##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20529
 FORM 10-Q þ Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934 For the quarterly period ended March 31, 2005 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)30 Massachusetts Avenue, North Andover, MA
    
    01845(Address of principal executive offices)
    
    (Zip Code)
   (978) 725-7500
(Registrants telephone number, including area code)   Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such report), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ
    
    No o
   Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes o
    
    No þ
   Indicate the number of shares outstanding of each of the registrants classes of common stock,
as of the latest practicable date. Class
    
    Outstanding as of April 30, 2005Common Stock, par value $.10 per share
    
    4,388,319 shares




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LSB CORPORATION AND SUBSIDIARY INDEX PagePART I  FINANCIAL INFORMATIONITEM 1
    
    FINANCIAL STATEMENTS:Consolidated Balance Sheets
    
    
    3Consolidated Statements of Income
    
    
    4Consolidated Statements of Changes in Stockholders Equity
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Notes to Consolidated Financial Statements
    
    
    7-9ITEM 2
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:Financial Condition:Investment Portfolio
    
    
    12Loan Portfolio
    
    
    12Allowance for Loan Losses
    
    
    13Risk Assets
    
    
    13-14Deposits
    
    
    14Borro wings
    
    
    14Results of Operations:Three months ended March 31, 2005 and 2004
    
    
    15Loan Interest Income
    
    
    16Deposit Interest Expense
    
    
    16Liquidity and Capital Resources
    
    
    17-18ITEM 3
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
    
    18ITEM 4
    
    CONTROLS AND PROCEDURES
    
    
    18PART II  OTHER INFORMATIONITEM 1
    
    LEGAL PROCEEDINGS
    
    
    19ITEM 2
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    19ITEM 3
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    19ITEM 4
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    19ITEM 5
    
    OTHER INFORMATION
    
    
    19ITEM 6
    
    EXHIBITS
    
    
    19SIGNATURES
    
    
    20EXHIBIT INDEX
    
    
    21Ex-31.1 Section 302 Certification of C.E.O.Ex-31.2 Section 302 Certification of C.F.O.Ex-32.1 Section 906 Certification of C.E.O.Ex-32.2 Section 906 Certification of C.F.O.
  2




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PART 1   FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS LSB CORPORATION AND SUBSIDIARY 
   March 31,
    
    
    December 31,2005
    
    
    2004(In thousands, except share data)ASSETSAssets:Cash and due from banks
    
    $
    6,704
    
    
    $
    7,193Federal funds sold
    
    
    3,427
    
    
    
    209Total cash and cash equivalents
    
    
    10,131
    
    
    
    7,402Investment securities held to maturity (market value
of $234,314 in 2005 and $198,716 in 2004)
    
    
    238,659
    
    
    
    200,264Investment securities available for sale (amortized
cost of
$62,035 in 2005 and $63,706 in 2004)
    
    
    60,448
    
    
    
    63,039Federal Home Loan Bank stock, at cost
    
    
    9,681
    
    
    
    7,887Loans, net of allowance for loan losses
    
    
    230,313
    
    
    
    228,670Bank premises and equipment
    
    
    3,419
    
    
    
    3,486Accrued interest receivable
    
    
    2,928
    
    
    
    2,894Deferred income tax asset
    
    
    3,663
    
    
    
    3,067Other assets
    
    
    1,371
    
    
    
    1,768Total assets
    
    $
    560,613
    
    
    $
    518,477LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Interest bearing deposits
    
    $
    284,900
    
    
    $
    284,309Non-interest bearing deposits
    
    
    16,973
    
    
    
    14,797Federal Home Loan Bank advances
    
    
    112,971
    
    
    
    105,102Other borrowed funds
    
    
    81,000
    
    
    
    49,000Securities sold under agreements to repurchase
    
    
    2,918
    
    
    
    3,161Advance payments by borrowers for taxes and insurance
    
    
    653
    
    
    
    506Other liabilities
    
    
    3,194
    
    
    
    3,764Total liabilities
    
    
    502,609
    
    
    
    460,639Stockholders equity:Preferred
stock, $.10 par value per share: 5,000,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, $.10 par value per share;
20,000,000 shares authorized;
4,605,026 and 4,556,742 shares issued at
March 31, 2005 and
December 31, 2004, respectively, and 4,385,726
and 4,337,442 shares
outstanding at March 31, 2005 and December 31,
2004, respectively
    
    
    461
    
    
    
    456Additional paid-in capital
    
    
    59,606
    
    
    
    59,145Retained earnings
    
    
    1,635
    
    
    
    1,389Treasury stock, at cost (219,300 shares)
    
    
    (2,758
    )
    
    
    (2,758
    )Accumulated other comprehensive loss
    
    
    (940
    )
    
    
    (394
    )Total stockholders equity
    
    
    58,004
    
    
    
    57,838Total liabilities and stockholders equity
    
    $
    560,613
    
    
    $
    518,477
 The accompanying notes are an integral part of these unaudited Consolidated Financial Statements. 3




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LSB CORPORATION AND SUBSIDIARY 
   Three months endedMarch 31,2005
    
    
    2004(In thousands, except share data)Interest and dividend income:Loans
    
    $
    3,572
    
    
    $
    3,303Investment securities held to maturity
    
    
    1,914
    
    
    
    1,669Investment securities available for sale
    
    
    524
    
    
    
    428Federal Home Loan Bank stock
    
    
    84
    
    
    
    36Other interest and dividend income
    
    
    15
    
    
    
    6Total interest and dividend income
    
    
    6,109
    
    
    
    5,442Interest expense:Deposits
    
    
    1,066
    
    
    
    828Federal Home Loan Bank advances
    
    
    1,173
    
    
    
    1,052Other borrowed funds
    
    
    308
    
    
    
    136Securities sold under agreements to repurchase
    
    
    8
    
    
    
    3Total interest expense
    
    
    2,555
    
    
    
    2,019Net interest income
    
    
    3,554
    
    
    
    3,423Provision for loan losses
    
    
    
    
    
    
    Net interest income after provision for loan losses
    
    
    3,554
    
    
    
    3,423Non-interest income:Loan servicing fees
    
    
    38
    
    
    
    20Deposit account fees
    
    
    207
    
    
    
    202Gains on sales of mortgage loans
    
    
    11
    
    
    
    11Other income
    
    
    109
    
    
    
    89Total non-interest income
    
    
    365
    
    
    
    322Non-interest expense:Salaries and employee benefits
    
    
    1,576
    
    
    
    1,622Occupancy and equipment expenses
    
    
    255
    
    
    
    197Professional expenses
    
    
    104
    
    
    
    115Data processing expenses
    
    
    221
    
    
    
    200Other expenses
    
    
    425
    
    
    
    354Total non-interest expenses
    
    
    2,581
    
    
    
    2,488Income before income tax expense
    
    
    1,338
    
    
    
    1,257Income tax expense
    
    
    479
    
    
    
    471Net income
    
    $
    859
    
    
    $
    786Average shares outstanding
    
    
    4,365,559
    
    
    
    4,263,637Common stock equivalents
    
    
    167,192
    
    
    
    192,342Average diluted shares outstanding
    
    
    4,532,751
    
    
    
    4,455,979Basic earnings per share
    
    $
    0.20
    
    
    $
    0.18Diluted earnings per share
    
    $
    0.19
    
    
    $
    0.18
 The accompanying notes are an integral part of these unaudited Consolidated Financial Statements. 4




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LSB CORPORATION AND SUBSIDIARY 
  
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Paid-In
    
    
    (Accumulated
    
    
    Treasury
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Capital
    
    
    Deficit)
    
    
    Stock
    
    
    Income
    
    
    Equity(In thousands, except per share data)Balance at December 31, 2003
    
    $
    445
    
    
    $
    58,350
    
    
    $
    (1,055
    )
    
    $
    (2,758
    )
    
    $
    20
    
    
    $
    55,002Net income
    
    
    
    
    
    
    
    
    
    
    786
    
    
    
    
    
    
    
    
    
    
    
    786Other comprehensive income:Unrealized gain on securities
available for sale (tax effect $61)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94
    
    
    $
    94Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    880Exercise of stock options
    
    
    6
    
    
    
    294
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300Dividends declared and paid
($0.13 per share)
    
    
    
    
    
    
    
    
    
    
    (553
    )
    
    
    
    
    
    
    
    
    
    
    (553
    )Balance at March 31, 2004
    
    $
    451
    
    
    $
    58,644
    
    
    $
    (822
    )
    
    $
    (2,758
    )
    
    $
    114
    
    
    $
    55,629
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Paid-In
    
    
    Retained
    
    
    Treasury
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Capital
    
    
    Earnings
    
    
    Stock
    
    
    Loss
    
    
    Equity(In thousands, except per share data)Balance at December 31, 2004
    
    $
    456
    
    
    $
    59,145
    
    
    $
    1,389
    
    
    $
    (2,758
    )
    
    $
    (394
    )
    
    $
    57,838Net income
    
    
    
    
    
    
    
    
    
    
    859
    
    
    
    
    
    
    
    
    
    
    
    859Other comprehensive income:Unrealized loss on securities
available for sale (tax effect $374)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (546
    )
    
    $
    (546
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    313Exercise of stock options
    
    
    5
    
    
    
    265
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    270Tax benefit of stock options exercised
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196Dividends declared and paid
($0.14 per share)
    
    
    
    
    
    
    
    
    
    
    (613
    )
    
    
    
    
    
    
    
    
    
    
    (613
    )Balance at March 31, 2005
    
    $
    461
    
    
    $
    59,606
    
    
    $
    1,635
    
    
    $
    (2,758
    )
    
    $
    (940
    )
    
    $
    58,004
 The accompanying notes are an integral part of these unaudited Consolidated Financial Statements. 5




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##### Table of Contents



LSB CORPORATION AND SUBSIDIARY 
   Three months endedMarch 31,2005
    
    
    2004(In thousands)Cash flows from operating activities:Net income
    
    $
    859
    
    
    $
    786Adjustments to reconcile net income to net cash provided by
operating activities:Gains on sales of mortgage loans
    
    
    (11
    )
    
    
    (11
    )Net amortization of investment securities
    
    
    408
    
    
    
    453Depreciation of premises and equipment
    
    
    113
    
    
    
    84Loans originated for sale
    
    
    (1,741
    )
    
    
    (1,497
    )Proceeds from sales of mortgage loans
    
    
    1,752
    
    
    
    884Increase in accrued interest receivable
    
    
    (34
    )
    
    
    (412
    )Increase in deferred income tax asset
    
    
    (222
    )
    
    
    Decrease in other assets
    
    
    397
    
    
    
    267Increase in advance payments by borrowers
    
    
    147
    
    
    
    107Decrease in other liabilities
    
    
    (374
    )
    
    
    (618
    )Net cash provided by operating activities
    
    
    1,294
    
    
    
    43Cash flows from investing activities:Proceeds from maturities of investment securities held to maturity
    
    
    25,170
    
    
    
    1,000Proceeds from maturities of investment securities available for sale
    
    
    15,000
    
    
    
    1,585Purchases of investment securities held to maturity
    
    
    (45,613
    )
    
    
    (11,527
    )Purchases of mortgage-backed securities held to maturity
    
    
    (22,654
    )
    
    
    Purchases of investment securities available for sale
    
    
    (14,197
    )
    
    
    Purchases of other equity securities available for sale
    
    
    (72
    )
    
    
    Purchases of Federal Home Loan Bank stock
    
    
    (1,794
    )
    
    
    (299
    )Principal payments of securities held to maturity
    
    
    4,377
    
    
    
    4,124Principal payments of securities available for sale
    
    
    857
    
    
    
    1,092Increase in loans, net
    
    
    (1,643
    )
    
    
    (6,465
    )Purchases of Bank premises and equipment
    
    
    (46
    )
    
    
    (257
    )Net cash used in investing activities
    
    
    (40,615
    )
    
    
    (10,747
    )Cash flows from financing activities:Net increase in deposits
    
    
    2,767
    
    
    
    8,346Additions to Federal Home Loan Bank advances
    
    
    33,900
    
    
    
    20,000Payments on Federal Home Loan Bank advances
    
    
    (26,031
    )
    
    
    (25
    )Net (decrease) increase in agreements to repurchase securities
    
    
    (243
    )
    
    
    484Net increase (decrease) in other borrowed funds
    
    
    32,000
    
    
    
    (13,000
    )Dividends paid
    
    
    (613
    )
    
    
    (553
    )Proceeds from exercise of stock options
    
    
    270
    
    
    
    300Net cash provided by financing activities
    
    
    42,050
    
    
    
    15,552Net increase in cash and cash equivalents
    
    
    2,729
    
    
    
    4,848Cash and cash equivalents, beginning of period
    
    
    7,402
    
    
    
    8,761Cash and cash equivalents, end of period
    
    $
    10,131
    
    
    $
    13,609Cash paid during the period for:Interest on deposits
    
    $
    1,073
    
    
    $
    827Interest on borrowed funds
    
    
    1,436
    
    
    
    1,171Income taxes
    
    
    1,185
    
    
    
    1,145Supplemental schedule of non-cash activities:Net change in valuation of investment securities available for sale
    
    
    (920
    )
    
    
    154Tax benefit relating to stock options exercised
    
    
    196
    
    
    
    
 The accompanying notes are an integral part of these unaudited Consolidated Financial Statements. 6




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LSB CORPORATION AND SUBSIDIARY 
    1. BASIS OF PRESENTATION LSB Corporation (the Corporation or the Company) is a Massachusetts corporation and the holding
company of its wholly-owned subsidiary Lawrence Savings Bank (the Bank) a state-chartered
Massachusetts savings bank. The Corporation was organized by the Bank on July 1, 2001 to be a bank
holding company and to acquire all of the capital stock of the Bank. The Corporation is supervised by the Board of Governors of the Federal Reserve System (FRB), and
it is also subject to the jurisdiction of the Massachusetts Division of Banks, while the Bank is
subject to the regulations of, and periodic examination by, the Federal Deposit Insurance
Corporation (FDIC) and the Massachusetts Division of Banks. The Banks deposits are insured by
the Bank Insurance Fund of the FDIC up to $100,000 per account, as defined by the FDIC, and the
Depositors Insurance Fund (DIF) for customer deposit amounts in excess of $100,000. The
Consolidated Financial Statements include the accounts of LSB Corporation and its wholly-owned
consolidated subsidiary, Lawrence Savings Bank, and its wholly-owned subsidiaries, Shawsheen
Security Corporation, Shawsheen Security Corporation II, Pemberton Corporation, and Spruce Wood
Realty Trust. All inter-company balances and transactions have been eliminated in consolidation.
The Company has one reportable operating segment. In the opinion of management, the accompanying
Consolidated Financial Statements reflect all necessary adjustments consisting of normal recurring
accruals for fair presentation. Certain amounts in prior periods have been re-classified to conform
to the current presentation. The Corporations Consolidated Financial Statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. Accordingly, management
is required to make estimates and assumptions that affect amounts reported in the balance sheets
and statements of income. Actual results could differ significantly from those estimates and
judgments. Material estimates that are particularly susceptible to change relate to the allowance
for loan losses. The interim results of consolidated income are not necessarily indicative of the results for any
future interim period or for the entire year. These interim Consolidated Financial Statements do
not include all disclosures associated with annual financial statements and, accordingly, should be
read in conjunction with the annual Consolidated Financial Statements and accompanying notes
included in the Companys Annual Report on Form 10-K as of and for the year ended December 31, 2004
filed with the Securities and Exchange Commission. 2. STOCK OPTIONS The Corporation measures compensation cost for stock-based plans using the intrinsic value method.
The intrinsic value method measures compensation cost, if any, as the fair market value of the
Companys stock at the grant date over the exercise price. All options granted have an exercise
price equivalent to the fair market value at the date of grant and, accordingly, no compensation
cost has been recorded. If the fair value based method of accounting for stock options had been
used, the Companys net income and earnings per share would have been reduced to the pro forma
amounts for the three months ended March 31, presented in the table which follows: Three months ended3/31/05
    
    
    3/31/04(In thousands, except per share data)Net income:As Reported
    
    $
    859
    
    
    $
    786Less: Pro forma stock based compensation cost (net of taxes)
    
    
    30
    
    
    
    104Pro forma
    
    $
    829
    
    
    $
    682Basic earnings per share:As Reported
    
    $
    0.20
    
    
    $
    0.18Pro forma
    
    
    0.19
    
    
    
    0.16Diluted earnings per share:As Reported
    
    $
    0.19
    
    
    $
    0.18Pro forma
    
    
    0.18
    
    
    
    0.15
 7




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The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for grants in 2005:
expected volatility of 23.8%, expected average life of 4.3 years, risk-free interest rate of 3.8%
and expected dividend yield of 3.21%. 3. DEFINED BENEFIT PLAN The Company provides pension benefits for its employees through membership in the Savings Bank
Employees Retirement Association (the Plan). The Plan is a multiple-employer, non-contributory,
defined benefit plan. Bank employees become eligible after attaining 21 years of age and
completing one year of service. Additionally, benefits become fully vested after three years of
eligible service. The Companys annual contribution to the Plan is based upon standards
established by the Employee Retirement Income Security Act. The contribution is based on an
actuarial method intended to provide not only for benefits attributable to service date, but also
for those expected to be earned in the future. The Company does not expect to contribute to the
Plan for the Plan year ending October 31, 2005. Net pension cost components for the quarters ended March 31, follow: 2005
    
    
    2004(In thousands)Service cost
    
    $
    87
    
    
    $
    104Interest cost
    
    
    107
    
    
    
    106Expected return on plan assets
    
    
    (136
    )
    
    
    (121
    )Net amortization and deferrals
    
    
    (1
    )
    
    
    (1
    )Net periodic pension cost
    
    $
    57
    
    
    $
    88
 4. CONTINGENCIES The Bank is involved in various legal proceedings incidental to its business. After review with
legal counsel, management does not believe resolution of such litigation will have a material
adverse effect on the financial condition and operating results of the Company. In one litigation matter, the Bank was awarded a $4.2 million judgment against the debtor in 1997.
On February 13, 2002, the debtor filed a petition in bankruptcy under Chapter 7 of the Bankruptcy
Code. Post-judgment interest calculated from the date of judgment to the date of the bankruptcy
filing is approximately $1.9 million. In the Bankruptcy case, the Companys wholly owned
subsidiary, Lawrence Savings Bank (the Bank), is the only secured creditor. On June 15, 2004, the Company reported the receipt of $2.5 million interim distribution in the case
on the order of the U.S. Bankruptcy Judge. The $2.5 million distribution was recorded as income by
the Bank on June 15, 2004. The Bank has agreed to return any of the interim distribution as may be
necessary to pay additional taxes imposed on the bankruptcy estate in the event reserves set aside
for expenses and taxes are insufficient. The Bankruptcy Trustee has sold various assets during 2004 and 2005, and is currently holding
approximately $1.8 million in cash (net of various expenses). The date of completion of the final
tax returns for the Bankruptcy Estate (which may create a recovery on taxes previously paid) and
the distribution date of the remaining assets held by the Bankruptcy Trustee to the Bank are not
known at this time. Accordingly, no recognition of the remaining assets currently held by the
Bankruptcy Trustee has been recorded in the Consolidated Financial Statements. It is managements opinion that collection of any remaining amounts owed to the Bank beyond the
amount of the interim distribution and assets currently held by the Bankruptcy Trustee are
uncertain and are not susceptible to meaningful estimation at this time. 5. RECENT ACCOUNTING DEVELOPMENTS The Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) Issue 03-1:
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. In
November 2003 and March 2004, the FASBs EITF issued a consensus on EITF Issue 03-1. EITF 03-1
contains new guidance on other-than-temporary impairments of investment securities. The guidance
dictates when impairment is deemed to exist, provides guidance on determining if impairment is
other than temporary, and directs how to calculate impairment loss. Issue 03-1 also details
expanded annual disclosure rules. In September 2004, the FASBs EITF issued EITF Issue No. 03-1-1
Effective Date of Paragraphs 10-20 of EITF Issue 03-1 The Meaning of Other-Than-Temporary
Impairment and Its Application to 8




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5. RECENT ACCOUNTING DEVELOPMENTS (Continued) Certain Investments, which delays the effective date for the measurement and recognition guidance
contained in paragraphs 10-20 of EITF 03-1 to be concurrent with the final issuance of EITF 03-1-a
Implementation Guidance for the Application of Paragraph 16 of EITF 03-1 The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1-a is
currently being debated by the FASB in regards to final guidance and effective date with a comment
period that ended October 29, 2004. EITF 03-1, as issued, was originally effective for periods
beginning after June 15, 2004 and the disclosure requirements of this issuance remain in effect.
The adoption of the original EITF 03-1 (excluding paragraphs 10-20) did not have a material impact
on the Companys financial position or results of operations. Statement of Position 03-3 (SOP 03-3): Accounting for Certain Loans or Debt Securities Acquired
in a Transfer. In December 2003, the American Institute of Certified Public Accountants (AICPA)
issued SOP 03-3. SOP 03-3 requires loans acquired through a transfer, such as a business
combination, where there are differences in expected cash flows and contractual cash flows due in
part to credit quality, be recognized at their fair value. The yield that may be accreted is
limited to the excess of the investors estimate of undiscounted expected principal, interest and
other cash flows over the investors initial investment in the loan. The excess of contractual cash
flows over expected cash flows is not to be recognized as an adjustment of yield, loss accrual, or
valuation allowance. Valuation allowances can not be created nor carried over in the initial
accounting for loans acquired in a transfer of loans with evidence of deterioration of credit
quality since origination. However, valuation allowances for non-impaired loans acquired in a
business combination can be carried over. This SOP is effective for loans acquired in fiscal years
beginning after December 15, 2004, with early adoption encouraged. The Company does not believe the
adoption of SOP 03-3 will have a material impact on the Companys financial position or results of
operations. SFAS No. 123 (revised 2004) (SFAS 123R), Share-Based Payment. In December 2004, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123
(revised 2004). SFAS No. 123R replaces SFAS No. 123 Accounting for Stock-Based Compensation and
supersedes Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees. SFAS No. 123R will require that the compensation cost relating to share-based payment
transactions be recognized in the Companys financial statements, eliminating pro forma disclosure
as an alternative. That cost will be measured based on the grant-date fair value of the equity or
liability instruments issued. SFAS No. 123R was effective for public entities as of the first
interim or annual period that begins after June 15, 2005. The impact of the Company adopting such
accounting can be seen in Note 2, Stock-Based Compensation, of the Notes to Consolidated Financial
Statements. On April 14, 2005 the Securities and Exchange Commission (SEC) deferred the effective
date for the adoption of SFAS 123R to annual periods that begin after June 15, 2005. Therefore, the
Company will adopt SFAS 123R beginning January 1, 2006. 9




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS In this report, the Company has made forward-looking statements (within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 as
amended) that are subject to risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future results of operations of the Company, projected
or anticipated benefits, or events related to other future developments involving the Company or
the industry in which it operates. Also, when verbs in the future or present tense such as
believes, expects, anticipates, continues, attempts or similar expressions are used,
forward-looking statements are being made. Stockholders should note that many factors, some of
which are discussed elsewhere in this document and in the documents which we incorporate herein by
reference, could affect the future financial results of the Company and could cause results to
differ materially from those expressed in or incorporated by reference in this document. Those
factors include fluctuations in interest rates, disruptions in credit markets, inflation, changes
in the regulatory environment, government regulations and changes in regional and local economic
conditions and changes in the competitive environment in the geographic and business areas in which
the Company conducts its operations. As a result of such risks and uncertainties, the Companys
actual results may differ materially from such forward-looking statements. The Company does not
undertake, and specifically disclaims any obligation to publicly release revisions to any such
forward-looking statements to reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements. EXECUTIVE LEVEL OVERVIEW LSB Corporation (the Corporation or the Company) is a one bank-holding company principally
conducting business through Lawrence Savings Bank (the Bank). The Corporation became the holding
company for the Bank on July 1, 2001 pursuant to a plan of reorganization in which each share of
Bank common stock then outstanding (and accompanying preferred stock purchase rights) was converted
into and exchanged for one share of the Corporations common stock (and accompanying preferred
stock purchase rights). The principal source of funds for the Corporation is dividends from its
Bank subsidiary. The principal sources of funds for the Banks lending and investment activities
are deposits, loan payments and prepayments, investment securities payments and maturities,
advances from the Federal Home Loan Bank, Federal funds purchased and securities sold under
agreements to repurchase. The Bank was established as a Massachusetts savings bank in 1868; the Bank converted from mutual to
stock form on May 9, 1986. The Bank has four wholly-owned subsidiaries at March 31, 2005.
Shawsheen Security Corporation and Shawsheen Security Corporation II engage exclusively in buying,
selling, dealing in and holding securities for their own accounts. Pemberton Corporation and
Spruce Wood Realty Trust, respectively, hold foreclosed real estate and real estate used in the
ordinary course of the Banks business. The Corporation is subject to regulation and supervision by the Board of Governors of the Federal
Reserve System (FRB), and Massachusetts Division of Banks. The Bank is subject to supervision
and regulation of, and periodic examination by, the Federal Deposit Insurance Corporation (FDIC)
and the Massachusetts Division of Banks. The Banks primary market area is the Merrimack Valley in Massachusetts and southern New Hampshire.
The Bank has six banking offices in the communities of Andover, Lawrence, Methuen (2), North
Andover, Massachusetts and Salem, New Hampshire. The Companys financial results are dependent on the following areas of the income statement: net
interest income, provision for loan losses, non-interest income, non-interest expense and provision
for income taxes. Net interest income is the primary earnings of the Company and the main focus of
management. Managements efforts are to increase the commercial loan portfolios, which include
construction, commercial real estate and commercial loans, and core deposit accounts, which are
lower interest rate accounts. Net interest income is the difference between interest earned on
loans and investment securities and interest paid on deposits and borrowings. Deposits and
borrowings have short durations and the cost of these funds do not necessarily rise and fall in
tandem with earnings from loans and investment securities. There are many risks involved in
managing net interest income including, but not limited to credit risk, interest rate risk and
duration risk. These risks have a direct impact on the level of net interest income. The Company
manages these risks through its internal credit and underwriting function, a credit review by an outside firm and
review at meetings of the Asset and Liability Management Committee (ALCO) on a regular basis.
The credit review process reviews loans for underwriting and grading of loan quality while ALCO
reviews the liquidity, interest rate risk, duration risk and 10




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##### Table of Contents



allocation of capital resources. Loan
quality has a direct impact on the amount of provisions for loan losses the Company reports. During the first quarter 2005, the Bank implemented a $40.0 million leverage program by purchasing
investment securities funded by Federal Home Loan Bank advances. This decision was made for the
following reasons:  
    To take advantage of profitable investment opportunities.
    The 2005 Budget process revealed compression of net interest income due to a probable
higher funding cost.
    Adequate capital is available to implement the leverage program. The Equity to Asset
ratio was 11.15% and 10.35% at December 31, 2004 and March 31, 2005, respectively. Results of the leverage program for the first quarter 2005 were:  
    Lower yields on assets even though yields on loans and investment securities increased
from first quarter 2004 due to the change in asset mix.
    Maintained net interest income levels consistent with fourth quarter 2004 and improved
over first quarter 2004.
    Purchased Federal Home Loan Bank stock in connection with and required due to increased
advances from Federal Home Loan Bank. The provision for loan losses was zero for the quarter ended March 31, 2005 based on managements
assessment of the adequacy of the allowance based on an evaluation of the Banks loan portfolio and
the level of non-performing loans. Non-interest income includes various fees. Customers loan and deposit accounts generate various
amounts of fee income depending on the product selected. The Company generates gains on sales of
mortgage loans and receives fee income from servicing loans sold. Non-interest income is primarily
impacted by the volume of customer transactions, which could change in response to changes in
interest rates, pricing and competition. Non-interest expenses include salaries and employee benefits, occupancy and equipment,
professional, data processing and other expenses of the Company which generally are directly
related to business volume and are controlled by a budget process. Provisions for income taxes are directly related to earnings of the Company. Changes in the
statutory tax rates and the earnings of the Company, the Bank and its subsidiaries, would affect
the amount of income taxes reported. 
 FINANCIAL CONDITION OVERVIEW The Company has maintained risk assets below 1% of total assets for the past several years. The
Company maintains its commitment to servicing the banking needs of the local community in the
Merrimack Valley area of Massachusetts and southern New Hampshire. The Company had total assets of
$560.6 million at March 31, 2005 compared to $518.5 million at December 31, 2004. The Bank
implemented a $40.0 million leverage program during the quarter ended March 31, 2005. The purchase
of mortgage-backed securities (MBSs) and collateralized mortgage obligations (CMOs) was funded
with Federal Home Loan Bank advances. The program was implemented to take advantage of profitable
investment opportunities. The financial impact of the program is being monitored closely by
management. The increase in asset size at March 31, 2005 from December 31, 2004 is mainly
attributable to an increase of $35.8 million in investment securities, $1.6 million in loan growth,
$1.8 million in Federal Home Loan Bank stock and $3.2 million in Federal funds sold. The funding
for these assets came from an increase in deposits of $2.8 million and borrowed funds of $39.6
million during the first quarter of 2005. 11




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##### Table of Contents



INVESTMENTS The investment securities portfolio totaled $299.1 million or 53.4% of total assets at March 31,
2005, compared to $263.3 million, or 50.8% of total assets at December 31, 2004, an increase of
$35.8 million from year-end. The change in mix in the investment securities portfolio was the
result of maturities of U.S. Government Agency obligations, maturities and payments on asset-backed
securities, payments on MBSs and maturities of corporate obligations. Purchases and reinvested
funds were in MBSs, asset-backed securities and corporate obligations. The increase in investment
securities was the result of the utilization of funds from deposit and borrowed funds growth. The following table reflects the components and carrying values of the investment securities
portfolio at March 31, 2005 and December 31, 2004: 12/31/04
    
    
    3/31/05(In thousands)Investment securities held to maturity (at amortized cost):US Government Agency obligations
    
    $
    88,830
    
    
    $
    104,042Mortgage-backed securities
    
    
    52,243
    
    
    
    31,193Asset-backed securities
    
    
    86,428
    
    
    
    50,829Corporate obligations
    
    
    9,595
    
    
    
    12,624Municipal obligations
    
    
    1,563
    
    
    
    1,576Total investment securities held to maturity
    
    $
    238,659
    
    
    $
    200,264Investment securities available for sale (at market value):US Treasury obligations
    
    $
    4,787
    
    
    $
    4,845US Government Agency obligations
    
    
    19,747
    
    
    
    34,907Mortgage-backed securities
    
    
    4,268
    
    
    
    4,582Asset-backed securities
    
    
    27,377
    
    
    
    14,452Corporate obligations
    
    
    3,089
    
    
    
    3,120Mutual Funds
    
    
    959
    
    
    
    972Equity securities
    
    
    221
    
    
    
    161Total investment securities available for sale
    
    $
    60,448
    
    
    $
    63,039Total investment securities portfolio
    
    $
    299,107
    
    
    $
    263,303
 
 LOANS The following table reflects the loan portfolio at March 31, 2005 and December 31, 2004: 3/31/05
    
    
    12/31/04(In thousands)Residential mortgage loans
    
    $
    59,879
    
    
    $
    60,057Equity loans
    
    
    8,906
    
    
    
    8,869Construction loans
    
    
    17,156
    
    
    
    15,211Commercial real estate loans
    
    
    134,414
    
    
    
    131,605Commercial loans
    
    
    13,496
    
    
    
    16,369Consumer loans
    
    
    601
    
    
    
    699Total loans
    
    
    234,452
    
    
    
    232,810Allowance for loan losses
    
    
    (4,139
    )
    
    
    (4,140
    )Total loans, net
    
    $
    230,313
    
    
    $
    228,670
 Total loans increased to $234.5 or 41.8% of total assets at March 31, 2005 from $232.8 million or
44.9% of total assets at December 31, 2004. The residential mortgage loan balances have decreased
slightly compared to year-end 2004 as the refinancing activity of existing mortgages and sales into the secondary market have slowed
during the first three months of 2005. Construction loans have increased $1.9 million and
commercial real estate loans have increased $2.8 million while commercial loans decreased $2.9
million in the first quarter of 2005. 12




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##### Table of Contents



ALLOWANCE FOR LOAN LOSSES The following table summarizes changes in the allowance for loan losses for the three months ended
March 31, 2005 and 2004: Three months ended3/31/05
    
    
    3/31/04(In thousands)Beginning balance
    
    $
    4,140
    
    
    $
    4,220Provision charged to operations
    
    
    
    
    
    
    Recoveries on loans previously charged-off
    
    
    3
    
    
    
    2Loans charged-off
    
    
    (4
    )
    
    
    (4
    )Ending balance
    
    $
    4,139
    
    
    $
    4,218
 The balance of the allowance for loan losses reflects managements assessment of losses and is
based on a review of the risk characteristics of the loan portfolio. The Company considers many
factors in determining the adequacy of the allowance for loan losses. Collateral value on a loan
by loan basis, trends of loan delinquencies on a portfolio segment level, risk classification
identified in the Companys regular review of individual loans, and economic conditions are primary
factors in establishing allowance levels. Management believes the allowance level is adequate to
absorb estimated credit losses associated with the loan portfolio. The allowance for loan losses
reflects information available to management at the end of each period. 
 RISK ASSETS Risk assets consist of non-performing loans and other real estate owned. Non-performing loans
consist of both a) loans 90 days or more past due, and b) loans placed on non-accrual because full
collection of the principal balance is in doubt. Other real estate owned (OREO) is comprised of
foreclosed properties where the Company has formally received title or has possession of the
collateral. Properties are carried at the lower of the investment in the related loan or the
estimated fair value of the property or collateral less selling costs. Fair value of such property
or collateral is determined based upon independent appraisals and other relevant factors.
Management periodically reviews property values and makes adjustments as required. Gains from
sales of properties, net operating expenses and any subsequent provisions to increase the allowance
for losses on real estate acquired by foreclosure are charged to other real estate owned expenses.
Losses are charged to the allowance. Total risk assets were $34 thousand at March 31, 2005. This represents an increase of $34 thousand
from December 31, 2004. The slight increase is primarily attributable to one non-performing loan
for $34 thousand at March 31, 2005 from zero at December 31, 2004. The Company had no impaired
loans at March 31, 2005, December 31, 2004 and March 31, 2004. The following table summarizes the Companys risk assets at March 31, 2005, December 31, 2004 and
March 31, 2004: 3/31/05
    
    
    12/31/04
    
    
    3/31/04(Dollars in thousands)Non-performing loans
    
    $
    34
    
    
    $
    
    
    
    $
    106Other real estate owned
    
    
    
    
    
    
    
    
    
    
    Total risk assets
    
    $
    34
    
    
    $
    
    
    
    $
    106Risk assets as a percent of total assets
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.02
    %
 The following table shows the allowance for loan losses as a percent of total loans at March 31,
2005, December 31, 2004 and March 31, 2004: 3/31/05
    
    
    12/31/04
    
    
    3/31/04(Dollars in thousands)Allowance for loan losses
    
    $
    4,139
    
    
    $
    4,140
    
    
    $
    4,218Allowance for loan losses as a percent of total loans
    
    
    1.77
    %
    
    
    1.78
    %
    
    
    1.93
    %
 13




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##### Table of Contents



The allowance for loan losses has remained fairly consistent at $4.1 million at March 31, 2005 and
at December 31, 2004 and $4.2 million at March 31, 2004. However, the allowance for loan losses as
a percent of total loans has decreased to 1.77 % at March 31, 2005 down from 1.78% at December 31,
2004, due to an increase in total loans outstanding at March 31, 2005 compared to December 31,
2004. The loan portfolio has grown $15.9 million or 7.3% since March 31, 2004, without a
significant change in credit risk to the Company. 
 DEPOSITS Total interest bearing deposits amounted to $284.9 million at March 31, 2005 compared to $284.3
million at December 31, 2004, an increase of $591 thousand. The change from December 31, 2004 is
due primarily to increases in savings accounts and NOW accounts, partially offset by a decrease in
money market investment accounts. All other deposit categories experienced slight increases. The following table reflects the components of interest bearing deposits at March 31, 2005 and
December 31, 2004: 3/31/05
    
    
    12/31/04(In thousands)NOW and Super NOW accounts
    
    $
    39,089
    
    
    $
    38,061Savings accounts
    
    
    46,529
    
    
    
    44,673Money market investment accounts
    
    
    80,184
    
    
    
    82,877Certificates of deposit
    
    
    89,960
    
    
    
    89,649Retirement accounts
    
    
    29,138
    
    
    
    29,049Total interest bearing deposits
    
    $
    284,900
    
    
    $
    284,309
 
 BORROWINGS Borrowings consist of Federal Home Loan Bank advances, other borrowed funds (short term FHLB
advances) and securities sold under agreements to repurchase. Total borrowings amounted to $196.9
million at March 31, 2005 compared to $157.3 million at December 31, 2004, an increase of $39.6
million. The overall increase was due to the Leverage program entered into by the Company in the
first quarter of 2005. The following table reflects the components of borrowings at March 31, 2005 and December 31, 2004: 3/31/05
    
    
    12/31/04(In thousands)Federal Home Loan Bank advances
    
    $
    112,971
    
    
    $
    105,102Other borrowed funds
    
    
    81,000
    
    
    
    49,000Securities sold under agreements to repurchase
    
    
    2,918
    
    
    
    3,161Total borrowings
    
    $
    196,889
    
    
    $
    157,263
 14




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##### Table of Contents



RESULTS OF OPERATIONS 
 THREE MONTHS ENDED MARCH 31, 2005 AND 2004 OVERVIEW The Company reported net income of $859 thousand or $0.19 diluted earnings per share and $786
thousand or $0.18 diluted earnings per share for the three months ended March 31, 2005 and 2004,
respectively. The net income increase of $73 thousand was due primarily to an increase in net
interest income of $131 thousand or 3.8% to $3.6 million compared to the same period in 2004.
Non-interest income increased by $43 thousand while non-interest expenses increased by $93
thousand. NET INTEREST INCOME FROM OPERATIONS Net interest income for the three months ended March 31, 2005 and 2004 increased by $131 thousand
or 3.8% to $3.6 million from $3.4 million, respectively. The net interest rate spread
decreased to 2.49% for the quarter ended March 31, 2005 versus 2.75% for the same quarter of 2004.
Interest income in the first quarter of 2005 experienced an increase due to higher average
investment and loan balances from the first quarter of 2004 which contributed in total $673
thousand to interest income. Interest expense increased mainly due to higher average balances of
deposits and borrowings by $435 thousand and higher interest costs of $101 thousand. The following table presents the components of net interest income and net interest rate spread for
the three months ended March 31, 2005 and 2004: Income/Expense
    
    
    Yield/RateThree Months Ended3/31/05
    
    
    3/31/04
    
    
    3/31/05
    
    
    3/31/04(Dollars in thousands)Interest income and average yield:Loans
    
    $
    3,572
    
    
    $
    3,303
    
    
    
    6.20
    %
    
    
    6.15
    %Investments, mortgage-backed securities
and other earning assets
    
    
    2,537
    
    
    
    2,139
    
    
    
    3.60
    
    
    
    3.58Total
    
    
    6,109
    
    
    
    5,442
    
    
    
    4.77
    
    
    
    4.80Interest expense and average rate paid:Deposits
    
    
    1,066
    
    
    
    828
    
    
    
    1.52
    
    
    
    1.27Federal Home Loan Bank advances
    
    
    1,173
    
    
    
    1,052
    
    
    
    4.05
    
    
    
    5.15Securities sold under agreements to
repurchase and other borrowed funds
    
    
    316
    
    
    
    139
    
    
    
    2.46
    
    
    
    1.05Total
    
    
    2,555
    
    
    
    2,019
    
    
    
    2.28
    
    
    
    2.05Net interest income
    
    $
    3,554
    
    
    $
    3,423Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.49
    %
    
    
    2.75
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.77
    %
    
    
    3.02
    %
 15




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##### Table of Contents



INTEREST INCOME Interest income for the first quarter of 2005 was $6.1 million as compared to $5.4 million for the
same quarter of 2004. The increase of $667 thousand in interest income is primarily due to higher
average investment security balances and higher average loan balances. Changes in yields had a
minimal impact to interest income. Yields on loans were 6.20% and 6.15% for the quarters ended March 31, 2005 and 2004, respectively.
The contribution to interest income due to higher loan yields was an increase of $1 thousand.
Higher average loan balances of $233.6 versus $216.1 million for the quarters ended March 31, 2005
and 2004, respectively, increased interest income by $268 thousand. The following table lists the components of loan interest income for the three months ended March
31, 2005 and 2004: Three months ended3/31/05
    
    
    3/31/04(In thousands)Residential mortgage loans
    
    $
    781
    
    
    $
    778Loans held for sale
    
    
    2
    
    
    
    6Equity loans
    
    
    104
    
    
    
    133Construction loans
    
    
    260
    
    
    
    206Commercial real estate loans
    
    
    2,191
    
    
    
    1,944Commercial loans
    
    
    224
    
    
    
    225Consumer loans
    
    
    10
    
    
    
    11Total loan interest income
    
    $
    3,572
    
    
    $
    3,303
 Yields on investment securities were 3.60% and 3.58% for the quarters ended March 31, 2005 and
2004, respectively, impacting interest income by a minimal amount. Higher average investment
security balances of $285.9 million during the first quarter of 2005 versus $240.3 million for the
same period in 2004, increased interest income by $405 thousand. 
 INTEREST EXPENSE Interest expense for the first quarter of 2005 totaled $2.6 million, an increase of $536 thousand
from the same quarter of 2004. This increase is primarily due to higher average balances of
interest bearing liabilities, which increased interest expense by $435 thousand. Overall, higher
rates paid on interest bearing liabilities increased interest expense by $101 thousand. Rates on deposits were 1.52% and 1.27% for the quarters ended March 31, 2005 and 2004,
respectively. This increase resulted in interest expense increasing by $149 thousand. Average
deposit balances were $285.1 million for the first quarter of 2005 versus $261.3 million for the same period in 2004, which resulted in an $89
thousand increase to interest expense. The following table lists the components of deposit interest expense for the three months ended
March 31, 2005 and 2004: Three months ended3/31/05
    
    
    3/31/04(In thousands)NOW and Super NOW accounts
    
    $
    11
    
    
    $
    10Savings deposit accounts
    
    
    55
    
    
    
    40Money market investment accounts
    
    
    244
    
    
    
    236Certificates of deposit
    
    
    532
    
    
    
    332Retirement accounts
    
    
    224
    
    
    
    210Total deposit interest expense
    
    $
    1,066
    
    
    $
    828
 Rates on FHLB advances were 4.05% and 5.15% for the first quarters of 2005 and 2004, respectively.
The decrease in rates paid on FHLB advances decreased interest expense by $232 thousand. The
average balances of FHLB advances increased to $117.4 million in the first quarter 2005 from $82.1
million for the first quarter of 2004, which resulted in an increase in interest expense of $353
thousand. 16




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##### Table of Contents



Rates on repurchase agreements and other borrowed funds (which include FHLB advances less than 90
days) were 2.46% and 1.05% for the first quarters of 2005 and 2004, respectively. The increase in
rates paid on these interest bearing liabilities resulted in interest expense increasing by $184
thousand. The average balance decreased to $52.1 million in 2005 from $53.3 million in 2004 which
decreased interest expense by $7 thousand. PROVISION FOR LOAN LOSSES The provision for loan losses was zero for the three months ended March 31, 2005 and 2004. The
absence of a provision for loan losses was based on managements assessment of the adequacy of the
allowance based on an evaluation of the Banks loan portfolio and the level of non-performing
loans. The balance of the allowance for loan losses has remained fairly consistent at $4.1 million
at March 31, 2005 and December 31, 2004, respectively. The coverage of the allowance for loan
losses has decreased slightly to 1.77% at March 31, 2005 from 1.78% at December 31, 2004 due to the
loan growth during 2005. NON-INTEREST INCOME Non-interest income was $365 thousand and $322 thousand for the quarters ended March 31, 2005 and
2004, respectively. The increase was primarily attributable to loan fee income increasing by $18
thousand in 2005 versus 2004. The increase in loan fees for the first quarter of 2005 can be
attributed to a decrease in the provision for losses associated with mortgage servicing rights
(MSR) resulting in a $25 thousand positive impact to earnings from 2004. Deposit account fees
increased $5 thousand to $207 thousand in the first quarter of 2005 due to an increase in NOW
account fees of $5 thousand attributable to a new service the Company offered in 2004. Other
non-interest income increased to $109 thousand from $89 thousand in the first three months of 2005
versus 2004, respectively, due to an increase in ATM and debit card related fee income. NON-INTEREST EXPENSE Non-interest expense totaled $2.6 million compared to $2.5 million for the quarters ended March 31,
2005 and 2004, respectively. Salaries and employee benefits decreased by $46 thousand in the first
quarter of 2005 compared to the first quarter of 2004 mainly due to decreases in retirement and
post-retirement benefits. Occupancy and equipment expenses totaled $255 thousand in 2005, an
increase of $58 thousand over 2004 mainly due to higher depreciation expense due to the Salem, NH
branch which was not opened until June 2004 and higher repairs and maintenance in the first quarter
of 2005. Professional expenses decreased to $104 thousand in the first quarter 2005 compared to
$115 thousand in the same period in 2004 primarily due to a reduction in legal expenses. Data
processing expenses increased to $221 thousand in the first quarter of 2005 compared to $200
thousand in the same quarter in 2004 due to an increase in computer repairs and maintenance costs.
Other operating expenses increased $71 thousand during 2005 from
2004. During 2004, the Company recognized the reimbursement of $100 thousand of legal expenses which were
part of an insurance claim recovery in the amount of $197 thousand. INCOME TAXES The Company reported an income tax expense of $479 thousand for the quarter ended March 31, 2005 or
an effective income tax rate of 35.8%. This compares to an income tax expense of $471 thousand for
the quarter ended March 31, 2004 or effective income tax rate of 37.5%. The effective tax rate for
the first quarter of 2005 reflects the forecasted rate for the year 2005 and is in line with the
year 2004 effective tax rate. 
 LIQUIDITY AND CAPITAL RESOURCES The Companys primary source of funds is cash dividends from its wholly-owned subsidiary, Lawrence
Savings Bank. The Bank paid dividends to the Company in the amount of $600 thousand and $550
thousand during the first three months of 2005 and 2004, respectively. The Company made cash
payments of dividends to shareholders in the amount of $613 thousand and $553 thousand in the first
three months of 2005 and 2004, respectively. The Banks primary sources of funds include collections of principal payments and repayments on
outstanding loans, increases in deposits, advances from the Federal Home Loan Bank of Boston
(FHLB) and securities sold under agreements to repurchase. The Bank has a line of credit of $6.8
million with the FHLB. The Bank currently has two $5 million unsecured Federal funds lines of
credit. 17




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The FHLB requires member banks to maintain qualified collateral for its advances. Collateral is
comprised of the Banks investments in FHLB stock, its residential mortgage portfolio and the
portion of the investment portfolio which meets FHLB qualifying collateral requirements and has
been designated as such. The Banks borrowing capacity at the FHLB at March 31, 2005 was $298.4
million, of which $194.0 million had been borrowed. At March 31, 2005, the Companys stockholders equity was $58.0 million as compared to $57.8
million at December 31, 2004. The change during the first three months of 2005 occurred due to net
income of $859 thousand, a tax benefit associated with the exercise of stock options of $196
thousand and $270 thousand from the exercise of stock options. Stockholders equity was reduced by
the declaration of cash dividends to shareholders of $613 thousand and a $546 thousand decrease in
the market value of investment securities available for sale, net of taxes. The Companys leverage
ratio at March 31, 2005 and December 31, 2004 was 10.91% and 11.25%, respectively. The Companys
and the Banks total risk based capital ratios were 19.44% and 18.34% at March 31, 2005,
respectively, compared with 19.63% and 18.74% at December 31, 2004, respectively. The Company
exceeds all regulatory minimum capital ratio requirements set forth by the FRB, and the Bank
exceeds all minimum capital ratio requirements as defined by the FDIC. 
 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The response is incorporated herein by reference to the discussion under the sub-caption Interest
Rate Sensitivity of the caption MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS on pages 18 and 19 of the LSB Corporations Annual Report for the fiscal
year ended December 31, 2004. 
 ITEM 4: CONTROLS AND PROCEDURES The Companys chief executive officer and chief financial officer, after evaluating the
effectiveness of the Companys disclosure controls and procedures (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
quarterly report (the Evaluation Date), have concluded that as of the Evaluation Date the
Companys disclosure controls and procedures were effective and designed to ensure that material
information relating to the Company and its subsidiary would be made known to them by others within
those entities. During the period covered by this quarterly report, there were no significant changes in the
Companys internal controls that have materially affected, or are reasonable likely to materially
affect the internal controls over financial reporting. 18




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PART II - OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS The Bank is involved in various legal proceedings incidental to its business. After review with
legal counsel, management does not believe resolution of such litigation will have a material
adverse effect on the financial condition and operating results of the Company. In one litigation matter, the Bank was awarded a $4.2 million judgment against the debtor in 1997.
On February 13, 2002, the debtor filed a petition in bankruptcy under Chapter 7 of the Bankruptcy
Code. Post-judgment interest calculated from the date of judgment to the date of the bankruptcy
filing is approximately $1.9 million. In the Bankruptcy case, the Companys wholly owned
subsidiary, Lawrence Savings Bank (the Bank), is the only secured creditor. On June 15, 2004, the Company reported the receipt of $2.5 million interim distribution in the case
on the order of the U.S. Bankruptcy Judge. The $2.5 million distribution was recorded as income by
the Bank on June 15, 2004. The Bank has agreed to return any of the interim distribution as may be
necessary to pay additional taxes imposed on the bankruptcy estate in the event reserves set aside
for expenses and taxes are insufficient. The Bankruptcy Trustee has sold various assets during 2004 and 2005, and is currently holding
approximately $1.8 million in cash (net of various expenses). The date of completion of the final
tax returns for the Bankruptcy Estate (which may create a recovery on taxes previously paid) and
the distribution date of the remaining assets held by the Bankruptcy Trustee to the Bank are not
known at this time. Accordingly, no recognition of the remaining assets currently held by the
Bankruptcy Trustee has been recorded in the Consolidated Financial Statements. It is managements opinion that collection of any remaining amounts owed to the Bank beyond the
amount of the interim distribution and assets currently held by the Bankruptcy Trustee are
uncertain and are not susceptible to meaningful estimation at this time. 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 
 ITEM 5. OTHER INFORMATION None. 
 ITEM 6. EXHIBITS Please see the Exhibit Index attached hereto. 19




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. LSB CORPORATIONMay 13, 2005
    
    /s/ Paul A. MillerPaul A. MillerPresident andChief Executive OfficerMay 13, 2005
    
    /s/ John E. SharlandJohn E. SharlandSenior Vice PresidentChief Financial Officer
 20




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LSB CORPORATION AND SUBSIDIARY Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2005 
 EXHIBIT INDEX Page31.1 Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
    
    
    2231.2 Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
    
    
    2332.1 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
    
    
    2432.2 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
    
    
    25
 21