##### Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-K
 þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2009
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission File Number 000-32955
 LSB CORPORATION
  Massachusetts
    
    04-3557612(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification Number)
 30 Massachusetts Avenue, North Andover, MA
    
    01845(Address of principal executive offices)
    
    (Zip Code)
 
  Titles of each Class
    
    Name of each Exchange on which registeredCommon Stock, par value $.10 per share
    
    NASDAQ Global Market(including associated Preferred Stock Purchase Rights)
 
  o þ
  o þ
 þ o
 o o
 þ
  o Large accelerated filer
    
    o Accelerated filer
    
    o Non-accelerated filer
    
    þ Smaller reporting company(Do not check if smaller reporting company)
 o þ
  *
    
    For purposes of this calculation only, the common stock of LSB Corporation held by directors
and executive officers of LSB Corporation has been treated as owned by affiliates.
  Class
    
    Outstanding as of March 5, 2010Common Stock, par value $.10 per share
    
    4,506,686 shares
   (1)
    
    Certain information required for Part III of this report is incorporated herein by reference
to the registrants definitive Proxy Statement for its 2010 Annual Meeting of Stockholders,
which the registrant intends to file with the Commission within 120 days after the end of the
registrants fiscal year ended December 31, 2009.




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##### 



PART IITEM 1. BUSINESS
    
    
    2ITEM 1A. RISK FACTORS
    
    
    9ITEM 1B. UNRESOLVED STAFF COMMENTS
    
    
    12ITEM 2. PROPERTIES
    
    
    13ITEM 3. LEGAL PROCEEDINGS
    
    
    13ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    13PART II
    
    
    14ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    14ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
    
    
    16ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
    
    
    17ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    31ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    33ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
    
    
    60ITEM 9A (T). CONTROLS AND PROCEDURES
    
    
    60ITEM 9B. OTHER INFORMATION
    
    
    60PART III
    
    
    60ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
    
    
    60ITEM 11. EXECUTIVE COMPENSATION
    
    
    60ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    61ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
    
    
    61ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    61PART IV
    
    
    61ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    61SIGNATURES
    
    
    64EX-13 2009 Annual Report to Stockholders of LSB CorporationEX-21 Subsidiary of LSB Corporation and subsidiaries of River BankEX-23.1 Consent of Wolf & Company, P.C.EX-31.1 Certification of Chief Executive Officer under Section 302EX-31.2 Certification of Chief Financial Officer under Section 302EX-32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as added by Section 906EX-32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as added by Section 906




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PART I
 CAUTION REGARDING FORWARD-LOOKING STATEMENTS
  CAUTION REGARDING NON-GAAP FINANCIAL MEASURES
  
 ITEM 1. BUSINESS
 SUMMARY
 The Wall
Street Journal
      2




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




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




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FEDERAL DEPOSIT INSURANCE PREMIUMS
      5




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BANK HOLDING COMPANY ACT, CHANGE IN CONTROL ACT AND REGULATION Y
  GRAMM-LEACH-BLILEY ACT
    FEDERAL RESERVE ACT SECTIONS 23A AND 23B AND REGULATION W
  FEDERAL RESERVE ACT SECTION 22 AND REGULATION O
  HOME OWNERSHIP AND EQUITY PROTECTION ACT AND REGULATION Z
  6




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USA PATRIOT ACT
  SARBANES-OXLEY ACT OF 2002
  
    
    The creation of the Public Company Accounting Oversight Board, with which all accounting
firms performing audits for public companies are required to register, and which is
empowered to set auditing, quality control and independence standards, to inspect
registered firms, and to conduct investigations and to take disciplinary actions, subject
to SEC oversight.
    
    The strengthening of auditor independence from corporate management by limiting the type
and scope of services that auditors can offer their public company audit clients, requiring
periodic rotation of public company audit partners, requiring direct auditor reports to
company audit committees, and prohibiting public companies from exerting improper influence
over their outside auditors.
    
    The imposition of new corporate governance requirements including, among other things,
independence and financial expertise requirements for audit committee membership and
empowerment of public company audit committees to appoint, compensate and oversee their
companys outside auditors.
    
    Requirements that the Chief Executive Officer and the Chief Financial Officer certify
financial statements included in public company filings with the SEC and disclose bonuses
and stock-based compensation for periods for which the company is forced to restate its
financial results, a prohibition of insider stock trades during periods when a companys
employee benefits plans are precluded from trading, and a prohibition of public company
loans or extensions of credit to directors and officers except by regulated financial
institutions in conformity with applicable banking regulations governing insider lending.
    
    Requirements that public companies disclose whether they have a code of ethics for their
senior financial officers and if not, why not, and that management periodically assess and
report on the adequacy of the companys internal controls.
    
    The imposition of new and accelerated public company disclosure requirements,
requirements to report off balance sheet transactions and of accelerated reporting of
insider transactions in company stock.
  TROUBLED ASSET RELIEF PROGRAM AND EMERGENCY ECONOMIC STABILIZATION ACT
   7




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MASSACHUSETTS BANK REGULATION
  Regulatory Enforcement Authority
    Parity Regulation
  Massachusetts Depositors Insurance Fund
 8




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SECURITIES AND EXCHANGE COMMISSION FILINGS ON COMPANYS WEB SITE
  
 ITEM 1A. RISK FACTORS
 Changes in interest rates could adversely impact the Companys financial condition and results
of operations.
  If the Company has higher loan losses than it has provided for, its earnings could materially
decrease .
 A significant amount of the Companys loans are concentrated in northeastern Massachusetts and
southern New Hampshire, and adverse conditions in this area could negatively impact its operations.
 The Company operates in a highly regulated environment and may be adversely impacted by changes in
law and regulations
 9




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The Companys FDIC premiums have materially increased and could continue to do so because market
developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of
reserves to insured deposits. Additional increases could materially affect the Companys earnings.
 The impact of further contemplated legislative and regulatory changes cannot be predicted at this
time.
 The Company has strong competition within its market area which may limit the Companys growth and
profitability
 The success of the Company is dependent on retaining certain key personnel or attracting and
retaining additional, qualified personnel
 The Company continues to encounter technological change, and may have fewer resources than many of
its larger competitors to continue to invest in technological improvements.
 The Company relies on dividends from the Bank for substantially all of its revenue
 10




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Market fluctuations and changes in interest rates have had, and may continue to have, significant
and negative effects on the Companys investment portfolio and stockholders equity.
 
    
    market value risk, which is the risk that invested assets will decrease in value due to
a change in the prevailing market yields on our investments, an unfavorable change in the
liquidity of an investment or an unfavorable change in the financial prospects or a
downgrade in the credit rating of the issuer of an investment or one or more other factors;
    
    reinvestment risk, which is the risk that interest rates will decline, an investment
will be redeemed and the Company will not be able to reinvest the proceeds in a comparable
investment that provides a yield equal to or greater than the investment which was
redeemed; and
    
    liquidity risk, which is the risk that the Company may have to sell assets at an
undesirable time and/or price to provide funds for its business.
  Management may assess a decline in fair value as being temporary when in fact it is
other-than-temporary and, consequently, not charge the impairment to the Companys earnings, which
could have a significant impact on its future operating results.
   If the Companys investment in the Federal Home Loan Bank of Boston becomes impaired, its earnings
and stockholders equity could decrease
 When the Company becomes subject to the full SEC requirements under Section 404 of the
Sarbanes-Oxley Act of 2002, it will likely incur significant costs in connection with providing
outside auditors attestation reports on managements internal control assertions.
 11




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When the Company becomes subject to the full SEC requirements under Section 404 of the
Sarbanes-Oxley Act of 2002, if its internal control reports disclose significant deficiencies or
material weaknesses, its stockholders and lenders could lose confidence in its financial reporting,
which would likely harm the trading price of its stock, its access to additional capital, and its
liquidity.
 The tightening of available liquidity could limit the Companys ability to replace deposits and
fund loan demand, which could adversely affect its earnings and capital levels.
 If regulatory capital levels were to decline from well capitalized to adequately capitalized,
the Companys expenses and sources of funding could be adversely affected.
 
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  12




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ITEM 2. PROPERTIES
   LeaseYear
    
    
    
    
    
    
    
    
    
    CurrentAcquired
    
    Square
    
    Owned/
    
    Term
    
    RenewalOr Leased
    
    Feet
    
    Leased
    
    Expires
    
    OptionsCORPORATE OFFICES AND MAIN BANKING OFFICE30 Massachusetts Ave.
    
    
    1992
    
    
    
    45,315
    
    
    Owned
    
    
    
    
    
    
    No. Andover, MA 01845BRANCH BANKING OFFICESMassachusetts342 North Main Street
    
    
    1995
    (1)
    
    
    2,449
    
    
    Leased
    
    
    2015
    
    
    One (5 yrs.)Andover, MA 0181010 South Broadway
    
    
    2009
    (2)
    
    
    2,170
    
    
    Owned
    
    
    
    
    
    
    Lawrence, MA 0184320 Jackson Street
    
    
    1968
    (3)
    
    
    2,369
    
    
    Leased
    
    
    2011
    
    
    
    Methuen, MA 01844148 Lowell Street
    
    
    1979
    
    
    
    5,234
    
    
    Owned
    
    
    
    
    
    
    Methuen, MA 01844New Hampshire51 Crystal Ave.
    
    
    2007
    (4)
    
    
    2,600
    
    
    Leased
    
    
    2027
    
    
    Four (5 yrs.)Derry, NH 03038401-403 Main Street, Ste. 105
    
    
    2004
    
    
    
    2,500
    
    
    Leased
    
    
    2014
    
    
    Two (5 yrs.)Salem, NH 03079
 
 (1)
    
    The Bank has occupied the branch since 1979 and performed a sale-leaseback transaction in 1995.(2)
    
    Prior to establishing this location in 2009 and opening a full service branch in January 2010,
the Bank occupied a branch office at 300 Essex Street as a tenant for twelve years.(3)
    
    The Bank has executed a lease agreement and received all regulatory approvals in 2009 and will
re-locate its 20 Jackson Street branch in the summer of 2010.(4)
    
    The Bank opened a full service branch at this location in January 2009. 
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  13




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
 Wall Street Journal
  Common Stock Prices
    
    CashFiscal Year
    
    High
    
    Low
    
    Dividends2009Fourth Quarter
    
    $
    11.74
    
    
    $
    9.40
    
    
    $
    0.05Third Quarter
    
    
    12.20
    
    
    
    9.81
    
    
    
    0.05Second Quarter
    
    
    10.67
    
    
    
    8.12
    
    
    
    0.05First Quarter
    
    
    9.04
    
    
    
    7.11
    
    
    
    0.152008Fourth Quarter
    
    $
    12.99
    
    
    $
    7.25
    
    
    $
    0.15Third Quarter
    
    
    17.50
    
    
    
    9.05
    
    
    
    0.15Second Quarter
    
    
    16.68
    
    
    
    14.86
    
    
    
    0.14First Quarter
    
    
    16.95
    
    
    
    15.50
    
    
    
    0.14
   Supervision and Regulation
   14




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15




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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
 FINANCIAL HIGHLIGHTS
 December 31,
    
    2009
    
    2008
    
    2007
    
    2006
    
    2005(Dollars in Thousands, Except Per Share Data)Balance
Sheet Data:Total assets
    
    $
    816,598



    
    
    $
    761,324
    
    
    $
    621,651
    
    
    $
    542,965
    
    
    $
    521,800Loans, gross
    
    
    536,619
    
    
    
    452,621
    
    
    
    358,113
    
    
    
    288,163
    
    
    
    234,611Allowance for loan losses
    
    
    7,168
    
    
    
    5,885
    
    
    
    4,810
    
    
    
    4,309
    
    
    
    4,126Federal funds sold
    
    
    6,597
    
    
    
    6,469
    
    
    
    56
    
    
    
    11,871
    
    
    
    198Investment securities
    
    
    230,533
    
    
    
    264,561
    
    
    
    230,596
    
    
    
    218,682
    
    
    
    260,046Deposits
    
    
    492,794
    
    
    
    408,663
    
    
    
    322,083
    
    
    
    295,662
    
    
    
    303,087Borrowed funds
    
    
    259,082
    
    
    
    276,490
    
    
    
    235,351
    
    
    
    184,782
    
    
    
    153,380Stockholders equity
    
    
    60,520
    
    
    
    72,142
    
    
    
    60,298
    
    
    
    58,531
    
    
    
    59,922Year Ended December 31,
    
    2009
    
    2008
    
    2007
    
    2006
    
    2005Operating
Data:Interest income
    
    $
    40,842
    
    
    $
    38,755
    
    
    $
    35,008
    
    
    $
    28,956
    
    
    $
    25,558Interest expense
    
    
    21,267
    
    
    
    21,880
    
    
    
    19,681
    
    
    
    15,160
    
    
    
    11,638Net interest income
    
    
    19,575
    
    
    
    16,875
    
    
    
    15,327
    
    
    
    13,796
    
    
    
    13,920Provision (credit) for loan losses
    
    
    1,640
    
    
    
    1,285
    
    
    
    645
    
    
    
    160
    
    
    
    Impairment write-downs on securities
    
    
    
    
    
    
    (10,105
    )
    
    
    
    
    
    
    
    
    
    
    Gains (losses) on sales of investment securities
    
    
    1,832
    
    
    
    
    
    
    
    
    
    
    
    (2,417
    )
    
    
    Gains on pension plan termination
    
    
    
    
    
    
    
    
    
    
    762
    
    
    
    602
    
    
    
    Prepayment penalty on FHLB advances
    
    
    (127
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other non-interest income
    
    
    2,091
    
    
    
    2,116
    
    
    
    1,922
    
    
    
    1,410
    
    
    
    1,555Lawsuit judgment collected
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,233Salaries and employee benefits expense
    
    
    7,083
    
    
    
    6,706
    
    
    
    6,836
    
    
    
    7,399
    
    
    
    6,899Other non-interest expense
    
    
    6,944
    
    
    
    5,170
    
    
    
    4,721
    
    
    
    5,621
    
    
    
    4,245Income (loss) before income taxes
    
    
    7,704
    
    
    
    (4,275
    )
    
    
    5,809
    
    
    
    211
    
    
    
    6,564Income tax expense (benefit)
    
    
    2,667
    
    
    
    (1,552
    )
    
    
    2,091
    
    
    
    85
    
    
    
    2,407Net income (loss) before preferred stock
dividends and accretion
    
    
    5,037
    
    
    
    (2,723
    )
    
    
    3,718
    
    
    
    126
    
    
    
    4,157Preferred stock dividends and accretion
    
    
    (1,245
    )
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss) attributable to
common shareholders
    
    $
    3,792
    
    
    $
    (2,727
    )
    
    
    3,718
    
    
    
    126
    
    
    
    4,157Basic earnings (loss) per share
    
    $
    0.85
    
    
    $
    (0.61
    )
    
    $
    0.81
    
    
    $
    0.03
    
    
    $
    0.94Diluted earnings (loss) per share
    
    $
    0.85
    
    
    $
    (0.61
    )
    
    $
    0.81
    
    
    $
    0.03
    
    
    $
    0.92At or for the Year Ended December 31,
    
    2009
    
    2008
    
    2007
    
    2006
    
    2005Other
Data:Efficiency ratio
    
    
    64.74
    %
    
    
    62.54
    %
    
    
    67.00
    %
    
    
    85.66
    %
    
    
    72.19
    %Interest rate spread
    
    
    2.23
    
    
    
    2.14
    
    
    
    2.19
    
    
    
    2.22
    
    
    
    2.34Net interest margin on average earning
assets
    
    
    2.56
    
    
    
    2.50
    
    
    
    2.72
    
    
    
    2.68
    
    
    
    2.66Return (loss) on average assets [net income (loss)/
average assets]
    
    
    0.64
    
    
    
    (0.39
    )
    
    
    0.64
    
    
    
    0.02
    
    
    
    0.77Return (loss) on average equity [net income (loss)/
average stockholders equity]
    
    
    6.97
    
    
    
    (4.63
    )
    
    
    6.35
    
    
    
    0.22
    
    
    
    7.14Dividend payout ratio (dividends declared per
share divided by diluted earnings per share)
    
    
    35.29
    
    
    
    n/m
    
    
    
    69.14
    
    
    
    n/m
    
    
    
    60.87Average stockholders equity to average
assets ratio
    
    
    9.15
    
    
    
    8.41
    
    
    
    10.10
    
    
    
    10.80
    
    
    
    10.81Cash dividends declared and paid per
common share
    
    $
    0.30
    
    
    $
    0.58
    
    
    $
    0.56
    
    
    $
    0.56
    
    
    $
    0.56Book value per share with CPP
    
    
    13.43
    
    
    
    16.14
    
    
    
    13.35
    
    
    
    12.74
    
    
    
    13.42Book value per share excluding CPP
    
    
    13.43
    
    
    
    12.78
    
    
    
    13.35
    
    
    
    12.74
    
    
    
    13.42Tangible book value per share with CPP
[excludes accumulated other
comprehensive income/(loss)]
    
    
    12.57
    
    
    
    15.40
    
    
    
    13.26
    
    
    
    13.05
    
    
    
    13.58Tangible book value per share excluding CPP
    
    
    12.57
    
    
    
    12.04
    
    
    
    13.26
    
    
    
    13.05
    
    
    
    13.58Market value per share at year end
    
    
    9.71
    
    
    
    7.31
    
    
    
    16.00
    
    
    
    16.57
    
    
    
    17.35
 
 n/m =
    
    not meaningful 16




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
 FORWARD-LOOKING STATEMENTS AND FACTORS WHICH MAY AFFECT FUTURE RESULTS
  OVERVIEW
        17




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CRITICAL ACCOUNTING POLICIES
  ALLOWANCE FOR LOAN LOSSES
  INCOME TAXES
  INVESTMENT SECURITIES
  FINANCIAL CONDITION
 OVERVIEW
  INTEREST EARNING ASSETS
  18




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INVESTMENT SECURITIES
   2009
    
    
    2008Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)U. S. Treasury obligations
    
    $
    5,794
    
    
    
    2.5
    %
    
    $
    6,004
    
    
    
    2.3
    %Government-sponsored enterprise
obligations
    
    
    33,518
    
    
    
    14.5
    
    
    
    15,722
    
    
    
    5.9Mortgage-backed securities
    
    
    140,529
    
    
    
    61.1
    
    
    
    187,206
    
    
    
    70.8Collateralized mortgage obligations
    
    
    45,159
    
    
    
    19.6
    
    
    
    47,059
    
    
    
    17.8Corporate obligations
    
    
    2,378
    
    
    
    1.0
    
    
    
    5,683
    
    
    
    2.1Mutual funds
    
    
    966
    
    
    
    0.4
    
    
    
    958
    
    
    
    0.4Equity securities
    
    
    2,189
    
    
    
    0.9
    
    
    
    1,929
    
    
    
    0.7Total
    
    $
    230,533
    
    
    
    100.0
    %
    
    $
    264,561
    
    
    
    100.0
    %
   Within
    
    
    Weighted
    
    
    One to
    
    
    Weighted
    
    
    Five
    
    
    Weighted
    
    
    Over
    
    
    WeightedOne
    
    
    Average
    
    
    Five
    
    
    Average
    
    
    to Ten
    
    
    Average
    
    
    Ten
    
    
    Average
    
    
    
    
    
    
    AverageYear
    
    
    Yield
    
    
    Years
    
    
    Yield
    
    
    Years
    
    
    Yield
    
    
    Years
    
    
    Yield
    
    
    Total
    
    
    Yield(Dollars in Thousands)U. S. Treasury bonds and
government-sponsored
enterprise obligations
    
    $
    500
    
    
    
    0.54
    %
    
    $
    38,812
    
    
    
    2.28
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    39,312
    
    
    
    2.26
    %Mortgage-backed
securities
    
    
    849
    
    
    
    3.85
    %
    
    
    8,489
    
    
    
    4.27
    %
    
    
    20,054
    
    
    
    4.03
    %
    
    
    111,137
    
    
    
    5.56
    %
    
    
    140,529
    
    
    
    5.25
    %Collateralized mortgage
obligations
    
    
    
    
    
    
    
    %
    
    
    83
    
    
    
    8.00
    %
    
    
    9,090
    
    
    
    3.77
    %
    
    
    35,986
    
    
    
    3.82
    %
    
    
    45,159
    
    
    
    3.82
    %Corporate obligations
    
    
    2,378
    
    
    
    5.66
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    2,378
    
    
    
    5.66
    %Total
    
    $
    3,727
    
    
    
    4.56
    %
    
    $
    47,384
    
    
    
    2.65
    %
    
    $
    29,144
    
    
    
    3.95
    %
    
    $
    147,123
    
    
    
    5.13
    %
    
    $
    227,378
    
    
    
    4.45
    %
 LOANS
  19




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##### Table of Contents



2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Balance
    
    
    Percent
    
    
    Balance
    
    
    Percent
    
    
    Balance
    
    
    Percent
    
    
    Balance
    
    
    Percent
    
    
    Balance
    
    
    Percent(Dollars in Thousands)Residential
real estate loans:Fixed rate
    
    $
    98,497
    
    
    
    18.4
    %
    
    $
    68,040
    
    
    
    15.0
    %
    
    $
    49,513
    
    
    
    13.8
    %
    
    $
    39,076
    
    
    
    13.5
    %
    
    $
    34,028
    
    
    
    14.5
    %Adjustable rate
    
    
    32,944
    
    
    
    6.1
    
    
    
    41,236
    
    
    
    9.1
    
    
    
    30,230
    
    
    
    8.4
    
    
    
    30,800
    
    
    
    10.7
    
    
    
    28,159
    
    
    
    12.0Loans held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    472
    
    
    
    0.2131,441
    
    
    
    24.5
    
    
    
    109,276
    
    
    
    24.1
    
    
    
    79,743
    
    
    
    22.2
    
    
    
    69,876
    
    
    
    24.2
    
    
    
    62,659
    
    
    
    26.7Home equity loans:Fixed rate
    
    
    9,577
    
    
    
    1.8
    
    
    
    12,398
    
    
    
    2.7
    
    
    
    13,821
    
    
    
    3.9
    
    
    
    11,170
    
    
    
    3.9
    
    
    
    3,592
    
    
    
    1.5Adjustable rate
    
    
    17,426
    
    
    
    3.2
    
    
    
    11,574
    
    
    
    2.6
    
    
    
    9,225
    
    
    
    2.6
    
    
    
    9,169
    
    
    
    3.2
    
    
    
    6,820
    
    
    
    2.927,003
    
    
    
    5.0
    
    
    
    23,972
    
    
    
    5.3
    
    
    
    23,046
    
    
    
    6.5
    
    
    
    20,339
    
    
    
    7.1
    
    
    
    10,412
    
    
    
    4.4Consumer loans
    
    
    657
    
    
    
    0.1
    
    
    
    831
    
    
    
    0.2
    
    
    
    1,007
    
    
    
    0.3
    
    
    
    975
    
    
    
    0.3
    
    
    
    468
    
    
    
    0.2Total retail loans
    
    
    159,101
    
    
    
    29.6
    
    
    
    134,079
    
    
    
    29.6
    
    
    
    103,796
    
    
    
    29.0
    
    
    
    91,190
    
    
    
    31.6
    
    
    
    73,539
    
    
    
    31.3Construction and
land development
    
    
    62,772
    
    
    
    11.7
    
    
    
    78,169
    
    
    
    17.3
    
    
    
    58,770
    
    
    
    16.4
    
    
    
    45,681
    
    
    
    15.9
    
    
    
    25,923
    
    
    
    11.0Commercial real
estate loans:Fixed rate
    
    
    69,971
    
    
    
    13.0
    
    
    
    50,925
    
    
    
    11.3
    
    
    
    29,270
    
    
    
    8.2
    
    
    
    17,434
    
    
    
    6.1
    
    
    
    14,793
    
    
    
    6.3Adjustable rate
    
    
    212,745
    
    
    
    39.7
    
    
    
    155,652
    
    
    
    34.3
    
    
    
    137,813
    
    
    
    38.5
    
    
    
    122,988
    
    
    
    42.6
    
    
    
    111,038
    
    
    
    47.4282,716
    
    
    
    52.7
    
    
    
    206,577
    
    
    
    45.6
    
    
    
    167,083
    
    
    
    46.7
    
    
    
    140,422
    
    
    
    48.7
    
    
    
    125,831
    
    
    
    53.7Commercial business
    
    
    32,030
    
    
    
    6.0
    
    
    
    33,796
    
    
    
    7.5
    
    
    
    28,464
    
    
    
    7.9
    
    
    
    10,870
    
    
    
    3.8
    
    
    
    9,318
    
    
    
    4.0Total corporate loans
    
    
    377,518
    
    
    
    70.4
    
    
    
    318,542
    
    
    
    70.4
    
    
    
    254,317
    
    
    
    71.0
    
    
    
    196,973
    
    
    
    68.4
    
    
    
    161,072
    
    
    
    68.7Total loans
    
    
    536,619
    
    
    
    100.0
    %
    
    
    452,621
    
    
    
    100.0
    %
    
    
    358,113
    
    
    
    100.0
    %
    
    
    288,163
    
    
    
    100.0
    %
    
    
    234,611
    
    
    
    100.0
    %Allowance for loan losses
    
    
    7,168
    
    
    
    
    
    
    
    5,885
    
    
    
    
    
    
    
    4,810
    
    
    
    
    
    
    
    4,309
    
    
    
    
    
    
    
    4,126Loans, net
    
    $
    529,451
    
    
    
    
    
    
    $
    446,736
    
    
    
    
    
    
    $
    353,303
    
    
    
    
    
    
    $
    283,854
    
    
    
    
    
    
    $
    230,485
  Due AfterDue Within
    
    
    One Through
    
    
    Due AfterOne Year
    
    
    Five Years
    
    
    Five Years
    
    
    Total(In Thousands)Construction
    
    $
    40,740
    
    
    $
    15,451
    
    
    $
    6,581
    
    
    $
    62,772Commercial
    
    
    21,081
    
    
    
    5,163
    
    
    
    5,786
    
    
    
    32,030Total
    
    $
    61,821
    
    
    $
    20,614
    
    
    $
    12,367
    
    
    $
    94,802
   ALLOWANCE FOR LOAN LOSSES
  20




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##### Table of Contents



2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(Dollars in Thousands)Balance at beginning of year
    
    $
    5,885
    
    
    $
    4,810
    
    
    $
    4,309
    
    
    $
    4,126
    
    
    $
    4,140Charge-offs by loan type:Residential mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    (43
    )
    
    
    (80
    )
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    (315
    )
    
    
    (111
    )
    
    
    (121
    )
    
    
    
    
    
    
    Construction and land development
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    (2
    )
    
    
    (3
    )
    
    
    (36
    )
    
    
    (30
    )
    
    
    (25
    )Total charge-offs
    
    
    (360
    )
    
    
    (214
    )
    
    
    (157
    )
    
    
    (30
    )
    
    
    (25
    )Recoveries by loan type:Residential mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    2
    
    
    
    3
    
    
    
    3
    
    
    
    32
    
    
    
    2Construction and land development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    1
    
    
    
    1
    
    
    
    10
    
    
    
    21
    
    
    
    9Total recoveries
    
    
    3
    
    
    
    4
    
    
    
    13
    
    
    
    53
    
    
    
    11Net (charge-offs) recoveries
    
    
    (357
    )
    
    
    (210
    )
    
    
    (144
    )
    
    
    23
    
    
    
    (14
    )Provision (credit) for loan losses
    
    
    1,640
    
    
    
    1,285
    
    
    
    645
    
    
    
    160
    
    
    
    Ending balance
    
    $
    7,168
    
    
    $
    5,885
    
    
    $
    4,810
    
    
    $
    4,309
    
    
    $
    4,126Ratio of net (charge-offs) recoveries to average loans
outstanding during the period
    
    
    (0.07
    )%
    
    
    (0.05
    )%
    
    
    (0.04
    )%
    
    
    0.01
    %
    
    
    (0.01
    )%Allowance as a % of total loans
    
    
    1.34
    %
    
    
    1.30
    %
    
    
    1.34
    %
    
    
    1.50
    %
    
    
    1.76
    %
 21




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##### Table of Contents



2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(Dollars in Thousands)
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percentof loans
    
    
    
    
    
    
    of loans
    
    
    
    
    
    
    of loans
    
    
    
    
    
    
    of loans
    
    
    
    
    
    
    of loansin each
    
    
    
    
    
    
    in each
    
    
    
    
    
    
    in each
    
    
    
    
    
    
    in each
    
    
    
    
    
    
    in eachcategory
    
    
    
    
    
    
    category
    
    
    
    
    
    
    category
    
    
    
    
    
    
    category
    
    
    
    
    
    
    categoryto total
    
    
    
    
    
    
    to total
    
    
    
    
    
    
    to total
    
    
    
    
    
    
    to total
    
    
    
    
    
    
    to totalAmount
    
    
    loans
    
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loansConstruction and land development,
commercial and commercial real estate
    
    $
    6,450
    
    
    
    70.4
    %
    
    $
    5,392
    
    
    
    70.4
    %
    
    $
    4,338
    
    
    
    71.0
    %
    
    $
    3,606
    
    
    
    68.4
    %
    
    $
    3,530
    
    
    
    68.7
    %Residential mortgage and home equity
    
    
    508
    
    
    
    29.5
    
    
    
    444
    
    
    
    29.4
    
    
    
    353
    
    
    
    28.7
    
    
    
    297
    
    
    
    31.3
    
    
    
    290
    
    
    
    31.1Consumer
    
    
    36
    
    
    
    0.1
    
    
    
    43
    
    
    
    0.2
    
    
    
    36
    
    
    
    0.3
    
    
    
    39
    
    
    
    0.3
    
    
    
    21
    
    
    
    0.2Unallocated
    
    
    174
    
    
    
    N/A
    
    
    
    6
    
    
    
    N/A
    
    
    
    83
    
    
    
    N/A
    
    
    
    367
    
    
    
    N/A
    
    
    
    285
    
    
    
    N/A$
    7,168
    
    
    
    100.0
    %
    
    $
    5,885
    
    
    
    100.0
    %
    
    $
    4,810
    
    
    
    100.0
    %
    
    $
    4,309
    
    
    
    100.0
    %
    
    $
    4,126
    
    
    
    100.0
    %
      POTENTIAL PROBLEM LOANS
  22




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##### Table of Contents



RISK ASSETS
  2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(Dollars in Thousands)Risk assets:Non-performing loans:Residential real estate
    
    $
    1,211
    
    
    $
    276
    
    
    $
    281
    
    
    $
    37
    
    
    $
    32Construction and land development
    
    
    2,527
    
    
    
    350
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    1,528
    
    
    
    1,951
    
    
    
    1,242
    
    
    
    1,020
    
    
    
    Commercial business
    
    
    683
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity
    
    
    54
    
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    Total non-performing loans
    
    
    6,003
    
    
    
    2,606
    
    
    
    1,523
    
    
    
    1,057
    
    
    
    32Other real estate owned:Land
    
    
    
    
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    OREO valuation allowance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total other real estate owned
    
    
    
    
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    Total risk assets
    
    $
    6,003
    
    
    $
    2,726
    
    
    $
    1,523
    
    
    $
    1,057
    
    
    $
    32Restructured loans
    
    $
    2,634
    
    
    $
    820
    
    
    $
    90
    
    
    $
    
    
    
    $
    Risk assets as a percent of total loans and OREO
    
    
    1.1
    %
    
    
    0.6
    %
    
    
    0.4
    %
    
    
    0.4
    %
    
    
    0.0
    %Risk assets as a percent of total assets
    
    
    0.7
    %
    
    
    0.4
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.0
    %
   INTEREST BEARING LIABILITIES
     23




---



##### Table of Contents



DEPOSITS
  BORROWED FUNDS
   RESULTS OF OPERATIONS
 OVERVIEW
   Reconciliation Table  Non-GAAP Financial Information
 For the twelve months ended December 31,
    
    2009
    
    
    2008(Dollars in thousands, except share data)Net income (loss) attributable to common shareholders per GAAP
    
    $
    3,792
    
    
    $
    (2,727
    )Add: Impairment of investments, net of tax
    
    
    
    
    
    
    6,567Normalized net income attributable to common shareholders (non-GAAP)
    
    $
    3,792
    
    
    $
    3,840Diluted normalized earnings per common share
    
    $
    0.85
    
    
    $
    0.86Return on average assets, normalized
    
    
    0.64
    %
    
    
    0.55
    %Return on average equity, normalized
    
    
    6.97
    %
    
    
    6.54
    %
    24




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##### Table of Contents



25




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##### Table of Contents



AVERAGE BALANCES, NET INTEREST INCOME AND AVERAGE INTEREST RATES
  2009
    
    
    2008Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    InterestBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in Thousands)AssetsLoans:Residential real estate
    
    $
    124,285
    
    
    $
    6,793
    
    
    
    5.47
    %
    
    $
    96,228
    
    
    $
    5,403
    
    
    
    5.61
    %Home equity
    
    
    25,152
    
    
    
    1,010
    
    
    
    4.02
    
    
    
    22,987
    
    
    
    1,198
    
    
    
    5.21Consumer
    
    
    699
    
    
    
    47
    
    
    
    6.72
    
    
    
    976
    
    
    
    65
    
    
    
    6.66Total retail loans
    
    
    150,136
    
    
    
    7,850
    
    
    
    5.23
    
    
    
    120,191
    
    
    
    6,666
    
    
    
    5.55Construction and land
    
    
    69,654
    
    
    
    3,906
    
    
    
    5.61
    
    
    
    66,546
    
    
    
    4,175
    
    
    
    6.27Commercial real estate
    
    
    246,274
    
    
    
    15,760
    
    
    
    6.40
    
    
    
    189,318
    
    
    
    12,859
    
    
    
    6.79Commercial
    
    
    30,793
    
    
    
    1,493
    
    
    
    4.85
    
    
    
    27,895
    
    
    
    1,705
    
    
    
    6.11Total corporate loans
    
    
    346,721
    
    
    
    21,159
    
    
    
    6.10
    
    
    
    283,759
    
    
    
    18,739
    
    
    
    6.60Total loans
    
    
    496,857
    
    
    
    29,009
    
    
    
    5.84
    
    
    
    403,950
    
    
    
    25,405
    
    
    
    6.29Investment securities:U.S. Treasury and government-
sponsored enterprise obligations
    
    
    25,252
    
    
    
    706
    
    
    
    2.80
    
    
    
    23,448
    
    
    
    915
    
    
    
    3.90Other bonds and equity securities
    
    
    18,937
    
    
    
    444
    
    
    
    2.34
    
    
    
    25,901
    
    
    
    1,383
    
    
    
    5.34CMOs and mortgage-backed
securities
    
    
    209,772
    
    
    
    10,651
    
    
    
    5.08
    
    
    
    210,565
    
    
    
    10,857
    
    
    
    5.16Short-term investments
    
    
    14,645
    
    
    
    32
    
    
    
    0.22
    
    
    
    11,696
    
    
    
    195
    
    
    
    1.67Total investment securities
    
    
    268,606
    
    
    
    11,833
    
    
    
    4.41
    
    
    
    271,610
    
    
    
    13,350
    
    
    
    4.92Total interest earning assets
    
    
    765,463
    
    
    
    40,842
    
    
    
    5.34
    %
    
    
    675,560
    
    
    
    38,755
    
    
    
    5.74
    %Allowance for loan losses
    
    
    (6,360
    )
    
    
    
    
    
    
    
    
    
    
    (5,172
    )Other assets
    
    
    30,920
    
    
    
    
    
    
    
    
    
    
    
    28,115Total assets
    
    $
    790,023
    
    
    
    
    
    
    
    
    
    
    $
    698,503Liabilities and Stockholders EquityDeposits:Regular savings accounts
    
    $
    74,012
    
    
    $
    927
    
    
    
    1.25
    %
    
    $
    41,994
    
    
    $
    575
    
    
    
    1.37
    %NOW accounts
    
    
    18,782
    
    
    
    44
    
    
    
    0.23
    
    
    
    17,867
    
    
    
    35
    
    
    
    0.20Money market accounts
    
    
    85,560
    
    
    
    1,230
    
    
    
    1.44
    
    
    
    81,085
    
    
    
    1,908
    
    
    
    2.35Certificates of deposit
    
    
    242,053
    
    
    
    7,967
    
    
    
    3.29
    
    
    
    194,800
    
    
    
    7,780
    
    
    
    3.99Total interest bearing deposits
    
    
    420,407
    
    
    
    10,168
    
    
    
    2.42
    
    
    
    335,746
    
    
    
    10,298
    
    
    
    3.07Borrowed funds
    
    
    262,732
    
    
    
    11,099
    
    
    
    4.22
    
    
    
    271,357
    
    
    
    11,582
    
    
    
    4.27Total interest bearing liabilities
    
    
    683,139
    
    
    
    21,267
    
    
    
    3.11
    %
    
    
    607,103
    
    
    
    21,880
    
    
    
    3.60
    %Non-interest bearing deposits
    
    
    31,598
    
    
    
    
    
    
    
    
    
    
    
    29,071Other liabilities
    
    
    3,037
    
    
    
    
    
    
    
    
    
    
    
    3,579Total liabilities
    
    
    717,774
    
    
    
    
    
    
    
    
    
    
    
    639,753Stockholders equity
    
    
    72,249
    
    
    
    
    
    
    
    
    
    
    
    58,750Total liabilities and
stockholders equity
    
    $
    790,023
    
    
    
    
    
    
    
    
    
    
    $
    698,503Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.23
    %
    
    
    
    
    
    
    
    
    
    
    2.14
    %Net interest income
    
    
    
    
    
    $
    19,575
    
    
    
    
    
    
    
    
    
    
    $
    16,875Net interest margin on average earning assets
    
    
    
    
    
    
    
    
    
    
    2.56
    %
    
    
    
    
    
    
    
    
    
    
    2.50
    %
 26




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##### Table of Contents



RATE-VOLUME ANALYSIS
  2009 vs. 2008Change due to
    
    
    TotalVolume
    
    
    Rate
    
    
    Change(In Thousands)Interest income:Loans:Residential real estate
    
    $
    1,537
    
    
    $
    (147
    )
    
    $
    1,390Equity
    
    
    105
    
    
    
    (293
    )
    
    
    (188
    )Consumer
    
    
    (19
    )
    
    
    1
    
    
    
    (18
    )Total retail loans
    
    
    1,623
    
    
    
    (439
    )
    
    
    1,184Construction and land
    
    
    189
    
    
    
    (458
    )
    
    
    (269
    )Commercial real estate
    
    
    3,681
    
    
    
    (780
    )
    
    
    2,901Commercial
    
    
    165
    
    
    
    (377
    )
    
    
    (212
    )Total corporate loans
    
    
    4,035
    
    
    
    (1,615
    )
    
    
    2,420Total interest on loans
    
    
    5,658
    
    
    
    (2,054
    )
    
    
    3,604Investment securities:U.S. Treasury and government-sponsored
enterprise obligations
    
    
    66
    
    
    
    (275
    )
    
    
    (209
    )Other bonds and equity securities
    
    
    (304
    )
    
    
    (635
    )
    
    
    (939
    )Mortgage-backed securities
    
    
    (41
    )
    
    
    (165
    )
    
    
    (206
    )Short-term investments
    
    
    40
    
    
    
    (203
    )
    
    
    (163
    )Total investments
    
    
    (239
    )
    
    
    (1,278
    )
    
    
    (1,517
    )Total interest income
    
    
    5,419
    
    
    
    (3,332
    )
    
    
    2,087Interest expense:Deposits:Regular savings accounts
    
    
    405
    
    
    
    (53
    )
    
    
    352NOW and Super NOW accounts
    
    
    2
    
    
    
    7
    
    
    
    9Money market accounts
    
    
    100
    
    
    
    (778
    )
    
    
    (678
    )Certificates of deposit
    
    
    1,695
    
    
    
    (1,508
    )
    
    
    187Total interest bearing deposits
    
    
    2,202
    
    
    
    (2,332
    )
    
    
    (130
    )Borrowed funds
    
    
    (315
    )
    
    
    (168
    )
    
    
    (483
    )Total interest expense
    
    
    1,887
    
    
    
    (2,500
    )
    
    
    (613
    )Net interest income
    
    $
    3,532
    
    
    $
    (832
    )
    
    $
    2,700
 NET INTEREST INCOME
     27




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##### Table of Contents



PROVISION FOR LOAN LOSSES
  NON-INTEREST INCOME (LOSS)
      NON-INTEREST EXPENSE
   28




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##### Table of Contents



INCOME TAXES
    LIQUIDITY
       29




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##### Table of Contents



CONTRACTUAL OBLIGATIONS AND COMMITMENTS
   Payments Due  By PeriodLess than
    
    
    One to
    
    
    Three to
    
    
    AfterContractual obligations
    
    Total
    
    
    One Year
    
    
    Three Years
    
    
    Five Years
    
    
    Five Years(In Thousands)FHLBB long- term
advances
    
    $
    205,971
    
    
    $
    31,000
    
    
    $
    48,000
    
    
    $
    32,900
    
    
    $
    94,071Wholesale repurchase
agreements
    
    
    40,000
    
    
    
    
    
    
    
    25,000
    
    
    
    15,000
    
    
    
    Subordinated debt
    
    
    6,000
    
    
    
    
    
    
    
    1,200
    
    
    
    2,400
    
    
    
    2,400Short-term borrowings
    
    
    7,111
    
    
    
    7,111
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    4,499
    
    
    
    346
    
    
    
    606
    
    
    
    583
    
    
    
    2,964Data processing vendor
    
    
    1,644
    
    
    
    750
    
    
    
    894
    
    
    
    
    
    
    
    Employee benefit
payments (1)
    
    
    1,414
    
    
    
    118
    
    
    
    235
    
    
    
    235
    
    
    
    826Total contractual cash
obligations
    
    $
    266,639
    
    
    $
    39,325
    
    
    $
    75,935
    
    
    $
    51,118
    
    
    $
    100,261
 
 (1)
    
    The amounts shown reflect expected employee benefits paid by the Company under its
supplemental executive retirement agreements through December 31, 2021. Amount of Commitment Expiring  By PeriodLess than
    
    
    One to
    
    
    Three to
    
    
    AfterCommitments
    
    Total
    
    
    One Year
    
    
    Three Years
    
    
    Five Years
    
    
    Five Years(In Thousands)Loan originations
    
    $
    21,706
    
    
    $
    21,706
    
    
    $
    
    
    
    $
    
    
    
    $
    Lines of credit
    
    
    80,221
    
    
    
    36,685
    
    
    
    8,212
    
    
    
    880
    
    
    
    34,444Letters of credit
    
    
    1,588
    
    
    
    1,588
    
    
    
    
    
    
    
    
    
    
    
    Total commitments
    
    $
    103,515
    
    
    $
    59,979
    
    
    $
    8,212
    
    
    $
    880
    
    
    $
    34,444
 OFF-BALANCE SHEET ARRANGEMENTS
  CAPITAL ADEQUACY
   30




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##### Table of Contents



RECENT ACCOUNTING DEVELOPMENTS
    IMPACT OF INFLATION AND CHANGING PRICES
   
 ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 ASSET/LIABILITY MANAGEMENT
  INTEREST RATE SENSITIVITY
  31




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##### Table of Contents



Interest Rate ShockDown
    
    
    Up2009
    
    Flat Rates
    
    

100 bp
    
    

200 bp(In Thousands)Year One
    
    $
    22,936
    
    
    $
    22,614
    
    
    $
    22,798Year Two
    
    
    23,231
    
    
    
    21,821
    
    
    
    23,688Total net interest income for 2 year period
    
    $
    46,167
    
    
    $
    44,435
    
    
    $
    46,486
 Interest Rate ShockDown
    
    
    Up2008
    
    Flat Rates
    
    

100 bp
    
    

200 bp(In Thousands)Year One
    
    $
    16,861
    
    
    $
    16,480
    
    
    $
    17,866Year Two
    
    
    17,861
    
    
    
    16,769
    
    
    
    20,038Total net interest income for 2 year period
    
    $
    34,722
    
    
    $
    33,249
    
    
    $
    37,904
  32




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##### Table of Contents



ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    34CONSOLIDATED BALANCE SHEETS
    
    
    35CONSOLIDATED STATEMENTS OF OPERATIONS
    
    
    36CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
    
    
    37CONSOLIDATED STATEMENTS OF CASH FLOWS
    
    
    38NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    39
 33




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 The Board of Directors and Stockholders  LSB Corporation:
    
 
 34




---



##### Table of Contents



Consolidated Balance Sheets
 December 31,
    
    2009
    
    
    2008(In Thousands, Except Share Data)Assets:Cash and due from banks
    
    $
    8,615
    
    
    $
    6,859Federal funds sold
    
    
    6,597
    
    
    
    6,469Total cash and cash equivalents
    
    
    15,212
    
    
    
    13,328Investment securities available for sale, at fair value,
amortized cost of $224,130 in 2009 and $259,057 in 2008 (notes 2 and 7)
    
    
    230,533
    
    
    
    264,561Federal Home Loan Bank stock, at cost (note 3)
    
    
    11,825
    
    
    
    11,825Loans, net of allowance for loan losses of $7,168 in 2009
and $5,885 in 2008 (notes 4 and 7)
    
    
    529,451
    
    
    
    446,736Premises and equipment, net (note 5)
    
    
    7,209
    
    
    
    5,528Accrued interest receivable
    
    
    2,727
    
    
    
    2,720Deferred income tax asset, net (note 8)
    
    
    4,315
    
    
    
    4,447Bank-owned life insurance
    
    
    11,120
    
    
    
    10,641Other real estate owned
    
    
    
    
    
    
    120Prepaid FDIC insurance
    
    
    3,069
    
    
    
    Other assets
    
    
    1,137
    
    
    
    1,418Total assets
    
    $
    816,598
    
    
    $
    761,324Liabilities and Stockholders Equity:Liabilities:Interest bearing core deposits (note 6)
    
    $
    218,021
    
    
    $
    150,093Non-interest bearing core deposits (note 6)
    
    
    34,368
    
    
    
    27,546Term deposits (note 6)
    
    
    240,405
    
    
    
    231,024Total deposits
    
    
    492,794
    
    
    
    408,663Long-term borrowed funds (note 7)
    
    
    245,971
    
    
    
    259,228Short-term borrowed funds (note 7)
    
    
    7,111
    
    
    
    17,262Subordinated debt (note 7)
    
    
    6,000
    
    
    
    Other liabilities
    
    
    4,202
    
    
    
    4,029Total liabilities
    
    
    756,078
    
    
    
    689,182Commitments and contingencies (notes 5, 12 and 13)Stockholders equity (notes 9 and 11):Preferred stock, Series A, $.10 par value; 5,000,000
shares authorized, none issued
    
    
    
    
    
    
    Cumulative perpetual preferred stock, Series B, $1,000 par value
(liquidation preference $1,000 per share), none issued in 2009,
15,000 shares authorized and issued in 2008
    
    
    
    
    
    
    14,455Common stock, $.10 par value; 20,000,000
shares authorized; 4,506,686 and 4,470,941 shares issued
and outstanding in 2009 and 2008, respectively
    
    
    451
    
    
    
    447Additional paid-in capital
    
    
    60,004
    
    
    
    60,179Accumulated deficit
    
    
    (3,802
    )
    
    
    (6,250
    )Accumulated other comprehensive income, net of tax
    
    
    3,867
    
    
    
    3,311Total stockholders equity
    
    
    60,520
    
    
    
    72,142Total liabilities and stockholders equity
    
    $
    816,598
    
    
    $
    761,324
 The accompanying notes are an integral part of these consolidated financial statements.
 35




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##### Table of Contents



Consolidated Statements of Operations
 Year Ended December 31,
    
    2009
    
    
    2008(In Thousands, Except Share Data)Interest and dividend income:Loans
    
    $
    29,009
    
    
    $
    25,405Investment securities available for sale (note 2)
    
    
    11,801
    
    
    
    12,727Federal Home Loan Bank stock (note 3)
    
    
    
    
    
    
    428Other interest income
    
    
    32
    
    
    
    195Total interest and dividend income
    
    
    40,842
    
    
    
    38,755Interest expense:Deposits (note 6)
    
    
    10,168
    
    
    
    10,298Long-term borrowed funds
    
    
    10,946
    
    
    
    11,396Short-term borrowed funds
    
    
    51
    
    
    
    186Subordinated debt
    
    
    102
    
    
    
    Total interest expense
    
    
    21,267
    
    
    
    21,880Net interest income
    
    
    19,575
    
    
    
    16,875Provision for loan losses (note 4)
    
    
    1,640
    
    
    
    1,285Net interest income after provision for loan losses
    
    
    17,935
    
    
    
    15,590Non-interest income (loss):Deposit account fees
    
    
    940
    
    
    
    1,043Loan servicing fees, net
    
    
    179
    
    
    
    153Impairment write-downs on equity securities (note 2)
    
    
    
    
    
    
    (10,105
    )Gain on sales of securities (note 2)
    
    
    1,832
    
    
    
    Prepayment penalty on FHLB advances (note 7)
    
    
    (127
    )
    
    
    Income on bank-owned life insurance
    
    
    479
    
    
    
    441Other income
    
    
    493
    
    
    
    479Total non-interest income (loss)
    
    
    3,796
    
    
    
    (7,989
    )Non-interest expense:Salaries and employee benefits (notes 10 and 11)
    
    
    7,083
    
    
    
    6,706Occupancy and equipment (note 5)
    
    
    1,471
    
    
    
    1,330Data processing
    
    
    926
    
    
    
    938Professional
    
    
    577
    
    
    
    580Marketing
    
    
    497
    
    
    
    472FDIC deposit insurance
    
    
    1,253
    
    
    
    83Other real estate owned
    
    
    10
    
    
    
    139Other
    
    
    2,210
    
    
    
    1,628Total non-interest expense
    
    
    14,027
    
    
    
    11,876Income (loss) before income tax expense
    
    
    7,704
    
    
    
    (4,275
    )Income tax expense (benefit) (note 8)
    
    
    2,667
    
    
    
    (1,552
    )Net income (loss) before preferred stock dividends and accretion
    
    
    5,037
    
    
    
    (2,723
    )Preferred stock dividends and accretion
    
    
    (1,245
    )
    
    
    (4
    )Net income (loss) attributable to common shareholders
    
    $
    3,792
    
    
    $
    (2,727
    )Average basic common shares outstanding
    
    
    4,484,920
    
    
    
    4,468,484Common stock equivalents
    
    
    1,124
    
    
    
    16,066Average diluted common shares outstanding
    
    
    4,486,044
    
    
    
    4,484,550Basic earnings (loss) per common share
    
    $
    0.85
    
    
    $
    (0.61
    )Diluted earnings (loss) per common share
    
    $
    0.85
    
    
    $
    (0.61
    )
 The accompanying notes are an integral part of these consolidated financial statements.
 36




---



##### Table of Contents



Consolidated Statements of Changes in
 
 Stockholders Equity
 AccumulatedOther
    
    
    TotalAdditional
    
    
    
    
    
    
    Compre-
    
    
    Stock-Preferred
    
    
    Common
    
    
    Paid-in
    
    
    Accumulated
    
    
    hensive
    
    
    holdersStock
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    Equity(In Thousands, Except Share Data)Balance at December 31, 2007
    
    $
    
    
    
    $
    452
    
    
    $
    60,382
    
    
    $
    (934
    )
    
    $
    398
    
    
    $
    60,298Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,723
    )
    
    
    
    
    
    
    (2,723
    )Other comprehensive income -
Unrealized gain on securities
available for sale (tax effect $1,880)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,913
    
    
    
    2,913Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    156
    
    
    
    
    
    
    
    
    
    
    
    156Issuance of preferred stock,
net of discount of $549
    
    
    14,451
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,451Accretion of discount on preferred stock
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    Fair value of warrants issued with preferred
stock
    
    
    
    
    
    
    
    
    
    
    549
    
    
    
    
    
    
    
    
    
    
    
    549Exercise of stock options and tax benefits
(9,500 shares)
    
    
    
    
    
    
    1
    
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    121Common stock repurchased (64,620 shares)
    
    
    
    
    
    
    (6
    )
    
    
    (1,028
    )
    
    
    
    
    
    
    
    
    
    
    (1,034
    )Common dividends declared and
paid ($0.58 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,589
    )
    
    
    
    
    
    
    (2,589
    )Balance at December 31, 2008
    
    
    14,455
    
    
    
    447
    
    
    
    60,179
    
    
    
    (6,250
    )
    
    
    3,311
    
    
    
    72,142Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,037
    
    
    
    
    
    
    
    5,037Other comprehensive income -
Unrealized gain on securities
available for sale (tax effect $343)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    556
    
    
    
    556Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,593Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    121
    
    
    
    
    
    
    
    
    
    
    
    121Exercise of stock options and tax benefits
(28,995 shares)
    
    
    
    
    
    
    4
    
    
    
    264
    
    
    
    
    
    
    
    
    
    
    
    268Common dividends declared and paid
($0.30 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,344
    )
    
    
    
    
    
    
    (1,344
    )Preferred dividends declared and paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (700
    )
    
    
    
    
    
    
    (700
    )Accretion of discount on preferred stock
    
    
    545
    
    
    
    
    
    
    
    
    
    
    
    (545
    )
    
    
    
    
    
    
    Redemption of preferred stock
    
    
    (15,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,000
    )Repurchase of warrants issued with
preferred stock
    
    
    
    
    
    
    
    
    
    
    (560
    )
    
    
    
    
    
    
    
    
    
    
    (560
    )Balance at December 31, 2009
    
    $
    
    
    
    $
    451
    
    
    $
    60,004
    
    
    $
    (3,802
    )
    
    $
    3,867
    
    
    $
    60,520
  Years Ended December 31,
    
    2009
    
    
    2008(In Thousands)Gross unrealized (losses) gains
arising during the year
    
    $
    2,731
    
    
    $
    (5,312
    )Tax effect
    
    
    (977
    )
    
    
    1,656Unrealized holding (losses) gains, net of tax
    
    
    1,754
    
    
    
    (3,656
    )Reclassification adjustment for (gains)
losses included in income
    
    
    (1,832
    )
    
    
    10,105Tax effect
    
    
    634
    
    
    
    (3,536
    )Unrealized gains on securities,
net of reclassification amount
    
    $
    556
    
    
    $
    2,913
 The accompanying notes are an integral part of these consolidated financial statements.
 37




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##### Table of Contents



Consolidated Statements  of Cash Flows
 Year Ended December 31,
    
    2009
    
    
    2008(In Thousands)Cash flows from operating activities:Net income (loss)
    
    $
    5,037
    
    
    $
    (2,723
    )Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses
    
    
    1,640
    
    
    
    1,285Impairment write-downs on securities
    
    
    
    
    
    
    10,105Net losses on sales of other real estate owned
    
    
    
    
    
    
    72Gains on sales of investments
    
    
    (1,832
    )
    
    
    Net accretion of investment securities
    
    
    (624
    )
    
    
    (496
    )Depreciation and amortization of premises and equipment
    
    
    619
    
    
    
    605Increase in accrued interest receivable
    
    
    (7
    )
    
    
    (267
    )Deferred income tax benefit
    
    
    (211
    )
    
    
    (3,842
    )Stock-based compensation
    
    
    121
    
    
    
    156Income on Bank-owned life insurance
    
    
    (479
    )
    
    
    (441
    )Increase in other assets and prepaid FDIC insurance
    
    
    (2,788
    )
    
    
    (129
    )Increase in other liabilities
    
    
    16
    
    
    
    138Net cash provided by operating activities
    
    
    1,492
    
    
    
    4,463Cash flows from investing activities:Proceeds from maturities of investment securities available for sale
    
    
    27,367
    
    
    
    15,741Proceeds from sales of investment securities available for sale
    
    
    31,642
    
    
    
    Purchases of investment securities available for sale
    
    
    (100,891
    )
    
    
    (97,235
    )Purchases of FHLBB stock
    
    
    
    
    
    
    (1,640
    )Principal payments on investment securities available for sale
    
    
    79,265
    
    
    
    42,713Loan originations, net of principal payments
    
    
    (77,518
    )
    
    
    (96,668
    )Loans purchased
    
    
    (6,837
    )
    
    
    Proceeds from sales of other real estate owned
    
    
    120
    
    
    
    1,758Purchases of premises and equipment
    
    
    (2,300
    )
    
    
    (2,543
    )Net cash used in investing activities
    
    
    (49,152
    )
    
    
    (137,874
    )Cash flows from financing activities:Net increase in deposits
    
    
    84,131
    
    
    
    86,580Additions to long-term borrowed funds
    
    
    9,900
    
    
    
    63,000Payments on long-term borrowed funds
    
    
    (23,157
    )
    
    
    (31,150
    )Net (decrease) increase in short-term borrowed funds
    
    
    (10,151
    )
    
    
    9,289Net increase in subordinated debt `
    
    
    6,000
    
    
    
    Net increase (decrease) in mortgagors escrow accounts
    
    
    157
    
    
    
    (28
    )Proceeds from issuance of preferred stock and warrants
    
    
    
    
    
    
    15,000Redemption of preferred stock
    
    
    (15,000
    )
    
    
    Repurchase of warrants issued with preferred stock
    
    
    (560
    )
    
    
    Dividends paid to preferred stockholder
    
    
    (700
    )
    
    
    Dividends paid to common stockholders
    
    
    (1,344
    )
    
    
    (2,589
    )Proceeds from exercise of stock options
    
    
    266
    
    
    
    117Tax benefits from exercise of stock options
    
    
    2
    
    
    
    4Common stock repurchased
    
    
    
    
    
    
    (1,034
    )Net cash provided by financing activities
    
    
    49,544
    
    
    
    139,189Net increase in cash and cash equivalents
    
    
    1,884
    
    
    
    5,778Cash and cash equivalents, beginning of year
    
    
    13,328
    
    
    
    7,550Cash and cash equivalents, end of year
    
    $
    15,212
    
    
    $
    13,328Cash paid during the year for:Interest on deposits
    
    $
    10,177
    
    
    $
    10,276Interest on borrowed funds
    
    
    11,210
    
    
    
    11,511Income taxes
    
    
    2,722
    
    
    
    2,405Supplemental non-cash investing activities:Transfers to other real estate owned
    
    
    
    
    
    
    1,950
 The accompanying notes are an integral part of these consolidated financial statements.
 38




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2009 and 2008
 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 BASIS OF PRESENTATION.
   FAIR VALUE HEIRARCHY
    CASH AND CASH EQUIVALENTS.
 INVESTMENT SECURITIES.
   39




---



##### Table of Contents



FEDERAL HOME LOAN BANK STOCK
 INTEREST ON LOANS .
 LOAN FEES.
 TRANSFER AND SERVICING OF ASSETS AND EXTINGUISHMENTS OF LIABILITIES.
 ALLOWANCE FOR LOAN LOSSES.
       40




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##### Table of Contents



PREMISES AND EQUIPMENT.
 BANK-OWNED LIFE INSURANCE
 OTHER REAL ESTATE OWNED.
 SHARE-BASED COMPENSATION PLANS.
 INCOME TAXES.
  EARNINGS PER SHARE
 COMPREHENSIVE INCOME
 RECENT ACCOUNTING DEVELOPMENTS
  41




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##### Table of Contents



(2) INVESTMENT SECURITIES
  2009
    
    
    2008Amortized
    
    
    Unrealized
    
    
    Fair
    
    
    Amortized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value
    
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Value(In Thousands)Debt securities:U.S. Treasury obligations
    
    $
    5,557
    
    
    $
    237
    
    
    $
    
    
    
    $
    5,794
    
    
    $
    5,578
    
    
    $
    426
    
    
    $
    
    
    
    $
    6,004Government-sponsored
enterprise obligations (1)
    
    
    33,379
    
    
    
    188
    
    
    
    (49
    )
    
    
    33,518
    
    
    
    15,485
    
    
    
    240
    
    
    
    (3
    )
    
    
    15,722Residential mortgage-backed:U.S. government guaranteed
    
    
    16,037
    
    
    
    483
    
    
    
    
    
    
    
    16,520
    
    
    
    10,886
    
    
    
    345
    
    
    
    (3
    )
    
    
    11,228Government-sponsored
enterprises
    
    
    118,537
    
    
    
    5,543
    
    
    
    (71
    )
    
    
    124,009
    
    
    
    170,481
    
    
    
    5,574
    
    
    
    (77
    )
    
    
    175,978Residential collateralized
mortgage obligations:U.S. government guaranteed
    
    
    21,965
    
    
    
    94
    
    
    
    (80
    )
    
    
    21,979
    
    
    
    3,102
    
    
    
    24
    
    
    
    
    
    
    
    3,126Government-sponsored
enterprises
    
    
    21,283
    
    
    
    389
    
    
    
    
    
    
    
    21,672
    
    
    
    41,617
    
    
    
    355
    
    
    
    (45
    )
    
    
    41,927Private-label
    
    
    1,415
    
    
    
    93
    
    
    
    
    
    
    
    1,508
    
    
    
    2,006
    
    
    
    
    
    
    
    
    
    
    
    2,006Corporate obligations
    
    
    2,489
    
    
    
    
    
    
    
    (111
    )
    
    
    2,378
    
    
    
    6,433
    
    
    
    
    
    
    
    (750
    )
    
    
    5,683Total debt securities
    
    
    220,662
    
    
    
    7,027
    
    
    
    (311
    )
    
    
    227,378
    
    
    
    255,588
    
    
    
    6,964
    
    
    
    (878
    )
    
    
    261,674Equity securities:Mutual funds
    
    
    1,000
    
    
    
    
    
    
    
    (34
    )
    
    
    966
    
    
    
    1,000
    
    
    
    
    
    
    
    (42
    )
    
    
    958Equity securities
    
    
    2,468
    
    
    
    
    
    
    
    (279
    )
    
    
    2,189
    
    
    
    2,469
    
    
    
    
    
    
    
    (540
    )
    
    
    1,929Total equity securities
    
    
    3,468
    
    
    
    
    
    
    
    (313
    )
    
    
    3,155
    
    
    
    3,469
    
    
    
    
    
    
    
    (582
    )
    
    
    2,887Total investment securities
    
    $
    224,130
    
    
    $
    7,027
    
    
    $
    (624
    )
    
    $
    230,533
    
    
    $
    259,057
    
    
    $
    6,964
    
    
    $
    (1,460
    )
    
    $
    264,561
 
 (1)
    
    Government-sponsored enterprise obligations include investment securities issued by
government sponsored enterprises (GSEs) such as Federal National Mortgage Association
(FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and the Federal Home Loan Bank
(FHLB). These investment securities do not represent obligations of the U.S. Government
and are not backed by the full faith and credit of the Treasury.    42




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##### Table of Contents



Government-
    
    Residential
    
    ResidentialSponsored
    
    Mortgage-
    
    CollateralizedU.S. Treasury
    
    Enterprise
    
    Backed
    
    MortgageObligations
    
    Obligations
    
    Securities
    
    Obligations(In Thousands)2009:Wholesale repurchase agreements:Amortized cost
    
    $
    
    
    
    $
    2,992
    
    
    $
    41,830
    
    
    $
    Fair value
    
    
    
    
    
    
    2,999
    
    
    
    44,009
    
    
    
    Customer repurchase agreements:Amortized cost
    
    
    
    
    
    
    6,494
    
    
    
    
    
    
    
    Fair value
    
    
    
    
    
    
    6,621
    
    
    
    
    
    
    
    FHLBB advances:Amortized cost
    
    
    5,058
    
    
    
    15,891
    
    
    
    77,700
    
    
    
    38,230Fair value
    
    
    5,294
    
    
    
    15,912
    
    
    
    81,089
    
    
    
    38,627FRB discount window:Amortized cost
    
    
    499
    
    
    
    
    
    
    
    11,258
    
    
    
    Fair value
    
    
    500
    
    
    
    
    
    
    
    11,668
    
    
    
    2008:Wholesale repurchase agreements:Amortized cost
    
    $
    
    
    
    $
    
    
    
    $
    47,219
    
    
    $
    Fair value
    
    
    
    
    
    
    
    
    
    
    48,835
    
    
    
    Customer repurchase agreements:Amortized cost
    
    
    
    
    
    
    5,986
    
    
    
    
    
    
    
    Fair value
    
    
    
    
    
    
    6,136
    
    
    
    
    
    
    
    FHLBB advances:Amortized cost
    
    
    5,074
    
    
    
    9,499
    
    
    
    119,589
    
    
    
    46,707Fair value
    
    
    5,494
    
    
    
    9,586
    
    
    
    123,544
    
    
    
    47,040
 Impaired securities.
  Less Than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized2009
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses(In Thousands)Debt securities:Government-sponsored
enterprise obligations
    
    $
    15,949
    
    
    $
    (49
    )
    
    $
    
    
    
    $
    
    
    
    $
    15,949
    
    
    $
    (49
    )Residential mortgage-
backed securities
    
    
    11,368
    
    
    
    (61
    )
    
    
    1,463
    
    
    
    (10
    )
    
    
    12,831
    
    
    
    (71
    )Residential collateralized
mortgage obligations
    
    
    12,453
    
    
    
    (79
    )
    
    
    16
    
    
    
    (1
    )
    
    
    12,469
    
    
    
    (80
    )Corporate obligations
    
    
    
    
    
    
    
    
    
    
    2,378
    
    
    
    (111
    )
    
    
    2,378
    
    
    
    (111
    )Total debt securities
    
    
    39,770
    
    
    
    (189
    )
    
    
    3,857
    
    
    
    (122
    )
    
    
    43,627
    
    
    
    (311
    )Equity securities:Mutual funds
    
    
    
    
    
    
    
    
    
    
    966
    
    
    
    (34
    )
    
    
    966
    
    
    
    (34
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    1,760
    
    
    
    (279
    )
    
    
    1,760
    
    
    
    (279
    )Total equity securities
    
    
    
    
    
    
    
    
    
    
    2,726
    
    
    
    (313
    )
    
    
    2,726
    
    
    
    (313
    )Total temporarily impaired
securities
    
    $
    39,770
    
    
    $
    (189
    )
    
    $
    6,583
    
    
    $
    (435
    )
    
    $
    46,353
    
    
    $
    (624
    )
 43




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##### Table of Contents



Less Than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized2008
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses(In Thousands)Debt securities:Government-sponsored
enterprise obligations
    
    $
    2,500
    
    
    $
    (3
    )
    
    $
    
    
    
    $
    
    
    
    $
    2,500
    
    
    $
    (3
    )Residential mortgage-
backed securities
    
    
    303
    
    
    
    (1
    )
    
    
    6,864
    
    
    
    (79
    )
    
    
    7,167
    
    
    
    (80
    )Residential collateralized
mortgage obligations
    
    
    2,006
    
    
    
    (1
    )
    
    
    7,085
    
    
    
    (44
    )
    
    
    9,091
    
    
    
    (45
    )Corporate obligations
    
    
    1,800
    
    
    
    (677
    )
    
    
    3,883
    
    
    
    (73
    )
    
    
    5,683
    
    
    
    (750
    )Total debt securities
    
    
    6,609
    
    
    
    (682
    )
    
    
    17,832
    
    
    
    (196
    )
    
    
    24,441
    
    
    
    (878
    )Equity securities:Mutual funds
    
    
    
    
    
    
    
    
    
    
    958
    
    
    
    (42
    )
    
    
    958
    
    
    
    (42
    )Equity securities
    
    
    1,500
    
    
    
    (540
    )
    
    
    
    
    
    
    
    
    
    
    1,500
    
    
    
    (540
    )Total equity securities
    
    
    1,500
    
    
    
    (540
    )
    
    
    958
    
    
    
    (42
    )
    
    
    2,458
    
    
    
    (582
    )Total temporarily impaired
securities
    
    $
    8,109
    
    
    $
    (1,222
    )
    
    $
    18,790
    
    
    $
    (238
    )
    
    $
    26,899
    
    
    $
    (1,460
    )
 U. S. Treasury and government-sponsored enterprise obligations.
 Residential mortgage-backed securities and residential collateralized mortgage obligations.
 Corporate obligations.
 Equity securities and mutual funds.
  44




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##### Table of Contents



Amortized
    
    
    FairDecember 31, 2009
    
    Cost
    
    
    Value(In Thousands)Debt securities:Within 1 year
    
    $
    3,825
    
    
    $
    3,727After 1 year through 5 years
    
    
    46,866
    
    
    
    47,384After 5 years through 10 years
    
    
    28,685
    
    
    
    29,144After 10 years
    
    
    141,286
    
    
    
    147,123Total debt securities
    
    $
    220,662
    
    
    $
    227,378
 (3) FEDERAL HOME LOAN BANK STOCK
  (4) LOANS
  2009
    
    
    2008(In Thousands)Residential real estate
    
    $
    131,441
    
    
    $
    109,276Home equity
    
    
    27,003
    
    
    
    23,972Consumer
    
    
    657
    
    
    
    831Retail loans
    
    
    159,101
    
    
    
    134,079Construction and land development
    
    
    62,772
    
    
    
    78,169Commercial real estate
    
    
    282,716
    
    
    
    206,577Commercial business
    
    
    32,030
    
    
    
    33,796Corporate loans
    
    
    377,518
    
    
    
    318,542Total loans
    
    
    536,619
    
    
    
    452,621Allowance for loan losses
    
    
    (7,168
    )
    
    
    (5,885
    )Net loans
    
    $
    529,451
    
    
    $
    446,736
     2009
    
    
    2008(In Thousands)Balance at beginning of year
    
    $
    2,822
    
    
    $
    2,112New loans granted
    
    
    315
    
    
    
    1,145Retirement/reduction of directors and officers
    
    
    (25
    )
    
    
    (249
    )Repayment of principal
    
    
    (553
    )
    
    
    (186
    )Balance at end of year
    
    $
    2,559
    
    
    $
    2,822
  45




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##### Table of Contents



2009
    
    
    2008(In Thousands)Balance at beginning of year
    
    $
    5,885
    
    
    $
    4,810Total charge-offs
    
    
    (360
    )
    
    
    (214
    )Total recoveries
    
    
    3
    
    
    
    4Net charge-offs
    
    
    (357
    )
    
    
    (210
    )Provision for loan losses
    
    
    1,640
    
    
    
    1,285Balance at end of year
    
    $
    7,168
    
    
    $
    5,885
   2009
    
    2008(In Thousands)Total impaired loans
    
    $
    7,300
    
    
    $
    3,121Impaired loans with reserve
    
    
    3,196
    
    
    
    Impaired loan reserve
    
    
    415
    
    
    
    Impaired loans without reserve
    
    
    4,104
    
    
    
    3,121Impaired loans average balance
    
    
    4,111
    
    
    
    611Interest income in accordance with original loan terms
    
    
    99
    
    
    
    38Interest income recognized
    
    
    48
    
    
    
    
  (5) PREMISES AND EQUIPMENT
  EstimatedUseful Lives
    
    
    2009
    
    
    2008(In Thousands)Premises
    
    10  39 years
    
    $
    5,221
    
    
    $
    5,143Equipment
    
    3  10  years
    
    
    2,645
    
    
    
    5,642Leasehold improvements
    
    3  20 years
    
    
    2,077
    
    
    
    1,0479,943
    
    
    
    11,832Less accumulated depreciation and amortization
    
    
    
    
    
    
    (2,734
    )
    
    
    (6,304
    )$
    7,209
    
    
    $
    5,528
    Minimum
    
    
    MinimumRental
    
    
    RentalExpense
    
    
    Income(In Thousands)2010
    
    $
    346
    
    
    $
    2032011
    
    
    309
    
    
    
    1732012
    
    
    297
    
    
    
    482013
    
    
    297
    
    
    
    12014
    
    
    286
    
    
    
    Thereafter
    
    
    2,964
    
    
    
    $
    4,499
    
    
    $
    425
  46




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##### Table of Contents



(6) DEPOSITS
  Rates as ofDecember 31,2009
    
    
    2009
    
    
    2008(Dollars in Thousands)NOW acccounts
    
    
    0.100.50
    %
    
    $
    20,739
    
    
    $
    17,239Savings accounts
    
    
    0.251.44
    %
    
    
    90,642
    
    
    
    56,251Money market accounts
    
    
    0.501.49
    %
    
    
    106,640
    
    
    
    76,603Total interest bearing core deposits
    
    
    
    
    
    
    218,021
    
    
    
    150,093Non-interest bearing demand deposit accounts
    
    
    
    
    
    
    34,368
    
    
    
    27,546Total core deposits
    
    
    
    
    
    
    252,389
    
    
    
    177,639Certificates of deposit
    
    
    0.702.96
    %
    
    
    202,707
    
    
    
    196,629Retirement certificates of deposit
    
    
    0.702.96
    %
    
    
    37,698
    
    
    
    34,395Total term deposits
    
    
    
    
    
    
    240,405
    
    
    
    231,024Total deposits
    
    
    
    
    
    $
    492,794
    
    
    $
    408,663
   Equal to
    
    
    
    
    
    
    WeightedLess
    
    
    and greater
    
    
    
    
    
    
    Averagethan
    
    
    than
    
    
    
    
    
    
    Interest$100,000
    
    
    $100,000
    
    
    Total
    
    
    Rate(Dollars in Thousands)Three months or less
    
    $
    38,675
    
    
    $
    43,509
    
    
    $
    82,184
    
    
    
    3.15
    %From three to six months
    
    
    21,884
    
    
    
    11,841
    
    
    
    33,725
    
    
    
    2.20From six to twelve months
    
    
    25,283
    
    
    
    24,258
    
    
    
    49,541
    
    
    
    2.93From one to two years
    
    
    14,799
    
    
    
    32,728
    
    
    
    47,527
    
    
    
    3.05From two to three years
    
    
    3,421
    
    
    
    5,504
    
    
    
    8,925
    
    
    
    2.87Three years and thereafter
    
    
    8,355
    
    
    
    10,148
    
    
    
    18,503
    
    
    
    3.57$
    112,417
    
    
    $
    127,988
    
    
    $
    240,405
    
    
    
    2.97
    %
  (7) BORROWED FUNDS AND SUBORDINATED DEBT
  2009
    
    
    2008Weighted Average
    
    
    
    
    
    
    Weighted AverageAmount
    
    
    Interest Rate
    
    
    Amount
    
    
    Interest Rate(Dollars in Thousands)FHLBB long-term advances
    
    $
    205,971
    
    
    
    4.12
    %
    
    $
    219,228
    
    
    
    4.27
    %Wholesale repurchase agreements
    
    
    40,000
    
    
    
    4.36
    %
    
    
    40,000
    
    
    
    4.36
    %$
    245,971
    
    
    
    4.16
    %
    
    $
    259,228
    
    
    
    4.28
    %
  47




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##### Table of Contents



2009
    
    
    2008Weighted Average
    
    
    
    
    
    
    Weighted AverageMaturity
    
    Amount
    
    
    Interest Rate
    
    
    Amount
    
    
    Interest Rate(Dollars in Thousands)2009
    
    $
    
    
    
    
    
    %
    
    $
    10,000
    
    
    
    5.14
    %2010
    
    
    31,000
    
    
    
    5.10
    
    
    
    44,000
    
    
    
    5.042011
    
    
    33,000
    
    
    
    3.27
    
    
    
    33,000
    
    
    
    3.272012
    
    
    15,000
    
    
    
    5.18
    
    
    
    15,000
    
    
    
    5.182013
    
    
    14,000
    
    
    
    3.20
    
    
    
    8,000
    
    
    
    3.282014
    
    
    18,900
    
    
    
    4.18
    
    
    
    15,000
    
    
    
    4.50Thereafter
    
    
    94,071
    
    
    
    4.06
    
    
    
    94,228
    
    
    
    4.06$
    205,971
    
    
    
    4.12
    %
    
    $
    219,228
    
    
    
    4.27
    %
     2009
    
    
    2008Weighted Average
    
    
    
    
    
    
    Weighted AverageAmount
    
    
    Interest Rate
    
    
    Amount
    
    
    Interest Rate(Dollars in Thousands)FHLBB short-term borrowings
    
    $
    
    
    
    
    
    %
    
    
    11,000
    
    
    
    2.08
    %Federal Reserve Bank discount window
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Customer repurchase agreements
    
    
    7,111
    
    
    
    0.25
    
    
    
    6,262
    
    
    
    0.50$
    7,111
    
    
    
    0.25
    %
    
    $
    17,262
    
    
    
    1.51
    %
  48




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##### Table of Contents



2009
    
    2008Customer
    
    Short-Term
    
    Customer
    
    Short-TermRepurchase
    
    FHLBB
    
    Repurchase
    
    FHLBBAgreements
    
    Advances
    
    Agreements
    
    Advances(Dollars in Thousands)Outstanding at December 31
    
    $
    7,111
    
    
    $
    
    
    
    $
    6,262
    
    
    $
    11,000Average balance outstanding during the year
    
    
    5,943
    
    
    
    2,419
    
    
    
    5,107
    
    
    
    5,352Maximum outstanding at any month end
    
    
    7,534
    
    
    
    16,000
    
    
    
    7,051
    
    
    
    16,000Weighted average rate at December 31
    
    
    0.25
    %
    
    
    
    %
    
    
    0.50
    %
    
    
    2.08
    %Weighted average rate during the year
    
    
    0.26
    
    
    
    1.60
    
    
    
    1.13
    
    
    
    2.39
    (8) INCOME TAXES
  2009
    
    
    2008(In Thousands)Current expense:Federal
    
    $
    2,304
    
    
    $
    1,798State
    
    
    574
    
    
    
    492Total current expense
    
    
    2,878
    
    
    
    2,290Deferred expense (benefit):Federal
    
    
    (125
    )
    
    
    (3,358
    )State
    
    
    (37
    )
    
    
    (1,159
    )Change in state rates
    
    
    
    
    
    
    177Change in valuation reserve
    
    
    (49
    )
    
    
    498Total deferred benefit
    
    
    (211
    )
    
    
    (3,842
    )Total income tax expense (benefit)
    
    $
    2,667
    
    
    $
    (1,552
    )
  2009
    
    
    2008(In Thousands)Expected federal income tax expense (benefit)
    
    $
    2,619
    
    
    $
    (1,454
    )Items affecting expected tax:State income tax, net of federal benefit
    
    
    354
    
    
    
    (440
    )Dividends received deduction
    
    
    (38
    )
    
    
    (134
    )Tax exempt income
    
    
    (46
    )
    
    
    (49
    )Officers life insurance
    
    
    (163
    )
    
    
    (150
    )Change in state rates
    
    
    
    
    
    
    177Change in valuation reserve
    
    
    (49
    )
    
    
    498Other
    
    
    (10
    )
    
    
    Total income tax expense (benefit)
    
    $
    2,667
    
    
    $
    (1,552
    )
 49




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##### Table of Contents



2009
    
    
    2008(In Thousands)Deferred tax assets:Allowance for loan losses
    
    $
    2,922
    
    
    $
    2,370Impairment write-downs on securities
    
    
    3,628
    
    
    
    4,036Pension costs and other post-retirement benefits
    
    
    99
    
    
    
    103Deferred compensation
    
    
    481
    
    
    
    502Depreciation
    
    
    444
    
    
    
    396Other
    
    
    44
    
    
    
    19Gross deferred tax asset
    
    
    7,618
    
    
    
    7,426Valuation reserve
    
    
    (449
    )
    
    
    (498
    )Deferred tax asset
    
    
    7,169
    
    
    
    6,928Deferred tax liabilities:Unrealized gain on investment securities available for sale
    
    
    (2,536
    )
    
    
    (2,193
    )Other
    
    
    (318
    )
    
    
    (288
    )Gross deferred tax liability
    
    
    (2,854
    )
    
    
    (2,481
    )Net deferred income tax asset
    
    $
    4,315
    
    
    $
    4,447
     (9) STOCKHOLDERS EQUITY
    50




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##### Table of Contents



Actual
    
    Adequately Capitalized
    
    Well CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)At December 31, 2009LSB CorporationTotal risk-based capital
    
    $
    69,633
    
    
    
    12.01
    %
    
    $
    46,379
    
    
    
    8.0
    %
    
    $
    57,974
    
    
    
    10.0
    %Tier 1 risk-based capital
    
    
    56,465
    
    
    
    9.74
    
    
    
    23,190
    
    
    
    4.0
    
    
    
    34,784
    
    
    
    6.0Tier 1 leverage capital
    
    
    56,465
    
    
    
    6.98
    
    
    
    32,365
    
    
    
    4.0
    
    
    
    40,457
    
    
    
    5.0River BankTotal risk-based capital
    
    
    68,669
    
    
    
    11.84
    %
    
    
    46,379
    
    
    
    8.0
    %
    
    
    57,974
    
    
    
    10.0
    %Tier 1 risk-based capital
    
    
    55,501
    
    
    
    9.57
    
    
    
    23,190
    
    
    
    4.0
    
    
    
    34,784
    
    
    
    6.0Tier 1 leverage capital
    
    
    55,501
    
    
    
    6.85
    
    
    
    32,393
    
    
    
    4.0
    
    
    
    40,491
    
    
    
    5.0At December 31, 2008LSB CorporationTotal risk-based capital
    
    $
    74,372
    
    
    
    14.45
    %
    
    $
    41,183
    
    
    
    8.0
    %
    
    $
    51,479
    
    
    
    10.0
    %Tier 1 risk-based capital
    
    
    68,487
    
    
    
    13.30
    
    
    
    20,592
    
    
    
    4.0
    
    
    
    30,887
    
    
    
    6.0Tier 1 leverage capital
    
    
    68,487
    
    
    
    9.22
    
    
    
    29,721
    
    
    
    4.0
    
    
    
    37,152
    
    
    
    5.0River BankTotal risk-based capital
    
    $
    66,774
    
    
    
    12.97
    %
    
    $
    41,183
    
    
    
    8.0
    %
    
    $
    51,479
    
    
    
    10.0
    %Tier 1 risk-based capital
    
    
    60,889
    
    
    
    11.83
    
    
    
    20,592
    
    
    
    4.0
    
    
    
    30,887
    
    
    
    6.0Tier 1 leverage capital
    
    
    60,889
    
    
    
    8.18
    
    
    
    29,777
    
    
    
    4.0
    
    
    
    37,222
    
    
    
    5.0
 Senior Cumulative Perpetual Preferred Stock, Series B
  Accounting for Issuance of Senior Preferred and Warrants
  Senior Preferred Terms
  Warrant Terms
  Accounting for the Redemption of Senior Preferred and Warrants
  Stock Repurchase Plan
  51




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##### Table of Contents



Restrictions on Dividends, Loans and Advances
   Stockholders Rights Plan
  (10) EMPLOYEE BENEFITS
 401(k) Savings Plan
  Employee Stock Ownership Plan
  Incentive Compensation Plan
  Employment Termination or Change-in-Control Agreements
  52




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##### Table of Contents



Supplemental Executive Retirement Agreements
  (11) STOCK COMPENSATION AWARDS
  Cumulative OptionAuthorized
    
    
    Cumulative
    
    
    Awards, Net ofAwards
    
    
    Stock Awards
    
    
    Expiration1986 Plan
    
    
    720,500
    
    
    
    N/A
    
    
    
    430,2501997 Plan
    
    
    449,500
    
    
    
    N/A
    
    
    
    427,8502006 Plan
    
    
    400,000
    
    
    
    30,250
    
    
    
    77,5751,570,000
    
    
    
    30,250
    
    
    
    935,675
      53




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##### Table of Contents



2009
    
    
    2008Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    PriceOutstanding at beginning of year
    
    
    248,100
    
    
    $
    14.33
    
    
    
    251,600
    
    
    $
    14.51Granted
    
    
    9,000
    
    
    
    10.74
    
    
    
    9,000
    
    
    
    8.00Exercised
    
    
    (28,995
    )
    
    
    9.13
    
    
    
    (9,500
    )
    
    
    12.39Forfeited
    
    
    
    
    
    
    
    
    
    
    (3,000
    )
    
    
    16.77Expired
    
    
    (17,705
    )
    
    
    11.67
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    210,400
    
    
    
    15.12
    
    
    
    248,100
    
    
    
    14.33Options exercisable end of year
    
    
    210,400
    
    
    
    15.12
    
    
    
    240,725
    
    
    
    14.27Weighted average fair value of
options granted during the year
    
    
    
    
    
    $
    2.57
    
    
    
    
    
    
    $
    2.01
    2009
    
    2008Expected volatility
    
    
    29.78
    %
    
    
    53.00
    %Risk-free interest rate
    
    
    3.22
    %
    
    
    2.03
    %Expected dividend yield
    
    
    3.38
    %
    
    
    7.50
    %Expected life in years
    
    7 years
    

7 years
  (12) CONTINGENCIES
  (13) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
   54




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##### Table of Contents



2009
    
    Fixed Rate
    
    
    Variable Rate
    
    
    Total(In Thousands)Financial instruments with contract amounts represent credit risk:Unused commitments to extend credit:Residential mortgages
    
    $
    1,932
    
    
    $
    
    
    
    $
    1,932Home equity lines of credit
    
    
    1,001
    
    
    
    12,017
    
    
    
    13,018Personal lines of credit
    
    
    315
    
    
    
    
    
    
    
    315Commercial real estate mortgage
    
    
    3,146
    
    
    
    12,075
    
    
    
    15,221Construction and land
    
    
    
    
    
    
    33,457
    
    
    
    33,457Commercial loans
    
    
    2,065
    
    
    
    35,919
    
    
    
    37,984Total unused commitments
    
    $
    8,459
    
    
    $
    93,468
    
    
    $
    101,927Letters of credit and standby letters of credit
    
    $
    
    
    
    $
    1,588
    
    
    $
    1,588
 2008
    
    Fixed Rate
    
    
    Variable Rate
    
    
    Total(In Thousands)Financial instruments with contract amounts represent credit risk:Unused commitments to extend credit:Residential mortgages
    
    $
    8,324
    
    
    $
    160
    
    
    $
    8,484Home equity lines of credit
    
    
    1,034
    
    
    
    11,905
    
    
    
    12,939Personal lines of credit
    
    
    295
    
    
    
    
    
    
    
    295Commercial real estate mortgage
    
    
    13
    
    
    
    21,297
    
    
    
    21,310Construction and land
    
    
    
    
    
    
    29,564
    
    
    
    29,564Commercial loans
    
    
    103
    
    
    
    28,817
    
    
    
    28,920Total unused commitments
    
    $
    9,769
    
    
    $
    91,743
    
    
    $
    101,512Letters of credit and standby letters of credit
    
    $
    
    
    
    $
    1,610
    
    
    $
    1,610
 (14) FAIR VALUE OF ASSETS AND LIABILITIES
   2009
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Fair Value(In Thousands)Investment securities available for sale:U.S. Treasury obligations
    
    $
    5,794
    
    
    $
    
    
    
    $
    
    
    
    $
    5,794All other debt securities
    
    
    
    
    
    
    221,584
    
    
    
    
    
    
    
    221,584Equity securities
    
    
    1,760
    
    
    
    970
    
    
    
    425
    
    
    
    3,155Total recurring assets
    
    $
    7,554
    
    
    $
    222,554
    
    
    $
    425
    
    
    $
    230,533
 2008
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Fair Value(In Thousands)Investment securities available for sale:U.S. Treasury obligations
    
    $
    6,004
    
    
    $
    
    
    
    $
    
    
    
    $
    6,004All other debt securities
    
    
    
    
    
    
    255,670
    
    
    
    
    
    
    
    255,670Equity securities
    
    
    1,500
    
    
    
    962
    
    
    
    425
    
    
    
    2,887Total recurring assets
    
    $
    7,504
    
    
    $
    256,632
    
    
    $
    425
    
    
    $
    264,561
  55




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##### Table of Contents



Year endedDecember 31, 20092009
    
    Level 1
    
    Level 2
    
    Level 3
    
    Total Losses(In Thousands)Non recurring:Impaired loans
    
    $
    
    
    
    $
    
    
    
    $
    2,781
    
    
    $
    415
    56




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##### Table of Contents



2009
    
    2008Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    Value(In Thousands)Financial assets:Cash and due from banks
    
    $
    8,615
    
    
    $
    8,615
    
    
    $
    6,859
    
    
    $
    6,859Short-term investments
    
    
    6,597
    
    
    
    6,597
    
    
    
    6,469
    
    
    
    6,469Investment securities available for sale
    
    
    230,533
    
    
    
    230,533
    
    
    
    264,561
    
    
    
    264,561Federal Home Loan Bank stock
    
    
    11,825
    
    
    
    11,825
    
    
    
    11,825
    
    
    
    11,825Accrued interest receivable
    
    
    2,727
    
    
    
    2,727
    
    
    
    2,720
    
    
    
    2,720Loans, net
    
    
    529,451
    
    
    
    526,087
    
    
    
    446,736
    
    
    
    446,609Financial liabilities:Core deposits
    
    
    252,389
    
    
    
    252,389
    
    
    
    177,639
    
    
    
    177,639Certificates of deposit
    
    
    240,405
    
    
    
    244,002
    
    
    
    231,024
    
    
    
    236,443Borrowed funds
    
    
    259,082
    
    
    
    272,320
    
    
    
    276,490
    
    
    
    297,385Mortgagors escrow accounts
    
    
    776
    
    
    
    776
    
    
    
    619
    
    
    
    619Accrued interest payable
    
    
    987
    
    
    
    987
    
    
    
    1,106
    
    
    
    1,106
  (15) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
  Balance Sheets
    
    2009
    
    
    2008(In Thousands)Assets:Cash deposits in subsidiaries
    
    $
    1,021
    
    
    $
    7,749Investment in subsidiary, at equity
    
    
    59,135
    
    
    
    64,172Other assets
    
    
    509
    
    
    
    423Total assets
    
    $
    60,665
    
    
    $
    72,344Liabilities and Stockholders Equity:Liabilities:Accrued income taxes
    
    $
    24
    
    
    $
    24Accrued expenses
    
    
    121
    
    
    
    178Total liabilities
    
    
    145
    
    
    
    202Total stockholders equity
    
    
    60,520
    
    
    
    72,142Total liabilities and stockholders equity
    
    $
    60,665
    
    
    $
    72,344
 57




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##### Table of Contents



Statements of Operations
    
    2009
    
    
    2008(In Thousands)Dividends from bank subsidiary
    
    $
    10,700
    
    
    $
    2,800Interest income
    
    
    122
    
    
    
    31Total operating income
    
    
    10,822
    
    
    
    2,831Non-interest expenses
    
    
    229
    
    
    
    228Income before income taxes and undistributed earnings
    
    
    10,593
    
    
    
    2,603Income tax benefit
    
    
    (37
    )
    
    
    (56
    )Income before undistributed earnings of subsidiary
    
    
    10,630
    
    
    
    2,659Equity in undistributed earnings (loss) of subsidiary
    
    
    (5,593
    )
    
    
    (5,382
    )Net income (loss) before preferred stock dividends and accretion
    
    
    5,037
    
    
    
    (2,723
    )Preferred stock dividends and accretion
    
    
    (1,245
    )
    
    
    (4
    )Net income (loss) attributable to common shareholders
    
    $
    3,792
    
    
    $
    2,727
  Statements of Cash Flows
    
    2009
    
    
    2008(In Thousands)Cash flows from operating activities:Net income (loss)
    
    $
    5,037
    
    
    $
    (2,723
    )Adjustments to reconcile net income to net cash
provided by operating activities:Net distributed (earnings) loss of subsidiaries
    
    
    5,593
    
    
    
    5,382(Increase) decrease in other assets
    
    
    (86
    )
    
    
    36(Decrease) increase in liabilities
    
    
    (57
    )
    
    
    80Stock-based compensation
    
    
    121
    
    
    
    156Net cash provided by operating activities
    
    
    10,608
    
    
    
    2,931Cash flows from investing activities:Investment in subsidiary
    
    
    
    
    
    
    (8,000
    )Net cash used by investing activities
    
    
    
    
    
    
    (8,000
    )Cash flows from financing activities:Proceeds from exercise of stock options and tax benefits
    
    
    268
    
    
    
    121Repurchases of common stock
    
    
    
    
    
    
    (1,034
    )Proceeds from issuance of preferred stock and warrants
    
    
    
    
    
    
    15,000Redemption of preferred stock
    
    
    (15,000
    )
    
    
    Repurchase of warrants issued with preferred stock
    
    
    (560
    )
    
    
    Dividends paid to preferred stockholders
    
    
    (700
    )
    
    
    Dividends paid to common stockholders
    
    
    (1,344
    )
    
    
    (2,589
    )Net cash (used) provided by financing activities
    
    
    (17,336
    )
    
    
    11,498Net (decrease) increase in cash and cash equivalents
    
    
    (6,728
    )
    
    
    6,429Cash and cash equivalents, beginning of year
    
    
    7,749
    
    
    
    1,320Cash and cash equivalents, end of year
    
    $
    1,021
    
    
    $
    7,749
 58




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##### Table of Contents



(16) Quarterly Results of Operations (Unaudited)
  Quarter Ended 2009March
    
    
    June
    
    
    September
    
    
    December31
    
    
    30

    
    
    30
    
    
    31(In Thousands, Except Per Share Data)Interest and dividend income
    
    $
    10,045
    
    
    $
    10,087
    
    
    $
    10,268
    
    
    $
    10,441Interest expense
    
    
    5,473
    
    
    
    5,359
    
    
    
    5,226
    
    
    
    5,208Net interest income
    
    
    4,572
    
    
    
    4,728
    
    
    
    5,042
    
    
    
    5,233Provision for loan losses
    
    
    240
    
    
    
    460
    
    
    
    400
    
    
    
    540Net interest income after provision for loan losses
    
    
    4,332
    
    
    
    4,268
    
    
    
    4,642
    
    
    
    4,693Gains on sales of securities
    
    
    227
    
    
    
    232
    
    
    
    572
    
    
    
    803Prepayment penalty on FHLB advances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (127
    )Non-interest income
    
    
    504
    
    
    
    542
    
    
    
    524
    
    
    
    519Non-interest expense
    
    
    3,623
    
    
    
    3,457
    
    
    
    3,267
    
    
    
    3,680Income before income taxes expense
    
    
    1,440
    
    
    
    1,585
    
    
    
    2,471
    
    
    
    2,208Income tax expense
    
    
    476
    
    
    
    524
    
    
    
    910
    
    
    
    757Net income before preferred stock dividends and accretion
    
    
    964
    
    
    
    1,061
    
    
    
    1,561
    
    
    
    1,451Preferred stock dividends and accretion
    
    
    (159
    )
    
    
    (215
    )
    
    
    (215
    )
    
    
    (656
    )Net income attributable to common stockholders
    
    $
    805
    
    
    $
    846
    
    
    $
    1,346
    
    
    $
    795Basic earnings per common share
    
    $
    0.18
    
    
    $
    0.19
    
    
    $
    0.30
    
    
    $
    0.18Diluted earnings per common share
    
    $
    0.18
    
    
    $
    0.19
    
    
    $
    0.30
    
    
    $
    0.18
 Quarter Ended 2008March
    
    
    June
    
    
    September
    
    
    December31
    
    

    30
    
    

    30
    
    

    31(In Thousands, Except Per Share Data)Interest and dividend income
    
    $
    9,282
    
    
    $
    9,560
    
    
    $
    9,925
    
    
    $
    9,988Interest expense
    
    
    5,393
    
    
    
    5,335
    
    
    
    5,482
    
    
    
    5,668Net interest income
    
    
    3,889
    
    
    
    4,225
    
    
    
    4,443
    
    
    
    4,320Provision for loan losses
    
    
    105
    
    
    
    400
    
    
    
    330
    
    
    
    450Net interest income after provision for loan losses
    
    
    3,784
    
    
    
    3,825
    
    
    
    4,113
    
    
    
    3,870Impairment write-downs on securities
    
    
    
    
    
    
    
    
    
    
    (9,383
    )
    
    
    (722
    )Non-interest income
    
    
    494
    
    
    
    510
    
    
    
    535
    
    
    
    577Non-interest expense
    
    
    2,822
    
    
    
    2,982
    
    
    
    2,985
    
    
    
    3,089Income (loss) before income taxes expense
    
    
    1,456
    
    
    
    1,353
    
    
    
    (7,720
    )
    
    
    636Income tax expense (benefit)1
    
    
    540
    
    
    
    410
    
    
    
    530
    
    
    
    (3,032
    )Net income (loss) before preferred stock accretion
    
    
    916
    
    
    
    943
    
    
    
    (8,250
    )
    
    
    3,668Preferred stock dividends and accretion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Net income (loss) attributable to common stockholders
    
    $
    916
    
    
    $
    943
    
    
    $
    (8,250
    )
    
    $
    3,664Basic earnings (loss) per common share
    
    $
    0.20
    
    
    $
    0.21
    
    
    $
    (1.85
    )
    
    $
    0.82Diluted earnings (loss) per common share
    
    $
    0.20
    
    
    $
    0.21
    
    
    $
    (1.85
    )
    
    $
    0.82
 
 1
    
    The tax benefit relating to the impairment write-down of FNMA and FHLMC preferred stock was
recognized in the fourth quarter of 2008 when a change in tax law re-characterized these losses
from capital losses to ordinary losses. 59




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
 Regulation S-K.
 
 ITEM 9A (T). CONTROLS AND PROCEDURES
    Managements Report on Internal Control Over Financial Reporting
   Internal Control-Integrated Framework
    
 ITEM 9B. OTHER INFORMATION
  
 PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
 ITEM 11. EXECUTIVE COMPENSATION
  60




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##### Table of Contents



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  
 PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
  (1)
    
    Financial Statements: The following Consolidated Financial
Statements of LSB Corporation and Subsidiary for the year ended December 31, 2009 are included in Item 8 of Part II to this
report:Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets at December 31, 2009 and 2008Consolidated Statements of Operations for the years ended December 31, 2009 and 2008Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2009 and 2008Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008Notes to Consolidated Financial Statements(2)
    
    Financial Statement Schedules: None.(3)
    
    List of Exhibits: The following is a list of exhibits which are either filed or
incorporated by reference as part of this Annual Report on Form 10-K. Upon request to
Investors Relations, LSB Corporation, 30 Massachusetts Avenue, North Andover, MA 01845,
copies of the individual exhibits will be furnished upon payment of a reasonable
reproduction fee.
 Exhibits:Number
    
    Description of Exhibit(2)
    
    Plan of Reorganization and Acquisition, dated as of March 12, 2001 between LSB Corporation
and Lawrence Savings Bank (Filed as Exhibit 2.1 to the Companys Current Report on Form 8-K
filed July 2, 2001, (File Number 000-32955) and incorporated herein by reference)(3) (i).1
    
    Articles of Organization of LSB Corporation (Filed as Exhibit 3.1 to the Companys
Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and incorporated herein
by reference)(3) (i).2
    
    Articles of Amendment of the Articles of Organization of LSB Corporation, as submitted
for filing in the Office of the Secretary of the Commonwealth of Massachusetts on December 30,
2005, (Filed as Exhibit 3(i).1 to the Companys Current Report on Form 8-K filed January 6,
2006, and incorporated herein by reference)(3) (i).3
    
    Articles of Amendment to the Articles of Organization of LSB Corporation, establishing
the fixed rate cumulative perpetual preferred stock, Series B (Filed as Exhibit 3.1 to the
Companys Current Report of Form 8-K filed December 17, 2008, and incorporated herein by
reference)
 61




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##### Table of Contents



Exhibits:Number
    
    Description of Exhibit(3) (ii)
    
    Amended and Restated By-Laws of LSB Corporation (Filed as Exhibit 3.1 to the Companys
Current Report on Form 8-K filed October 31, 2007, and incorporated herein by reference)(3) (iii)
    
    Lawrence Savings Bank Certificate of Vote of Directors Establishing a Series of a Class
of Stock (Filed as Exhibit 3(iii) to the Companys 2005 Annual Report on Form 10-K and
incorporated herein by reference)(4.1)
    
    Specimen certificate of shares of common stock of the Company (Filed as Exhibit 4.1 to the
Companys Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and
incorporated herein by reference)(4.2)
    
    Renewed Rights Agreement dated as of November 17, 2005, between LSB Corporation and
Computershare Trust Company, N.A., as Rights Agent (Filed as Exhibit 4.1 to the Companys
Current Report on Form 8-K filed January 31, 2006, and incorporated herein by reference)(4.3)
    
    Warrant to purchase 209,497 shares of common stock of LSB Corporation dated December 12,
2008, (filed as Exhibit 4.1 to the Companys Current Report on Form 8-K filed December 17,
2008, and incorporated herein by reference)(10.1)
    
    Supplemental Retirement Agreement by and between the Bank and Paul A. Miller dated April 21,
1989, (Filed as Exhibit 10.8 to the Companys Current Report on Form 8-K filed July 2, 2001,
(File Number 000-32955) and incorporated herein by reference)*(10.2)
    
    Supplemental Retirement Agreement by and between the Bank and Paul A. Miller dated April 21,
1996, (Filed as Exhibit 10.9 to the Companys Current Report on Form 8-K filed July 2, 2001,
(File Number 000-32955) and incorporated herein by reference)*(10.3)
    
    Lawrence Savings Bank 1986 Stock Option Plan (Filed as Exhibit 10.14 to the Companys
Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and incorporated herein
by reference)*(10.4)
    
    Lawrence Savings Bank 1997 Stock Option Plan (Filed as Exhibit 10.15 to the Companys
Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and incorporated herein
by reference)*(10.5)
    
    LSB Corporation 2006 Stock Option and Incentive Plan (Filed as Exhibit 10.1 to the Companys
Form S-8 filed June 5, 2006)*(10.6)
    
    LSB Corporations Form of Restricted Stock Agreement (Filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K filed December 26, 2006, and incorporated herein by reference)*(10.7)
    
    LSB Corporations Form of Incentive Stock Option Agreement (Filed as Exhibit 10.2 to the
Companys Current Report on Form 8-K filed December 26, 2006, and incorporated herein by
reference)*(10.8)
    
    LSB Corporations Form of Non-Qualified Stock Option Agreement (Filed as Exhibit 10.3 to the
Companys Current Report on Form 8-K filed December 26, 2006, and incorporated herein by
reference)*(10.9)
    
    LSB Corporation and River Bank Employee Stock Ownership Plan (Filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K filed March 19, 2007, and incorporated herein by
reference)*(10.10)
    
    LSB Corporation and River Bank Special Separation Plan (Filed as Exhibit 99.1 to the
Companys Current Report on Form 8-K filed December 14, 2007, and incorporated herein by
reference)*(10.11)
    
    LSB Corporation and River Bank Special Termination Agreement with Gerald T. Mulligan (Filed
as Exhibit 10.2 to the Companys Current Form 10-Q filed August 14, 2006, and incorporated
herein by reference)*(10.12)
    
    LSB Corporation and River Bank Special Termination Agreement with Michael J. Ecker (Filed
as Exhibit 10.3 to the Companys Current Form 10-Q filed August 14, 2006, and incorporated
herein by reference)*(10.13)
    
    LSB Corporation and River Bank Special Termination Agreement with Stephen B. Jones (Filed
as Exhibit 10.4 to the Companys Current Form 10-Q filed August 14, 2006, and incorporated
herein by reference)*(10.14)
    
    LSB Corporation and River Bank Special Termination Agreement with Diane L. Walker (Filed as
Exhibit 10.5 to the Companys Current Form 10-Q filed August 14, 2006, and incorporated herein
by reference)*(10.15)
    
    LSB Corporation and River Bank Special Termination Agreement with Teresa K. Flynn (Filed as
Exhibit 10.1 to the Companys Current Form 10-Q filed May 11, 2007, and incorporated herein by
reference)*
 62




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##### Table of Contents



Exhibits:Number
    
    Description of Exhibit(10.16)
    
    Letter Agreement which incorporates the Securities Purchase Agreement  Standard terms,
dated December 12, 2008, between LSB Corporation and the United States Department of the
Treasury (filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed December 17,
2008, and incorporated herein by reference)(10.17)
    
    Subordinated Debt Agreement dated October 20, 2009, between River Bank and Commerce Bank &
Trust Company (filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed October
23, 2009, and incorporated herein by reference)(10.18)
    
    Repurchase Agreement dated December 16, 2009, between the United States Department of the
Treasury and LSB Corporation (filed as Exhibit 10.1 to the Companys Current Report on Form
8-K filed December 17, 2009, and incorporated herein by reference)(13)
    
    2009 Annual Report to Stockholders of LSB Corporation enclosed herein (furnished solely for
the Commissions information)(14)
    
    LSB Corporation and River Bank Code of Professional Conduct (Filed as Exhibit 99.1 to the
Companys Current Report on Form 8-K filed November 20, 2006, and incorporated herein by
reference)(21)
    
    Subsidiary of LSB Corporation and subsidiaries of River Bank(23.1)
    
    Consent of Wolf & Company, P.C.(24)
    
    Power of Attorney (contained in signature page)(31.1)
    
    Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002(31.2)
    
    Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002(32.1)
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as added by
Section 906 of the Sarbanes-Oxley Act of 2002(32.2)
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as added by
Section 906 of the Sarbanes-Oxley Act of 2002
  
 *
    
    Management contract or compensatory plan or arrangement 63




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##### Table of Contents



SIGNATURES
  LSB CorporationBy:
    
    /s/ Gerald T. MulliganPresident and Chief Executive OfficerDate: March 10, 2010
  Signature
    
    Title
    
    Date/s/ Gerald T. Mulligan

Gerald T. Mulligan
    
    President, Chief Executive Officer and Director
(Principal Executive Officer)
    
    March 10, 2010/s/ Diane L. Walker

Diane L. Walker
    
    Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Principal Accounting
Officer)
    
    March 10, 2010/s/ Thomas J. Burke

Thomas J. Burke
    
    Chairman of the Board
Director
    
    March 10, 2010/s/ John P. Bachini, Jr.

John P. Bachini, Jr.
    
    Director
    
    March 10, 2010/s/ Kathleen Boshar Reynolds

Kathleen Boshar Reynolds
    
    Director
    
    March 10, 2010/s/ Malcolm W. Brawn

Malcolm W. Brawn
    
    Director
    
    March 10, 2010/s/ Richard Hart Harrington

Richard Hart Harrington
    
    Director
    
    March 10, 2010/s/ Robert F. Hatem

Robert F. Hatem
    
    Director
    
    March 10, 2010/s/ Marsha A. McDonough

Marsha A. McDonough
    
    Director
    
    March 10, 2010/s/ Fred P. Shaheen

Fred P. Shaheen
    
    Director
    
    March 10, 2010
 64