##### 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 September 30, 2008
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
 For the transition period from to
 Commission File Number 000-32955
 
 LSB Corporation
 
 Massachusetts
(State or other jurisdiction of 
incorporation or organization)
    
    04-3557612
(I.R.S. Employer
Identification Number)30 Massachusetts Avenue, North Andover, MA
(Address of principal executive offices)
    
    01845
(Zip Code)
 
 (978) 725-7500
  Yes þ
    
    No o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ  Yes o
    
    No þ
  Class
    
    Outstanding as of November 10, 2008Common Stock, par value $.10 per share
    
    4,461,441 shares




---



##### 



Page:PART I  FINANCIAL INFORMATIONITEM 1
    
    FINANCIAL STATEMENTSConsolidated Balance Sheets
    
    
    3Consolidated Statements of Operations
    
    
    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
    
    
    9-24ITEM 3
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
    
    24ITEM 4.T
    
    CONTROLS AND PROCEDURES
    
    
    24PART II  OTHER INFORMATIONITEM 1
    
    LEGAL PROCEEDINGS
    
    
    25ITEM 1A
    
    RISK FACTORS
    
    
    25-26ITEM 2
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    27ITEM 3
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    27ITEM 4
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    27ITEM 5
    
    OTHER INFORMATION
    
    
    27ITEM 6
    
    EXHIBITS
    
    
    27-28SIGNATURES
    
    
    29EXHIBIT INDEX
    
    
    30Ex-31.1 Certification of CEOEx-31.2 Certification of CFOEx-32.1 Certification of CEOEx-32.2 Certification of CFO
  2




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##### Table of Contents



PART 1   FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 
 September 30,
    
    
    December 31,2008
    
    
    2007(In thousands, except share data)ASSETSAssets:Cash and due from banks
    
    $
    6,979
    
    
    $
    7,494Federal funds sold
    
    
    13,617
    
    
    
    56Total cash and cash equivalents
    
    
    20,596
    
    
    
    7,550Investment securities available for sale (amortized cost of
$241,499 in 2008 and $229,885 in 2007)
    
    
    242,256
    
    
    
    230,596Federal Home Loan Bank stock, at cost
    
    
    11,787
    
    
    
    10,185Loans, net of allowance for loan losses
    
    
    431,457
    
    
    
    353,303Premises and equipment
    
    
    5,015
    
    
    
    3,590Accrued interest receivable
    
    
    2,642
    
    
    
    2,453Deferred income tax asset, net
    
    
    2,672
    
    
    
    2,485Bank-owned life insurance
    
    
    10,517
    
    
    
    10,200Other real estate owned
    
    
    939
    
    
    
    Other assets
    
    
    1,329
    
    
    
    1,289Total assets
    
    $
    729,210
    
    
    $
    621,651LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Core deposits
    
    $
    185,482
    
    
    $
    149,801Term deposits
    
    
    214,879
    
    
    
    172,282Total deposits
    
    
    400,361
    
    
    
    322,083Long-term borrowed funds
    
    
    263,267
    
    
    
    227,378Short-term borrowed funds
    
    
    9,536
    
    
    
    7,973Advance payments by borrowers for taxes and insurance
    
    
    791
    
    
    
    647Other liabilities
    
    
    4,078
    
    
    
    3,272Total liabilities
    
    
    678,033
    
    
    
    561,353Stockholders 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;
4,461,441 and 4,516,561 shares issued and outstanding at
September 30, 2008 and December 31, 2007, respectively
    
    
    446
    
    
    
    452Additional paid-in capital
    
    
    59,517
    
    
    
    60,382Accumulated deficit
    
    
    (9,245
    )
    
    
    (934
    )Accumulated other comprehensive income, net of tax
    
    
    459
    
    
    
    398Total stockholders equity
    
    
    51,177
    
    
    
    60,298Total liabilities and stockholders equity
    
    $
    729,210
    
    
    $
    621,651
  3




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##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except share data)Interest and dividend income:Loans
    
    $
    6,570
    
    
    $
    6,209
    
    
    $
    18,636
    
    
    $
    17,215Investment securities available for sale
    
    
    3,212
    
    
    
    2,562
    
    
    
    9,621
    
    
    
    7,522Federal Home Loan Bank stock
    
    
    88
    
    
    
    163
    
    
    
    344
    
    
    
    490Short term interest income
    
    
    55
    
    
    
    166
    
    
    
    167
    
    
    
    477Total interest and dividend income
    
    
    9,925
    
    
    
    9,100
    
    
    
    28,768
    
    
    
    25,704Interest expense:Deposits
    
    
    2,521
    
    
    
    2,697
    
    
    
    7,566
    
    
    
    7,321Long-term borrowed funds
    
    
    2,911
    
    
    
    2,480
    
    
    
    8,519
    
    
    
    6,262Short-term borrowed funds
    
    
    50
    
    
    
    85
    
    
    
    127
    
    
    
    666Total interest expense
    
    
    5,482
    
    
    
    5,262
    
    
    
    16,212
    
    
    
    14,249Net interest income
    
    
    4,443
    
    
    
    3,838
    
    
    
    12,556
    
    
    
    11,455Provision for loan losses
    
    
    330
    
    
    
    250
    
    
    
    835
    
    
    
    465Net interest income after provision for loan losses
    
    
    4,113
    
    
    
    3,588
    
    
    
    11,721
    
    
    
    10,990Non-interest income (loss):Impairment write-downs on securities
    
    
    (9,383
    )
    
    
    
    
    
    
    (9,383
    )
    
    
    Settlement gains on pension plan
    
    
    
    
    
    
    357
    
    
    
    
    
    
    
    357Deposit account fees
    
    
    269
    
    
    
    308
    
    
    
    782
    
    
    
    745Loan servicing fees, net
    
    
    27
    
    
    
    45
    
    
    
    100
    
    
    
    159Income on bank-owned life insurance
    
    
    124
    
    
    
    98
    
    
    
    317
    
    
    
    103Other income
    
    
    115
    
    
    
    117
    
    
    
    341
    
    
    
    349Total non-interest income (loss)
    
    
    (8,848
    )
    
    
    925
    
    
    
    (7,843
    )
    
    
    1,713Non-interest expense:Salaries and employee benefits
    
    
    1,692
    
    
    
    1,718
    
    
    
    4,963
    
    
    
    5,098Occupancy and equipment expense
    
    
    312
    
    
    
    333
    
    
    
    985
    
    
    
    922Data processing expense
    
    
    228
    
    
    
    236
    
    
    
    705
    
    
    
    761Professional expense
    
    
    160
    
    
    
    127
    
    
    
    422
    
    
    
    347Marketing expense
    
    
    98
    
    
    
    100
    
    
    
    344
    
    
    
    320OREO expense
    
    
    60
    
    
    
    
    
    
    
    116
    
    
    
    Other expense
    
    
    435
    
    
    
    390
    
    
    
    1,253
    
    
    
    1,187Total non-interest expense
    
    
    2,985
    
    
    
    2,904
    
    
    
    8,788
    
    
    
    8,635Income (loss) before income tax expense
    
    
    (7,720
    )
    
    
    1,609
    
    
    
    (4,910
    )
    
    
    4,068Income tax expense
    
    
    530
    
    
    
    577
    
    
    
    1,481
    
    
    
    1,440Net income (loss)
    
    $
    (8,250
    )
    
    $
    1,032
    
    
    $
    (6,391
    )
    
    $
    2,628Average shares outstanding
    
    
    4,456,821
    
    
    
    4,573,371
    
    
    
    4,469,884
    
    
    
    4,591,186Common stock equivalents
    
    
    12,661
    
    
    
    25,958
    
    
    
    19,881
    
    
    
    28,230Average diluted shares outstanding
    
    
    4,469,482
    
    
    
    4,599,329
    
    
    
    4,489,765
    
    
    
    4,619,416Basic earnings (loss) per share
    
    $
    (1.85
    )
    
    $
    0.23
    
    
    $
    (1.43
    )
    
    $
    0.57Diluted earnings (loss) per share
    
    $
    (1.85
    )
    
    $
    0.22
    
    
    $
    (1.42
    )
    
    $
    0.57
  4




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##### Table of Contents



AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Paid-In
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Capital
    
    
    Deficit
    
    
    Income (Loss)
    
    
    Equity(In thousands, except share data)Balance at December 31, 2006
    
    $
    459
    
    
    $
    61,578
    
    
    $
    (2,090
    )
    
    $
    (1,416
    )
    
    $
    58,531Net income
    
    
    
    
    
    
    
    
    
    
    3,718
    
    
    
    
    
    
    
    3,718Other comprehensive income:Unrealized gain on securities
available for sale, net (tax effect $1,416)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,264
    
    
    
    2,264Pension plan settlement gain
(tax effect $312)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (450
    )
    
    
    (450
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,532Stock-based compensation
    
    
    
    
    
    
    121
    
    
    
    
    
    
    
    
    
    
    
    121Common stock repurchased
(90,356 shares)
    
    
    (9
    )
    
    
    (1,454
    )
    
    
    
    
    
    
    
    
    
    
    (1,463
    )Exercise of stock options
and tax benefit (13,300 shares)
    
    
    2
    
    
    
    137
    
    
    
    
    
    
    
    
    
    
    
    139Dividends declared and paid
($0.56 per share)
    
    
    
    
    
    
    
    
    
    
    (2,562
    )
    
    
    
    
    
    
    (2,562
    )Balance at December 31, 2007
    
    $
    452
    
    
    $
    60,382
    
    
    $
    (934
    )
    
    $
    398
    
    
    $
    60,298
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Paid-In
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    Equity(In thousands, except share data)Balance at December 31, 2007
    
    $
    452
    
    
    $
    60,382
    
    
    $
    (934
    )
    
    $
    398
    
    
    $
    60,298Net loss
    
    
    
    
    
    
    
    
    
    
    (6,391
    )
    
    
    
    
    
    
    (6,391
    )Other comprehensive income:Unrealized gain on securities
available for sale, net (tax
effect $15)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61
    
    
    
    61Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,330
    )Stock-based compensation
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    47Common stock repurchased
(64,620 shares)
    
    
    (7
    )
    
    
    (1,028
    )
    
    
    
    
    
    
    
    
    
    
    (1,035
    )Exercise of stock options
and tax benefit (9,500 shares)
    
    
    1
    
    
    
    116
    
    
    
    
    
    
    
    
    
    
    
    117Dividends declared and paid
($0.43 per share)
    
    
    
    
    
    
    
    
    
    
    (1,920
    )
    
    
    
    
    
    
    (1,920
    )Balance at September 30, 2008
    
    $
    446
    
    
    $
    59,517
    
    
    $
    (9,245
    )
    
    $
    459
    
    
    $
    51,177
  5




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##### Table of Contents



Nine months ended Sept. 30,2008
    
    
    2007(In thousands)Cash flows from operating activities:Net income (loss)
    
    $
    (6,391
    )
    
    $
    2,628Adjustments to reconcile net income (loss) to net cash provided by operating activities:Provision for loan losses
    
    
    835
    
    
    
    465Impairment write-down on securities
    
    
    9,383
    
    
    
    Net losses on sales of other real estate owned
    
    
    52
    
    
    
    Settlement gains on pension
    
    
    
    
    
    
    (357
    )Net accretion of investment securities
    
    
    (386
    )
    
    
    (103
    )Depreciation and amortization of premises and equipment
    
    
    472
    
    
    
    456Increase in accrued interest receivable
    
    
    (189
    )
    
    
    (345
    )Deferred income tax benefit
    
    
    (172
    )
    
    
    (6
    )Stock-based compensation
    
    
    47
    
    
    
    27Increase in cash surrender value of Bank-owned life insurance
    
    
    (317
    )
    
    
    (103
    )(Increase) decrease in other assets
    
    
    (40
    )
    
    
    709Increase (decrease) in other liabilities
    
    
    806
    
    
    
    (171
    )Net cash provided by operating activities
    
    
    4,100
    
    
    
    3,200Cash flows from investing activities:Proceeds from maturities of investment securities available for sale
    
    
    8,246
    
    
    
    11,500Purchases of investment securities available for sale
    
    
    (62,841
    )
    
    
    (27,737
    )Purchases of Bank-owned life insurance
    
    
    
    
    
    
    (10,000
    )Redemption of FHLBB stock
    
    
    
    
    
    
    65Purchases of FHLBB stock
    
    
    (1,602
    )
    
    
    (204
    )Principal payments of investment securities available for sale
    
    
    33,984
    
    
    
    20,267Increase in loans, net
    
    
    (80,470
    )
    
    
    (61,154
    )Proceeds from sales of other real estate owned
    
    
    490
    
    
    
    Purchases of premises and equipment
    
    
    (1,897
    )
    
    
    (21
    )Net cash used in investing activities
    
    
    (104,090
    )
    
    
    (67,284
    )Cash flows from financing activities:Net increase in deposits
    
    
    78,278
    
    
    
    30,955Additions to long-term borrowed funds
    
    
    63,000
    
    
    
    159,000Payments on long-term borrowed funds
    
    
    (27,111
    )
    
    
    (89,105
    )Net (increase) decrease in short-term borrowed funds
    
    
    1,563
    
    
    
    (35,028
    )Increase in advance payments by borrowers
    
    
    144
    
    
    
    148Dividends paid
    
    
    (1,920
    )
    
    
    (1,930
    )Proceeds from exercise of stock options
    
    
    117
    
    
    
    117Tax benefit from exercise of stock options
    
    
    
    
    
    
    22Common stock repurchased
    
    
    (1,035
    )
    
    
    (917
    )Net cash provided by financing activities
    
    
    113,036
    
    
    
    63,262Net increase (decrease) in cash and cash equivalents
    
    
    13,046
    
    
    
    (822
    )Cash and cash equivalents, beginning of period
    
    
    7,550
    
    
    
    18,767Cash and cash equivalents, end of period
    
    $
    20,596
    
    
    $
    17,945Cash paid during the period for:Interest on deposits
    
    $
    7,547
    
    
    $
    7,306Interest on borrowed funds
    
    
    8,593
    
    
    
    6,741Income taxes
    
    
    1,775
    
    
    
    1,157Supplemental noncash investing and financing activities:Transfers to other real estate owned
    
    
    1,481
    
    
    
    
  6




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##### Table of Contents



Fair Value Measurements
 The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement No. 115
 Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active
 7




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##### Table of Contents



Assets atLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Fair Value(In thousands)Recurring:Investment securities available for sale
    
    $
    9,037
    
    
    $
    232,794
    
    
    $
    425
    
    
    $
    242,256Non-recurring:Impaired loans
    
    
    
    
    
    
    
    
    
    
    490
    
    
    
    490Other real estate owned
    
    
    
    
    
    
    
    
    
    
    939
    
    
    
    939Total assets
    
    $
    9,037
    
    
    $
    232,794
    
    
    $
    1,854
    
    
    $
    243,685
  Nine months endedSept. 30, 2008Investments(In thousands)Balance as of January 1, 2008
    
    $
    425Total realized/unrealized gains (losses)
included in net income
    
    
    Balance as of September 30, 2008
    
    $
    425Change in unrealized gains/(losses) relating to
instruments still held at the reporting date
    
    $
    
   Noncontrolling Interests in Consolidated
Financial Statements  An Amendment of ARB No. 51 Business
Combinations
 8




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##### Table of Contents



Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161).
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
  CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  EXECUTIVE LEVEL OVERVIEW
  9




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##### Table of Contents



FINANCIAL CONDITION
 SUMMARY
  10




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##### Table of Contents



Investments:
     11




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##### Table of Contents



9/30/08
    
    
    12/31/07Amortized
    
    
    Unrealized
    
    
    Fair
    
    
    Amortized
    
    
    Unrealized
    
    
    FairCost
    

    Gains
    
    Losses
    
    Value
    
    Cost
    
    Gains
    
    Losses
    
    Value(In thousands)Investment securities
available for sale:U.S. Treasury obligations
    
    $
    5,583
    
    
    $
    82
    
    
    $
    
    
    
    $
    5,665
    
    
    $
    5,589
    
    
    $
    4
    
    
    $
    (52
    )
    
    $
    5,541Government-sponsored
enterprise obligations
    
    
    17,045
    
    
    
    31
    
    
    
    (11
    )
    
    
    17,065
    
    
    
    15,748
    
    
    
    95
    
    
    
    (33
    )
    
    
    15,810U.S. Treasury and government
sponsored enterprise obligations
    
    
    22,628
    
    
    
    113
    
    
    
    (11
    )
    
    
    22,730
    
    
    
    21,337
    
    
    
    99
    
    
    
    (85
    )
    
    
    21,351Mortgage-backed securities
    
    
    162,905
    
    
    
    2,635
    
    
    
    (378
    )
    
    
    165,162
    
    
    
    134,969
    
    
    
    2,208
    
    
    
    (474
    )
    
    
    136,703Collateralized mortgage obligations
    
    
    45,358
    
    
    
    207
    
    
    
    (220
    )
    
    
    45,345
    
    
    
    60,660
    
    
    
    169
    
    
    
    (682
    )
    
    
    60,147Collateralized mortgage obligations
and mortgage-backed securities
    
    
    208,263
    
    
    
    2,842
    
    
    
    (598
    )
    
    
    210,507
    
    
    
    195,629
    
    
    
    2,377
    
    
    
    (1,156
    )
    
    
    196,850Corporate obligations
    
    
    6,417
    
    
    
    
    
    
    
    (1,195
    )
    
    
    5,222
    
    
    
    6,373
    
    
    
    30
    
    
    
    (583
    )
    
    
    5,820Mutual funds
    
    
    1,000
    
    
    
    
    
    
    
    (54
    )
    
    
    946
    
    
    
    1,000
    
    
    
    
    
    
    
    (41
    )
    
    
    959Equity securities
    
    
    3,191
    
    
    
    
    
    
    
    (340
    )
    
    
    2,851
    
    
    
    5,546
    
    
    
    70
    
    
    
    
    
    
    
    5,616Corporate obligations and
other investment securities
    
    
    10,608
    
    
    
    
    
    
    
    (1,589
    )
    
    
    9,019
    
    
    
    12,919
    
    
    
    100
    
    
    
    (624
    )
    
    
    12,395Total investment securities
available for sale
    
    $
    241,499
    
    
    $
    2,955
    
    
    $
    (2,198
    )
    
    $
    242,256
    
    
    $
    229,885
    
    
    $
    2,576
    
    
    $
    (1,865
    )
    
    $
    230,596
 Loans:
   9/30/08
    
    
    12/31/07(In thousands)Residential mortgage loans
    
    $
    105,706
    
    
    $
    79,743Home equity lines and loans
    
    
    23,530
    
    
    
    23,046Consumer loans
    
    
    911
    
    
    
    1,007Total retail loans
    
    
    130,147
    
    
    
    103,796Construction loans
    
    
    60,968
    
    
    
    47,885Commercial real estate loans
    
    
    219,079
    
    
    
    177,968Commercial loans
    
    
    26,798
    
    
    
    28,464Total corporate loans
    
    
    306,845
    
    
    
    254,317Total loans
    
    
    436,992
    
    
    
    358,113Allowance for loan losses
    
    
    (5,535
    )
    
    
    (4,810
    )Total loans, net
    
    $
    431,457
    
    
    $
    353,303
 12




---



##### Table of Contents



Allowance For Loan Losses:
  Three months ended
    
    
    Nine months ended9/30/08
    
    
    9/30/07
    
    
    9/30/08
    
    
    9/30/07(In thousands)Beginning balance
    
    $
    5,238
    
    
    $
    4,517
    
    
    $
    4,810
    
    
    $
    4,309Provision for loan losses
    
    
    330
    
    
    
    250
    
    
    
    835
    
    
    
    465Recoveries on loans previously charged-off
    
    
    1
    
    
    
    3
    
    
    
    3
    
    
    
    10Loans charged-off
    
    
    (34
    )
    
    
    (7
    )
    
    
    (113
    )
    
    
    (21
    )Ending balance
    
    $
    5,535
    
    
    $
    4,763
    
    
    $
    5,535
    
    
    $
    4,763Ratios:Annualized net charge-offs to average
loans outstanding
    
    
    0.03
    %
    
    
    0.00
    %
    
    
    0.04
    %
    
    
    0.00
    %Allowance for loan losses to total
loans at end of period
    
    
    1.27
    %
    
    
    1.36
    %
    
    
    1.27
    %
    
    
    1.36
    %
   Risk Assets:
   13




---



##### Table of Contents



9/30/08
    
    
    12/31/07
    
    
    9/30/07(Dollars in thousands)Non-performing loans
    
    $
    618
    
    
    $
    1,523
    
    
    $
    343Other real estate owned
    
    
    939
    
    
    
    
    
    
    
    Total risk assets
    
    $
    1,557
    
    
    $
    1,523
    
    
    $
    343Risk assets as a percent of total loans and OREO
    
    
    0.36
    %
    
    
    0.43
    %
    
    
    0.10
    %Risk assets as a percent of total assets
    
    
    0.21
    %
    
    
    0.24
    %
    
    
    0.06
    %
 Deposits:
    9/30/08
    
    
    12/31/07(In thousands)NOW accounts
    
    $
    17,337
    
    
    $
    17,877Demand deposit accounts
    
    
    28,374
    
    
    
    28,851Savings accounts
    
    
    52,411
    
    
    
    28,452Money market accounts
    
    
    87,360
    
    
    
    74,621Core deposits
    
    
    185,482
    
    
    
    149,801Brokered certificates of deposit
    
    
    32,889
    
    
    
    5,461Certificates of deposit
    
    
    181,990
    
    
    
    166,821Term deposits
    
    
    214,879
    
    
    
    172,282Total deposits
    
    $
    400,361
    
    
    $
    322,083
 Borrowed Funds:
  14




---



##### Table of Contents



9/30/08
    
    
    12/31/07(In thousands)Long-term borrowed funds:FHLBB long-term advances
    
    $
    223,267
    
    
    $
    202,378Wholesale repurchase agreements
    
    
    40,000
    
    
    
    25,000263,267
    
    
    
    227,378Short-term borrowed funds:FHLBB Ideal Way advances
    
    
    
    
    
    
    800FHLBB short-term advances
    
    
    6,000
    
    
    
    Customer repurchase agreements
    
    
    3,536
    
    
    
    7,1739,536
    
    
    
    7,973Total borrowed funds
    
    $
    272,803
    
    
    $
    235,351
 RESULTS OF OPERATIONS
 THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 SUMMARY
  Net Interest Income:
  Interest Income:
    15




---



##### Table of Contents



Interest Expense:
    Provision for Loan Losses:
  Non-Interest Income (Loss):
  Non-Interest Expense:
  16




---



##### Table of Contents



Income Taxes:
   17




---



##### Table of Contents



Three months ended
    
    
    Three months ended9/30/08
    
    
    9/30/07Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    InterestBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)AssetsInvestment securities:Short-term investments
    
    $
    12,094
    
    
    $
    55
    
    
    
    1.81
    %
    
    $
    12,895
    
    
    $
    166
    
    
    
    5.11
    %U. S. Treasury and government-
sponsored enterprise obligations
    
    
    23,057
    
    
    
    229
    
    
    
    3.95
    
    
    
    32,552
    
    
    
    330
    
    
    
    4.02Corporate and other
investment securities
    
    
    28,453
    
    
    
    338
    
    
    
    4.73
    
    
    
    18,730
    
    
    
    281
    
    
    
    5.95Collateralized mortgage
obligations and mortgage-
backed securities
    
    
    210,005
    
    
    
    2,733
    
    
    
    5.18
    
    
    
    169,657
    
    
    
    2,114
    
    
    
    4.94Total investment securities
    
    
    273,609
    
    
    
    3,355
    
    
    
    4.88
    
    
    
    233,834
    
    
    
    2,891
    
    
    
    4.91Loans:Residential real estate
    
    
    101,850
    
    
    
    1,431
    
    
    
    5.59
    
    
    
    72,939
    
    
    
    1,036
    
    
    
    5.64Equity
    
    
    22,922
    
    
    
    295
    
    
    
    5.12
    
    
    
    21,284
    
    
    
    349
    
    
    
    6.51Consumer
    
    
    1,100
    
    
    
    16
    
    
    
    5.79
    
    
    
    880
    
    
    
    14
    
    
    
    6.31Total retail loans
    
    
    125,872
    
    
    
    1,742
    
    
    
    5.51
    
    
    
    95,103
    
    
    
    1,399
    
    
    
    5.84Construction
    
    
    56,184
    
    
    
    870
    
    
    
    6.16
    
    
    
    54,220
    
    
    
    1,251
    
    
    
    9.15Commercial real estate
    
    
    212,106
    
    
    
    3,548
    
    
    
    6.65
    
    
    
    164,283
    
    
    
    3,062
    
    
    
    7.39Commercial
    
    
    26,792
    
    
    
    410
    
    
    
    6.09
    
    
    
    25,948
    
    
    
    497
    
    
    
    7.60Total corporate loans
    
    
    295,082
    
    
    
    4,828
    
    
    
    6.51
    
    
    
    244,451
    
    
    
    4,810
    
    
    
    7.81Total loans
    
    
    420,954
    
    
    
    6,570
    
    
    
    6.21
    
    
    
    339,554
    
    
    
    6,209
    
    
    
    7.25Total interest-earning assets
    
    
    694,563
    
    
    
    9,925
    
    
    
    5.68
    %
    
    
    573,388
    
    
    
    9,100
    
    
    
    6.30
    %Allowance for loan losses
    
    
    (5,328
    )
    
    
    
    
    
    
    
    
    
    
    (4,546
    )Other assets
    
    
    29,482
    
    
    
    
    
    
    
    
    
    
    
    26,368Total assets
    
    $
    718,717
    
    
    
    
    
    
    
    
    
    
    $
    595,210Liabilities and Stockholders
EquityDeposits:NOW and super NOW accounts
    
    $
    18,402
    
    
    $
    9
    
    
    
    0.19
    %
    
    $
    17,571
    
    
    $
    8
    
    
    
    0.18
    %Regular savings accounts
    
    
    46,605
    
    
    
    183
    
    
    
    1.56
    
    
    
    30,234
    
    
    
    38
    
    
    
    0.50Money market accounts
    
    
    87,856
    
    
    
    497
    
    
    
    2.25
    
    
    
    74,512
    
    
    
    584
    
    
    
    3.11Certificates of deposit
and escrow
    
    
    200,742
    
    
    
    1,832
    
    
    
    3.63
    
    
    
    168,040
    
    
    
    2,067
    
    
    
    4.88Total interest-bearing deposits
    
    
    353,605
    
    
    
    2,521
    
    
    
    2.84
    
    
    
    290,357
    
    
    
    2,697
    
    
    
    3.69Borrowed funds:Long-term borrowed funds
    
    
    265,409
    
    
    
    2,911
    
    
    
    4.36
    
    
    
    206,643
    
    
    
    2,480
    
    
    
    4.76Short-term borrowed funds
    
    
    10,109
    
    
    
    50
    
    
    
    1.97
    
    
    
    7,816
    
    
    
    85
    
    
    
    4.31Total borrowed funds
    
    
    275,518
    
    
    
    2,961
    
    
    
    4.28
    
    
    
    214,459
    
    
    
    2,565
    
    
    
    4.75Total interest-bearing liabilities
    
    
    629,123
    
    
    
    5,482
    
    
    
    3.47
    %
    
    
    504,816
    
    
    
    5,262
    
    
    
    4.14
    %Non-interest-bearing deposits
    
    
    29,294
    
    
    
    
    
    
    
    
    
    
    
    29,561Other liabilities
    
    
    2,804
    
    
    
    
    
    
    
    
    
    
    
    2,844Total liabilities
    
    
    661,221
    
    
    
    
    
    
    
    
    
    
    
    537,221Stockholders equity
    
    
    57,496
    
    
    
    
    
    
    
    
    
    
    
    57,989Total liabilities and
stockholders equity
    
    $
    718,717
    
    
    
    
    
    
    
    
    
    
    $
    595,210Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.21
    %
    
    
    
    
    
    
    
    
    
    
    2.16
    %Net interest income
    
    
    
    
    
    $
    4,443
    
    
    
    
    
    
    
    
    
    
    $
    3,838Net interest margin on average
earning assets
    
    
    
    
    
    
    
    
    
    
    2.54
    %
    
    
    
    
    
    
    
    
    
    
    2.66
    %
 18




---



##### Table of Contents



NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 SUMMARY
  Net Interest Income:
  Interest Income:
    Interest Expense:
   19




---



##### Table of Contents



Provision for Loan Losses:
  Non-Interest Income (Loss):
  Non-Interest Expense:
  Income Taxes:
  20




---



##### Table of Contents



21




---



##### Table of Contents



Nine months ended
    
    
    Nine months ended9/30/08
    
    
    9/30/07Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    InterestBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)AssetsInvestment securities:Short-term investments
    
    $
    10,424
    
    
    $
    167
    
    
    
    2.14
    %
    
    $
    12,248
    
    
    $
    477
    
    
    
    5.21
    %U. S. Treasury and government-
sponsored enterprise obligations
    
    
    23,825
    
    
    
    726
    
    
    
    4.07
    
    
    
    36,855
    
    
    
    1,093
    
    
    
    3.97Corporate and other
investment securities
    
    
    27,660
    
    
    
    1,161
    
    
    
    5.61
    
    
    
    18,822
    
    
    
    832
    
    
    
    5.91Collateralized mortgage
obligations and mortgage-
backed securities
    
    
    209,667
    
    
    
    8,078
    
    
    
    5.15
    
    
    
    166,118
    
    
    
    6,087
    
    
    
    4.90Total investment securities
    
    
    271,576
    
    
    
    10,132
    
    
    
    4.98
    
    
    
    234,043
    
    
    
    8,489
    
    
    
    4.85Loans:Residential real estate
    
    
    92,535
    
    
    
    3,898
    
    
    
    5.63
    
    
    
    71,567
    
    
    
    3,024
    
    
    
    5.65Equity
    
    
    22,645
    
    
    
    907
    
    
    
    5.35
    
    
    
    20,506
    
    
    
    979
    
    
    
    6.38Consumer
    
    
    1,002
    
    
    
    49
    
    
    
    6.53
    
    
    
    880
    
    
    
    44
    
    
    
    6.68Total retail loans
    
    
    116,182
    
    
    
    4,854
    
    
    
    5.58
    
    
    
    92,953
    
    
    
    4,047
    
    
    
    5.82Construction
    
    
    51,357
    
    
    
    2,509
    
    
    
    6.53
    
    
    
    51,247
    
    
    
    3,554
    
    
    
    9.27Commercial real estate
    
    
    195,882
    
    
    
    9,991
    
    
    
    6.81
    
    
    
    153,972
    
    
    
    8,463
    
    
    
    7.35Commercial
    
    
    26,837
    
    
    
    1,282
    
    
    
    6.38
    
    
    
    19,380
    
    
    
    1,151
    
    
    
    7.94Total corporate loans
    
    
    274,076
    
    
    
    13,782
    
    
    
    6.72
    
    
    
    224,599
    
    
    
    13,168
    
    
    
    7.84Total loans
    
    
    390,258
    
    
    
    18,636
    
    
    
    6.38
    
    
    
    317,552
    
    
    
    17,215
    
    
    
    7.25Total interest-earning assets
    
    
    661,834
    
    
    
    28,768
    
    
    
    5.81
    %
    
    
    551,595
    
    
    
    25,704
    
    
    
    6.23
    %Allowance for loan losses
    
    
    (5,032
    )
    
    
    
    
    
    
    
    
    
    
    (4,425
    )Other assets
    
    
    26,843
    
    
    
    
    
    
    
    
    
    
    
    19,835Total assets
    
    $
    683,645
    
    
    
    
    
    
    
    
    
    
    $
    567,005Liabilities and Stockholders
EquityDeposits:NOW and super NOW accounts
    
    $
    17,933
    
    
    $
    26
    
    
    
    0.19
    %
    
    $
    17,973
    
    
    $
    25
    
    
    
    0.19
    %Regular savings accounts
    
    
    37,929
    
    
    
    332
    
    
    
    1.17
    
    
    
    31,649
    
    
    
    118
    
    
    
    0.50Money market accounts
    
    
    80,532
    
    
    
    1,439
    
    
    
    2.39
    
    
    
    73,926
    
    
    
    1,666
    
    
    
    3.01Certificates of deposit
and escrow
    
    
    186,942
    
    
    
    5,769
    
    
    
    4.12
    
    
    
    155,746
    
    
    
    5,512
    
    
    
    4.73Total interest-bearing deposits
    
    
    323,336
    
    
    
    7,566
    
    
    
    3.13
    
    
    
    279,294
    
    
    
    7,321
    
    
    
    3.50Borrowed funds:Long-term borrowed funds
    
    
    259,933
    
    
    
    8,519
    
    
    
    4.38
    
    
    
    178,564
    
    
    
    6,262
    
    
    
    4.69Short-term borrowed funds
    
    
    8,913
    
    
    
    127
    
    
    
    1.90
    
    
    
    18,274
    
    
    
    666
    
    
    
    4.87Total borrowed funds
    
    
    268,846
    
    
    
    8,646
    
    
    
    4.30
    
    
    
    196,838
    
    
    
    6,928
    
    
    
    4.71Total interest-bearing liabilities
    
    
    592,182
    
    
    
    16,212
    
    
    
    3.66
    %
    
    
    476,132
    
    
    
    14,249
    
    
    
    4.00
    %Non-interest-bearing deposits
    
    
    28,817
    
    
    
    
    
    
    
    
    
    
    
    29,487Other liabilities
    
    
    2,939
    
    
    
    
    
    
    
    
    
    
    
    3,139Total liabilities
    
    
    623,938
    
    
    
    
    
    
    
    
    
    
    
    508,758Stockholders equity
    
    
    59,707
    
    
    
    
    
    
    
    
    
    
    
    58,247Total liabilities and
stockholders equity
    
    $
    683,645
    
    
    
    
    
    
    
    
    
    
    $
    567,005Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.15
    %
    
    
    
    
    
    
    
    
    
    
    2.23
    %Net interest income
    
    
    
    
    
    $
    12,556
    
    
    
    
    
    
    
    
    
    
    $
    11,455Net interest margin on average
earning assets
    
    
    
    
    
    
    
    
    
    
    2.53
    %
    
    
    
    
    
    
    
    
    
    
    2.78
    %
 22




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES:
         Regulatory Thresholdfor Well CapitalizedCategory
    
    09/30/08
    
    12/31/07LSB Corporation Tier 1 risk-based
    
    
    6.0
    %
    
    
    10.62
    %
    
    
    13.45
    %River Bank Tier 1 leverage ratio
    
    
    5.0
    %
    
    
    7.33
    %
    
    
    9.49
    %River Bank Tier 1 risk-based
    
    
    6.0
    %
    
    
    10.54
    %
    
    
    13.14
    %River Bank total risk-based
    
    
    10.0
    %
    
    
    11.64
    %
    
    
    14.22
    %
   23




---



##### Table of Contents



ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  
 ITEM 4.T: CONTROLS AND PROCEDURES
   24




---



##### Table of Contents



PART II  OTHER INFORMATION
 
   
   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.
    25




---



##### Table of Contents



The Company may need to recognize additional other-than-temporary impairment charge related to two
preferred securities issued by the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal
National Mortgage Association (FNMA) and may need to recognize further other-than-temporary
impairment charges if the fair values of those securities do not recover in the future.
  26




---



##### Table of Contents



(a)
    
    None.(b)
    
    None.
 (c)
    
    On April 26, 2007, the Company announced a common stock repurchase program to repurchase up
to 230,000 shares. During 2007 and 2008, 90,356 and 64,620 shares, respectively, were
repurchased. The Company has placed no deadline on the duration of the repurchase program.
As a result of the impairment charge taken in the third quarter of 2008, the Company has
suspended its stock repurchases until further notice. In addition, the Companys Employee
Stock Ownership Plan (ESOP) purchased 8,600 shares on the open market in 2007 and 5,100
shares in the first nine months of 2008. Excluding the ESOP shares, there were no shares
purchased other than disclosed above.
 
   
   
  (a)
    
    None(b)
    
    None
 
  Number
    
    Description2
    
    Plan of Reorganization and Acquisition, dated as of March 12, 2001 between LSB Corporation
and Lawrence Savings Bank (Filed as Exhibit 2.1 to the Companys Current Report on Form 8-K
filed July 2, 2001, (File Number 000-32955) and incorporated herein by reference)3(i).1
    
    Articles of Organization of LSB Corporation (Filed as Exhibit 3.1 to the Companys
Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and incorporated herein
by reference)3(i).2
    
    Articles of Amendment of the Articles of Organization of LSB Corporation, as submitted
for filing in the Office of the Secretary of the Commonwealth of Massachusetts on December 30,
2005, (Filed as Exhibit 3(i).1 to the Companys Current Report on Form 8-K filed January 6,
2006, and incorporated herein by reference)3(ii)
    
    Amended and Restated By-Laws of LSB Corporation (Filed as Exhibit 3.1 to the Companys
Current Report on Form 8-K filed October 31, 2007, and incorporated herein by reference)3(iii)
    
    Lawrence Savings Bank Certificate of Vote of Directors Establishing a Series of a Class
of Stock (Filed as Exhibit 3(iii) to the Companys 2005 Annual Report on Form 10-K and
incorporated herein by reference)4.1
    
    Specimen certificate of shares of common stock of the Company (Filed as Exhibit 4.1 to the
Companys Current Report on Form 8-K filed July 2, 2001, (File Number 000-32955) and
incorporated herein by reference)
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##### Table of Contents



Number
    
    Description4.2
    
    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)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 2002.32.3
    
    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.
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##### Table of Contents



LSB CORPORATIONNovember 13, 2008
    /s/ Gerald T. MulliganGerald T. MulliganPresident and
Chief Executive Officer November 13, 2008
    /s/ Diane L. WalkerDiane L. WalkerExecutive Vice President, Treasurer and
Chief Financial Officer 29




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##### Table of Contents



LSB CORPORATION AND SUBSIDIARY
 
 EXHIBIT INDEX
 Page31.1
    
    Certification of Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    3131.2
    
    Certification of Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    3232.1
    
    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
    
    
    3332.2
    
    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
    
    
    34
 30