribution to shareholders. The tax effect of
pre-1988 bad debt tax reserves subject to recapture in the case of certain excess distributions is
approximately $1.1 million. (9) Stockholders Equity The Company and the Bank are regulated by federal and state regulatory agencies. Failure by the
Company or the Bank to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by federal or state regulators that, if undertaken, could
have a direct material effect on the Companys Consolidated Financial Statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and
the Bank to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets
and of Tier 1 capital to average assets (Leverage ratio). There are two categories of capital under
the guidelines. Tier 1 capital as it applies to the Company and the Bank, includes stockholders
equity exclusive of the net unrealized gains/losses on investment securities available for sale and
the deferred tax asset is disallowed. Tier 2 capital includes the allowance for loan losses,
subject to guideline limitations. At December 31, 2004 and 2003, the Company and the Bank not only exceeded each of the minimum
capital requirements but also met the definition of well capitalized as defined by the FRB and
the FDIC under the regulatory framework for prompt corrective action. To be categorized as well
capitalized the Company or the Bank must maintain Tier 1 Total, and Leverage ratios as set forth
in the table below. There are no conditions or events that management believes have changed the
Companys or the Banks classification as well capitalized. 38




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##### Table of Contents



(9) Stockholders Equity  (continued) The Companys and the Banks actual capital ratios and amounts at December 31, 2004 and 2003,
follow: Risk-Based RatiosTier 1 Capital
    
    
    Total Capital
    
    
    Leverage Capital2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003(Dollars in Thousands)Capital 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
    %LSB Corporation
    
    
    18.38
    %
    
    
    19.25
    %
    
    
    19.63
    %
    
    
    20.50
    %
    
    
    11.25
    %
    
    
    12.11
    %Lawrence Savings Bank
    
    
    17.49
    %
    
    
    19.00
    %
    
    
    18.74
    %
    
    
    20.25
    %
    
    
    10.64
    %
    
    
    11.94
    %Capital Amounts:Adequately capitalizedLSB Corporation
    
    $
    12,474
    
    
    $
    11,421
    
    
    $
    24,949
    
    
    $
    22,842
    
    
    $
    20,383
    
    
    $
    18,163Lawrence Savings Bank
    
    
    12,355
    
    
    
    11,392
    
    
    
    24,711
    
    
    
    22,784
    
    
    
    20,300
    
    
    
    18,125Well capitalizedLSB Corporation
    
    
    18,712
    
    
    
    17,132
    
    
    
    31,186
    
    
    
    28,553
    
    
    
    25,478
    
    
    
    22,703Lawrence Savings Bank
    
    
    18,533
    
    
    
    17,088
    
    
    
    30,889
    
    
    
    28,480
    
    
    
    25,374
    
    
    
    22,656Actual Amounts:LSB Corporation
    
    
    57,310
    
    
    
    54,969
    
    
    
    61,211
    
    
    
    58,546
    
    
    
    57,310
    
    
    
    54,969Lawrence Savings Bank
    
    
    54,019
    
    
    
    54,100
    
    
    
    57,884
    
    
    
    57,668
    
    
    
    54,019
    
    
    
    54,100
 Stockholders Rights Plan In 1996, the Board of Directors adopted a stockholder rights plan declaring a dividend of one
preferred stock purchase right for each share of outstanding common stock. The rights will remain
attached to the common stock and are not exercisable except under limited circumstances relating to
(i) acquisition of beneficial ownership of more than 10% of the outstanding shares of common stock,
or (ii) a tender offer or exchange offer that would result in a person or group beneficially owning
more than 10% of the outstanding shares of common stock. The rights are not exercisable until those
aforementioned circumstances occur. The rights expire in 2006. Until a right is exercised, the
holder has no rights to vote or to receive dividends. The rights are not taxable to stockholders
until exercisable. (10) Employee Benefits The Company provides pension benefits for its employees through membership in the Savings Bank
Employees Retirement Association (the Plan). The Plan is a multiple-employer, non-contributory,
defined benefit plan. Bank employees become eligible after attaining age 21 and completing one year
of service. Additionally, benefits become fully vested after three years of eligible service. The
Companys annual contribution to the Plan is based upon standards established by the Employee
Retirement Income Security Act. The contribution is based on an actuarial method intended to
provide not only for benefits attributable to service to date, but also for those expected to be
earned in the future. The Company does not expect to contribute to the Plan for the year ending
October 31, 2005. 39




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##### Table of Contents



(10) Employee
Benefits  (continued) The following table sets forth the Plans funded status and amounts recognized in the Companys
Consolidated Financial Statements through the Plans latest valuation dates which were October 31,
2004 and 2003. 2004
    
    
    2003(In Thousands)Change in benefit obligation:Benefit obligation at beginning of year
    
    $
    6,760
    
    
    $
    6,042Service cost
    
    
    415
    
    
    
    355Interest cost
    
    
    423
    
    
    
    408Actuarial loss
    
    
    134
    
    
    
    332Benefits paid
    
    
    (276
    )
    
    
    (377
    )Benefit obligation at end of year
    
    $
    7,456
    
    
    $
    6,760Change in plan assets:Fair value of plan assets at beginning of year
    
    $
    6,060
    
    
    $
    5,308Actual return on plan assets
    
    
    638
    
    
    
    789Employer contribution
    
    
    356
    
    
    
    340Benefits paid
    
    
    (276
    )
    
    
    (377
    )Fair value of plan assets at end of year
    
    $
    6,778
    
    
    $
    6,060Funded status
    
    $
    (678
    )
    
    $
    (700
    )Unrecognized net actuarial gain
    
    
    (187
    )
    
    
    (168
    )Unrecognized transition asset
    
    
    (24
    )
    
    
    (28
    )Accrued benefit cost included in other liabilities
    
    $
    (889
    )
    
    $
    (896
    )Accumulated benefit obligation
    
    $
    5,224
    
    
    $
    4,424
 The discount rate and rate of increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligation were 5.75% and 4.50% for 2004 and 6.25%
and 4.50% for 2003. The Plan assets are an integral part of the Companys defined benefit plan and the asset mix
between debt and equity securities plays an important factor in the determination of the funded
status and net periodic pension cost based on Plan assumptions, interest rates and the overall
economic climate. SBERA offers a common and collective trust as the underlying investment structure
for pension plans participating in the Association. The target allocation mix for the common and
collective trust portfolio calls for an equity-based investment deployment range from 55% to 75% of
total portfolio assets. The remainder of the portfolio is allocated to fixed income. The
approximate investment allocation of the portfolio is shown in the table below. The Trustees of
SBERA, through the Associations Investment Committee, select investment managers for the common
and collective trust portfolio. A professional investment advisory firm is retained by the
Investment Committee to provide allocation analysis, performance measurement and to assist with
manager searches. The overall investment objective is to diversify equity investments across a
spectrum of investment types (e.g., small cap, large cap, international, etc.) and styles (e.g.,
growth, value, etc.). The following table shows the allocation of assets between debt and equity
for the Plan as of October 31: 2004
    
    
    2003Debt securities
    
    
    34
    %
    
    
    45
    %Equity securities
    
    
    66
    %
    
    
    55
    %Total Plan assets
    
    
    100
    %
    
    
    100
    %
 The Plans assets are distributed to Plan participants in the form of benefits. The Plan paid $276
thousand and $377 thousand for the Plan years ended October 31, 2004 and 2003, respectively. The
Company anticipates that the Plan is expected to pay benefits of $1.5 million, $101 thousand, $81
thousand, $172 thousand and $144 thousand during the Plan year ended October 31, 2005, 2006, 2007,
2008 and 2009, respectively. The aggregate benefits expected to be paid in the five-year period
from 2010-2014 are $3.2 million. These expected benefits to be paid are based on the same
assumptions used to measure the Companys benefit obligation at October 31, 2004 and include
estimated future employee services. 40




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##### Table of Contents



(10) Employee Benefits  (continued) Net pension cost components for the years ended October 31, follow: 2004
    
    
    2003
    
    
    2002(In Thousands)Service cost
    
    $
    415
    
    
    $
    355
    
    
    $
    319Interest cost
    
    
    423
    
    
    
    408
    
    
    
    377Expected return on plan assets
    
    
    (485
    )
    
    
    (425
    )
    
    
    (456
    )Amortization of net gains
    
    
    
    
    
    
    

    
    
    
    (81
    )Net amortization and deferrals
    
    
    (4
    )
    
    

    (4
    )
    
    
    (4
    )Net periodic pension cost
    
    $
    349
    
    
    $
    334
    
    
    $
    155
 Assumptions used to develop the net periodic pension cost were: 2004
    
    
    2003
    
    
    2002Discount rate
    
    
    6.25
    %
    
    
    6.75
    %
    
    
    7.00
    %Rate of increase in compensation levels
    
    
    4.50
    
    
    
    4.50
    
    
    
    4.50Expected long-term rate of return on assets
    
    
    8.00
    
    
    
    8.00
    
    
    
    8.00
 In general, the Company has selected the assumptions with respect to the expected long-term rate of
return based on prevailing yields on high quality debt securities increased by a premium of 3% to
5% for equity securities. The Company provides an employee savings plan (the Savings Plan) through the Savings Banks
Employees Retirement Association. The Savings Plan qualifies as a deferred salary arrangement
under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, employees may defer a
portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit.
Employees are eligible to participate in the Savings Plan immediately upon employment with the
Company provided they have attained 21 years of age. Company employees become eligible for matching
contributions after completing one year of service with 1,000 hours or more. On an annual basis,
the Company determines whether or not to contribute to the Savings Plan. The Company contributed
$105 thousand and $55 thousand on behalf of the employees who were in the Savings Plan in 2004 and
2003, respectively. The Board offers options on its common stock to Directors, Management and Officers to purchase
unissued common stock of the Company at a price equal to the fair market value of the Companys
common stock on the date of grant. All options expire ten years from the date of grant. Under the
1986 and 1997 Stock Option Plans, the Company may grant options to Directors, Officers or employees
for up to 859,100 shares of common stock of which 340,750 shares have been granted and exercised.
As of December 31, 2004, 511,350 options were outstanding with 6,000 available for future use. The
vesting schedule provides for 50% of options granted to vest after the first year and an additional
25% to vest each year thereafter. Options are fully vested three years after the grant date. The summary of the status of the Stock Option Plan as of December 31, and changes during the years
ended follow: 2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Number of
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceOutstanding at beginning of year
    
    
    505,730
    
    
    $
    8.86
    
    
    
    586,330
    
    
    $
    8.69
    
    
    
    601,030
    
    
    $
    8.63Granted
    
    
    114,100
    
    
    
    16.77
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (102,480
    )
    
    
    6.70
    
    
    
    (71,600
    )
    
    
    6.83
    
    
    
    (14,700
    )
    
    
    6.32Canceled
    
    
    (6,000
    )
    
    
    16.77
    
    
    
    (9,000
    )
    
    
    13.90
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    511,350
    
    
    
    10.97
    
    
    
    505,730
    
    
    
    8.86
    
    
    
    586,330
    
    
    
    8.69Options exercisable end of year
    
    
    405,250
    
    
    
    9.45
    
    
    
    466,730
    
    
    
    8.44
    
    
    
    503,830
    
    
    
    7.84Weighted average fair value of
options granted during the year
    
    
    
    
    
    $
    4.64
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
 41




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##### Table of Contents



(10) Employee Benefits  (continued) The following table summarizes information about the Stock Option Plans based on a range of
exercise prices as of December 31, 2004. Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Remaining
    
    
    Number of
    
    
    ExerciseRange of Exercise Price
    
    Options
    
    
    Price
    
    
    Life
    
    
    Options
    
    
    Price$2.00 to $5.00
    
    
    11,250
    
    
    $
    3.94
    
    
    
    0.5 years
    
    
    11,250
    
    
    $
    3.94$5.01 to $8.00
    
    
    149,500
    
    
    
    6.06
    
    
    
    1.5
    
    
    
    149,500
    
    
    
    6.06$8.01 to $11.00
    
    
    108,000
    
    
    
    9.13
    
    
    
    4.6
    
    
    
    108,000
    
    
    
    9.13$11.01 to $14.00
    
    
    136,500
    
    
    
    13.87
    
    
    
    6.6
    
    
    
    136,500
    
    
    
    13.87$14.01 to $17.00
    
    
    106,100
    
    
    
    16.77
    
    
    
    9.1
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    511,350
    
    
    $
    10.97
    
    
    
    4.8
    
    
    
    405,250
    
    
    $
    9.45
 In addition to the Companys defined benefit pension plan, the Company sponsors a
defined benefit post-retirement plan that provides limited post-retirement medical benefits to
certain full-time employees who retire before age 65 and life insurance benefits to full-time
employees who retire after age 62 and after completing 10 years of service. The plan is
non-contributory. The Companys policy is to fund the cost of postretirement benefits in amounts
determined at the discretion of management. The amounts of accrued postretirement benefit cost
reported on the Companys consolidated balance sheet were $338 thousand as of December 31, 2004 and
2003, respectively. The Company has two supplemental executive retirement plans with one of its key officers. At
December 31, 2004 and 2003 the accrued liability was



$1.3 million and $1.2 million, respectively. Expense associated with the plans was $118 thousand
for the years ended December 31, 2004 and 2003, respectively and $143 thousand for the year ended
December 31, 2002. (11) Contingencies The Bank is involved in various legal proceedings incidental to its business. After review with
legal counsel, management does not believe resolution of such litigation will have a material
adverse effect on the financial condition and operating results of the Company. In one litigation matter, the Bank was awarded a $4.2 million judgment against the debtor in 1997.
On February 13, 2002, the debtor filed a petition in bankruptcy under Chapter 7 of the Bankruptcy
Code. Post-judgment interest calculated from the date of judgment to the date of the bankruptcy
filing is approximately $1.9 million. On June 15, 2004, the Company reported the receipt of $2.5 million on a U.S. Bankruptcy Judges
Order on the Trustees Motion for authorization to make an interim distribution in this case in
which the Companys wholly owned subsidiary, Lawrence Savings Bank (the Bank), is the only
secured creditor. The $2.5 million distribution was recorded as income by the Bank on June 15,
2004. The Bank has agreed to return any of the interim distribution as would be necessary to pay
additional taxes imposed on the bankruptcy estate in the event reserves set aside for expenses and
taxes are insufficient. The Bankruptcy Trustee has sold various assets during 2004 and 2005, and is currently holding
approximately $1.8 million in cash (net of various expenses). The completion of the final tax
returns for the Bankruptcy Estate (which may create a recovery on taxes previously paid) and the
distribution date of the remaining assets held by the Bankruptcy Trustee to the Bank are not known
at this time. Accordingly, no recognition of the remaining assets currently held by the Bankruptcy
Trustee has been recorded in the Consolidated Financial Statements. It is managements opinion that collection of any remaining amounts owed to the Bank beyond the
amount of the interim distribution and assets currently held by the Bankruptcy Trustee are
substantially uncertain and are not susceptible to meaningful estimation at this time. (12) Financial Instruments with Off-Balance Sheet Risk The Company is a party to financial instruments with off-balance sheet risk. These instruments, in
the form of commitments to extend credit and financial and standby letters of credit, are offered
in the normal course of business to meet the financing needs of customers. The company is exposed
to varying degrees of credit and interest rate risk in excess of amounts recognized in the
consolidated financial statements as a result of such transactions. Commitments to extend credit
are agreements to lend to a customer as long as there is compliance with conditions established in
the agreement. These extensions of credit are based upon traditional underwriting standards and
generally have a fixed expiration date of less than five years. Letters of credit are documents issued by the Company on behalf of its customers in favor of third
parties, who can present requests for drafts from the Company within specified terms and
conditions. Letters of credit are secured by cash deposits. Standby letters of credit are
conditional commitments issued by the Company to guarantee payment to a third party. Outstanding
letters of credit generally expire within one year. The credit risk involved with these instruments
is similar to the risk of 42




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##### Table of Contents



(12) Financial
Instruments with Off-Balance Sheet Risk  (continued) extending loans and, accordingly, the underwriting standards are also similar. It is expected that
most letters of credit will not require cash disbursements. The components of financial instruments with off-balance sheet risk at December 31, follow: Fixed
    
    
    Variable2004
    
    Rate
    
    
    Rate
    
    
    Total(In Thousands)Financial instruments with contract amounts represent credit risk:Unused commitments to extend credit:Residential mortgages
    
    $
    793
    
    
    $
    478
    
    
    $
    1,271Home equity lines of credit
    
    
    596
    
    
    
    8,661
    
    
    
    9,257Personal lines of credit
    
    
    154
    
    
    
    
    
    
    
    154Commercial real estate mortgage
    
    
    
    
    
    
    19,168
    
    
    
    19,168Construction
    
    
    
    
    
    
    21,040
    
    
    
    21,040Commercial loans
    
    
    2
    
    
    
    17,867
    
    
    
    17,869Total unused commitments
    
    $
    1,545
    
    
    $
    67,214
    
    
    $
    68,759Letters of credit and standby letters of credit
    
    $
    
    
    
    $
    1,393
    
    
    $
    1,393Forward commitments to sell mortgage loans
    
    $
    300
    
    
    $
    
    
    
    $
    300
 Fixed
    
    
    Variable2003
    
    Rate
    
    
    Rate
    
    
    Total(In Thousands)Financial instruments with contract amounts represent credit risk:Unused commitments to extend credit:Residential mortgages
    
    $
    1,327
    
    
    $
    377
    
    
    $
    1,704Home equity lines of credit
    
    
    1,615
    
    
    
    7,737
    
    
    
    9,352Personal lines of credit
    
    
    165
    
    
    
    
    
    
    
    165Commercial real estate mortgage
    
    
    6
    
    
    
    6,502
    
    
    
    6,508Construction
    
    
    
    
    
    
    17,160
    
    
    
    17,160Commercial loans
    
    
    10
    
    
    
    18,416
    
    
    
    18,426Total unused commitments
    
    $
    3,123
    
    
    $
    50,192
    
    
    $
    53,315Letters of credit and standby letters of credit
    
    $
    
    
    
    $
    851
    
    
    $
    851Forward commitments to sell mortgage loans
    
    $
    340
    
    
    $
    
    
    
    $
    340
 Forward commitments to sell mortgage loans are contracts which the Company enters into for the
purpose of reducing the interest rate risk associated with originating loans held for sale. Risk
may arise from the possible inability of the Company to originate loans to fulfill the contracts. (13) Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value: Cash and Due From Banks, Short-Term Investments, Stock in Federal Home Loan Bank of Boston, Accrued Interest Receivable and Accrued Interest Payable. The carrying amount of each of these assets and liabilities is a reasonable estimate of fair value. Investment Securities For investment securities, fair values are based on quoted market prices or dealer quotes. If a
quoted market price is not available, fair value is estimated using quoted market prices for
similar securities. Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are
segregated by type such as commercial, commercial real estate, residential mortgage, and other
consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and
by classified and non-classified categories. The fair value of non-classified loans is calculated by discounting scheduled cash flows through
the expected maturity using current rates at which similar loans would be made to borrowers with
similar credit ratings. For non-classified residential mortgage loans, maturity estimates are based
on secondary market sources. 43




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##### Table of Contents



13) Fair Value of Financial Instruments  (continued) Fair value for significant classified loans is based on recent external appraisals. If
appraisals are not available, estimated cash flows are discounted using a rate commensurate with
the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows,
and discount rates are judgmentally determined using available market information and specific
borrower information. Deposits and Mortgagors Escrow Accounts The fair value of demand deposits, NOW accounts, money market deposit accounts, savings accounts,
and mortgage escrow accounts of borrowers is the amount payable on demand at the balance sheet
date. The fair value of certificates of deposit is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently offered for deposits of
similar remaining maturities. Borrowed Funds The fair value of borrowed funds is determined as the cost of extinguishing the debt inclusive of
any and all prepayment penalties. The prepayment penalties are determined by the Federal Home Loan
Bank of Boston. The estimated fair values of the Banks financial instruments at December 31, follow: 2004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    Value(In Thousands)Financial assets:Cash and due from banks
    
    $
    7,193
    
    
    $
    7,193
    
    
    $
    7,872
    
    
    $
    7,872Short-term investments
    
    
    209
    
    
    
    209
    
    
    
    889
    
    
    
    889Investment securities
    
    
    263,303
    
    
    
    261,755
    
    
    
    232,878
    
    
    
    233,184Federal Home Loan Bank stock
    
    
    7,887
    
    
    
    7,887
    
    
    
    6,593
    
    
    
    6,593Accrued interest receivable
    
    
    2,894
    
    
    
    2,894
    
    
    
    2,552
    
    
    
    2,552Loans, net
    
    
    228,670
    
    
    
    228,516
    
    
    
    207,283
    
    
    
    210,457Financial liabilities:Deposits
    
    $
    299,106
    
    
    $
    298,588
    
    
    $
    272,540
    
    
    $
    273,248Borrowed funds
    
    
    157,263
    
    
    
    160,061
    
    
    
    133,352
    
    
    
    139,039Mortgagors escrow accounts
    
    
    506
    
    
    
    506
    
    
    
    450
    
    
    
    450Accrued interest payable
    
    
    444
    
    
    
    444
    
    
    
    369
    
    
    
    369
 Fair Value of Off-Balance-Sheet Financial Instruments Off-balance sheet financial instruments generally have interest rates which reflect current market
rates. Management has determined that the difference between the carrying and fair value of these
instruments is not material. Limitations Fair value estimates are made at a specific point in time, based on relevant market information
about the financial instrument. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Companys entire holdings of a particular financial
instrument. Because no active market exists for a portion of the Companys financial instruments,
fair value estimates are based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in assumptions and market
conditions could significantly affect these estimates. Fair value estimates are based on existing on and off-balance-sheet financial instruments without
attempting to estimate the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. Other significant assets that are not
considered financial assets include other real estate acquired, banking premises and equipment, and
core deposit and other intangibles. In addition, the tax ramifications related to the realization
of the unrealized gains and losses can have a significant effect on fair value estimates and have
not been considered in any of the estimates. 44




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##### Table of Contents



(14) Condensed
Parent Company Financial Statements   Balance Sheets
    
    2004
    
    
    2003(In Thousands)Assets:Cash deposits in subsidiaries
    
    $
    424
    
    
    $
    159Investment securities held to maturity at amortized cost
    
    
    2,996
    
    
    
    500Investment in subsidiary, at equity
    
    
    54,478
    
    
    
    54,133Other assets
    
    
    12
    
    
    
    217Total assets
    
    $
    57,910
    
    
    $
    55,009Liabilities and Stockholders Equity:Liabilities:Accrued income taxes
    
    $
    10
    
    
    $
    (17
    )Accrued expenses
    
    
    62
    
    
    
    24Total liabilities
    
    
    72
    
    
    
    7Total stockholders equity
    
    
    57,838
    
    
    
    55,002Total liabilities and stockholders equity
    
    $
    57,910
    
    
    $
    55,009
 Statements of Operations
    
    2004
    
    
    2003
    
    
    2002(In Thousands)Dividends from bank subsidiary
    
    $
    4,200
    
    
    $
    500
    
    
    $
    4,500Interest income from investment securities held to maturity
    
    
    21
    
    
    
    18
    
    
    
    47Total operating income
    
    
    4,221
    
    
    
    518
    
    
    
    4,547Non-interest expenses
    
    
    243
    
    
    
    180
    
    
    
    235Income before income taxes and undistributed earnings
    
    
    3,978
    
    
    
    338
    
    
    
    4,312Income tax benefit
    
    
    (63
    )
    
    
    (51
    )
    
    
    (50
    )Income before undistributed earnings of subsidiary
    
    
    4,041
    
    
    
    389
    
    
    
    4,362Equity in undistributed earnings of subsidiary
    
    
    639
    
    
    
    3,747
    
    
    
    (1,262
    )Net income
    
    $
    4,680
    
    
    $
    4,136
    
    
    $
    3,100
 The Parent Companys statements of changes in stockholders equity are identical to the
consolidated statements of changes in stockholders equity and therefore are not presented here. Cash flows
    
    2004
    
    
    2003(In Thousands)Cash flows from operating activities:Net income
    
    $
    4,680
    
    
    $
    4,136Adjustments to reconcile net income to net cash provided by operating activities:Decrease in deferred income tax asset
    
    
    216Net distributed earnings of subsidiaries
    
    
    (759
    )
    
    
    (3,747
    )Increase in other assets
    
    
    (11
    )
    
    
    (156
    )Increase in liabilities
    
    
    65
    
    
    
    3Accretion of discounts on investment securities
    
    
    (21
    )
    
    
    (18
    )Net cash provided by operating activities
    
    
    4,170
    
    
    
    218Cash flows from investing activities:Purchases of investment securities held to maturity
    
    
    (13,975
    )
    
    
    (20,833
    )Proceeds from maturities of investment securities held to maturity
    
    
    11,500
    
    
    
    22,350Net cash (used in) provided by investing activities
    
    
    (2,475
    )
    
    
    1,517Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    806
    
    
    
    511Treasury stock purchased
    
    
    
    
    
    
    (1,022
    )Dividends paid
    
    
    (2,236
    )
    
    
    (2,023
    )Net cash used in financing activities
    
    
    (1,430
    )
    
    
    (2,534
    )Net (decrease) increase in cash and cash equivalents
    
    
    265
    
    
    
    (799
    )Cash and cash equivalents, beginning of year
    
    
    159
    
    
    
    958Cash and cash equivalents, end of year
    
    $
    424
    
    
    $
    159Supplemental cash flow information:Cash paid during the year for:Income taxes
    
    $
    
    
    
    $
    5
 45




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##### Table of Contents



(15) Quarterly Results of Operations (Unaudited) 2004March
    
    
    June
    
    
    September
    
    
    December31
    
    
    30
    
    
    30
    
    
    31(In Thousands, Except Per Share Data)Interest and dividend income
    
    $
    5,442
    
    
    $
    5,461
    
    
    $
    5,488
    
    
    $
    5,940Interest expense
    
    
    2,019
    
    
    
    2,095
    
    
    
    2,096
    
    
    
    2,310Net interest income
    
    
    3,423
    
    
    
    3,366
    
    
    
    3,392
    
    
    
    3,630Provision (credit) for loan losses
    
    
    
    
    
    
    (300
    )
    
    
    
    
    
    
    Net interest income after provision (credit) for loan losses
    
    
    3,423
    
    
    
    3,666
    
    
    
    3,392
    
    
    
    3,630Non-interest income
    
    
    322
    
    
    
    505
    
    
    
    348
    
    
    
    378Lawsuit judgment collected
    
    
    
    
    
    
    2,275
    
    
    
    
    
    
    
    5Non-interest expense
    
    
    2,488
    
    
    
    2,771
    
    
    
    2,706
    
    
    
    2,699Income before income tax
    
    
    1,257
    
    
    
    3,675
    
    
    
    1,034
    
    
    
    1,314Income tax expense
    
    
    471
    
    
    
    1,318
    
    
    
    337
    
    
    
    474Net income
    
    $
    786
    
    
    $
    2,357
    
    
    $
    697
    
    
    $
    840Basic earnings per share
    
    $
    0.18
    
    
    $
    0.55
    
    
    $
    0.16
    
    
    $
    0.19Diluted earnings per share
    
    $
    0.18
    
    
    $
    0.53
    
    
    $
    0.16
    
    
    $
    0.19
 2003March
    
    
    June
    
    
    September
    
    
    December31
    
    
    30
    
    
    30
    
    
    31(In Thousands, Except Per Share Data)Interest and dividend income
    
    $
    5,662
    
    
    $
    5,314
    
    
    $
    4,977
    
    
    $
    5,381Interest expense
    
    
    2,399
    
    
    
    2,316
    
    
    
    2,165
    
    
    
    2,097Net interest income
    
    
    3,263
    
    
    
    2,998
    
    
    
    2,812
    
    
    
    3,284Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net interest income after provision for loan losses
    
    
    3,263
    
    
    
    2,998
    
    
    
    2,812
    
    
    
    3,284Non-interest income
    
    
    280
    
    
    
    383
    
    
    
    658
    
    
    
    287Lawsuit judgment collected
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,996Non-interest expense
    
    
    2,672
    
    
    
    2,372
    
    
    
    2,417
    
    
    
    2,277Income before income tax
    
    
    871
    
    
    
    1,009
    
    
    
    1,053
    
    
    
    3,290Income tax expense
    
    
    321
    
    
    
    374
    
    
    
    399
    
    
    
    993Net income
    
    $
    550
    
    
    $
    635
    
    
    $
    654
    
    
    $
    2,297Basic earnings per share
    
    $
    0.13
    
    
    $
    0.15
    
    
    $
    0.16
    
    

    $
    0.54Diluted earnings per share
    
    $
    0.13
    
    
    $
    0.15
    
    
    $
    0.15
    
    
    $
    0.52
 46




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##### Table of Contents



Stockholders Information
 Wall Street Journal Wall Street Journal
 The following table sets forth for the fiscal periods indicated certain information with respect to
the sales prices of the Companys common stock. PriceFiscal Year
    
    High
    
    
    Low2004First Quarter
    
    $
    18.25
    
    
    $
    16.68Second Quarter
    
    
    17.75
    
    
    
    15.00Third Quarter
    
    
    20.81
    
    
    
    16.00Fourth Quarter
    
    
    20.50
    
    
    
    18.272003First Quarter
    
    $
    13.00
    
    
    $
    12.01Second Quarter
    
    
    17.40
    
    
    
    12.60Third Quarter
    
    
    17.52
    
    
    
    15.31Fourth Quarter
    
    
    17.99
    
    
    
    16.002002First Quarter
    
    $
    13.20
    
    
    $
    12.00Second Quarter
    
    
    14.02
    
    
    
    12.26Third Quarter
    
    
    14.00
    
    
    
    12.00Fourth Quarter
    
    
    13.51
    
    
    
    11.00
 The Company declared and paid a cash dividend of $0.52 per share ($0.13 in each quarter) during
2004. The Company expects to pay dividends during 2005. On December 31, 2004 there were
approximately 966 holders of common stock. This number does not reflect the number of persons or
entities who hold their stock in nominee or street name through various brokerage firms. The
Annual Meeting of the stockholders of LSB
Corporation will be held at 10:00 a.m. on Tuesday, May 3, 2005 at the Andover Country Club,
Canterbury Street, Andover, Massachusetts. Corporate Headquarters 
 Mailing Address 
 Investor Relations 
 A copy of the Companys Form 10-K as filed with the
Securities and Exchange Commission pursuant to the
Securities and Exchange Act of 1934, is available without
charge upon written request to Investor Relations. Transfer Agent 
 Independent Registered Public Accounting Firm 
 Legal Counsel nd
 47




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##### Table of Contents



Directors Of
LSB Corporation and
Lawrence Savings Bank
 Eugene A. Beliveau, D.D.S.Dentist Kathleen Boshar ReynoldsPrudential/Howe and Doherty Malcolm W. BrawnExecutive Vice President & Secretary
The Andover Companies Thomas J. BurkeChairman of the Board
Lawrence Savings Bank
Register of Deeds
Attorney Byron R. Cleveland, Jr.President
J. H. Horne & Co. Richard Hart Harrington, CPAChairman
Gordon, Harrington & Osborn, P.C. Robert F. HatemBusiness Consultant (retired) Marsha A. McDonoughEducation Consultant Paul A. MillerPresident and
Chief Executive Officer
Lawrence Savings Bank and
LSB Corporation Officers of
LSB Corporation
 Paul A. MillerPresident and
Chief Executive Officer John E. SharlandSenior Vice President, Treasurer and
Chief Financial Officer Barbara A. BiondoSecretary Richard J. DAmbrosioAssistant Treasurer Timothy L. FelterAssistant Treasurer and
Investment Officer Jeffrey W. LeedsAssistant Treasurer 48




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##### Table of Contents



Officers of
Lawrence Savings Bank
 Paul A. MillerPresident and
Chief Executive Officer Barbara A. BiondoSecretary Robyn K. LeBuffVice President and
Marketing Officer Brenda MiskinisAssistant Vice President and
Marketing Officer Lending Division Jeffrey W.
Leeds  Executive Vice President and
Chief Lending Officer
 Maureen McCarthyVice President and
Compliance/CRA Officer Commercial Banking
Jacob KojaloSenior Vice President and
Senior Lending Officer Robert J. DeLucaVice President Steven K. VentreVice President Scott P. McDuffeeCommercial Credit Officer Commercial Real Estate Lending
Richard L. ArchambaultVice President Frederick P. MaloofVice President Paul M. VallaceVice President Credit Policy and Administration
Lee. D. DickeySenior Vice President John P. MalynnVice President and
Collections Manager Linda A. BaileyAssistant Vice President and
Credit Administration Officer Personal Lending
John P. TeoliVice President Susan M. CainAssistant Vice President and
Senior Mortgage Underwriter Linda ChamberlandResidential Mortgage Officer Finance Division John E.
Sharland  Senior Vice President, Treasurer and
Chief Financial Officer
 Linda M. Chase BorrelliVice President and Controller Linda D. DulskiAssistant Vice President and
Accounting Operations Supervisor Personal Banking Division
Timothy L. FelterExecutive Vice President and
Investment Officer Gayle M. FiliVice President and Branch
Administration/Security Officer Susan M. DancauseAssistant Vice President,
Retirement Services Officer and
Internet Branch Manager Linda BuellAssistant Vice President and
Branch Manager Veronica CalixtoBranch Manager Cheryl FisherBranch Manager Carrie HigginbottomBranch Manager Johanny RodriguezBranch Manager Amy MarcelloBranch Manager Support Service Division Richard J.
DAmbrosio  Senior Vice President
 Carmela A. CutuliVice President and
Loan Servicing Manager Cheryl A. ViningVice President and
Deposit Servicing Manager Stanley R. Ward, Jr.Assistant Vice President Laura LaVoieAssistant Vice President
Senior Computer Network Engineer




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##### Table of Contents



Corporate Headquarters of
LSB Corporation 30 Massachusetts Avenue
North Andover, MA 01845-3460
(978) 725-7500 Banking Offices of
Lawrence Savings Bank Main Office: 
 Branch
Offices: 
 300 Essex Street
Lawrence, MA 01840
(978) 725-7530 20 Jackson Street
Methuen, MA 01844
(978) 725-7545 148 Lowell Street
Methuen, MA 01844
(978) 725-7570 401- 403 Main Street, Suite 105
Salem, NH 03079
(603) 870-9570 Lawrence Savings Bank
24 Hour Information
Phone: (978) 725-7700 www.LawrenceSavings.com Member
FDIC Member
DIF (LOGO)
This Annual Report is printed on recycled
paper:             LSBCM-AR-05