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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q x
    
    Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2004 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
(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 x                No o   Indicate by a check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yeso                No x   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 July 31, 2004Common Stock, par value $.10 per share
    
    4,307,442 shares




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##### Table of Contents



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
    
    
    11Loan Portfolio
    
    
    12Allowance for Loan Losses
    
    
    12Risk Assets
    
    
    13Deposits
    
    
    13Results of Operations:Three months ended June 30, 2004 and 2003
    
    
    14Loan Interest Income
    
    
    15Deposit Interest Expense
    
    
    15Six months ended June 30, 2004 and 2003
    
    
    17Loan Interest Income
    
    
    18Deposit Interest Expense
    
    
    18Liquidity and Capital Resources
    
    
    19ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
    
    20ITEM 4 CONTROLS AND PROCEDURES
    
    
    20PART II  OTHER INFORMATIONITEM 1 LEGAL PROCEEDINGS
    
    
    21ITEM 2 CHANGES IN SECURITIES
    
    
    21ITEM 3 DEFAULTS UPON SENIOR SECURITIES
    
    
    21ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    21ITEM 5 OTHER INFORMATION
    
    
    22ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
    
    
    22SIGNATURES
    
    
    23EXHIBIT INDEX
    
    
    24EX-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 
   June 30,
    
    December 31,2004
    
    2003(In Thousands, Except Share Data)ASSETSAssets:Cash and due from banks
    
    $
    7,221
    
    
    $
    7,872Federal funds sold
    
    
    3,545
    
    
    
    889Total cash and cash equivalents
    
    
    10,766
    
    
    
    8,761Investment securities held to maturity (market value of
$181,329 in 2004 and $184,592 in 2003)
    
    
    183,749
    
    
    
    184,286Investment securities available for sale (amortized cost of
$56,368 in 2004 and $48,571 in 2003)
    
    
    55,687
    
    
    
    48,592Federal Home Loan Bank stock, at cost
    
    
    7,694
    
    
    
    6,593Loans, net of allowance for loan losses
    
    
    207,973
    
    
    
    207,283Bank premises and equipment
    
    
    3,434
    
    
    
    2,875Accrued interest receivable
    
    
    2,622
    
    
    
    2,552Deferred income tax asset
    
    
    2,958
    
    
    
    3,519Other assets
    
    
    1,391
    
    
    
    1,647Total assets
    
    $
    476,274
    
    
    $
    466,108LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Interest bearing deposits
    
    $
    273,943
    
    
    $
    258,430Non-interest bearing deposits
    
    
    15,781
    
    
    
    14,110Federal Home Loan Bank advances
    
    
    96,161
    
    
    
    78,866Other borrowed funds
    
    
    26,000
    
    
    
    52,000Securities sold under agreements to repurchase
    
    
    3,159
    
    
    
    2,486Advance payments by borrowers for taxes and insurance
    
    
    489
    
    
    
    450Other liabilities
    
    
    3,765
    
    
    
    4,764Total liabilities
    
    
    419,298
    
    
    
    411,106Stockholders 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;
4,526,742 and 4,454,262 shares issued at June 30, 2004 and
December 31, 2003, respectively, and 4,307,442 and 4,234,962 shares
outstanding at June 30, 2004 and December 31, 2003, respectively
    
    
    453
    
    
    
    445Additional paid-in capital
    
    
    58,703
    
    
    
    58,350Retained earnings (accumulated deficit)
    
    
    976
    
    
    
    (1,055
    )Treasury stock, at cost (219,300 shares)
    
    
    (2,758
    )
    
    
    (2,758
    )Accumulated other comprehensive (loss) income
    
    
    (398
    )
    
    
    20Total stockholders equity
    
    
    56,976
    
    
    
    55,002Total liabilities and stockholders equity
    
    $
    476,274
    
    
    $
    466,108
 The accompanying notes are an integral part of these unaudited Consolidated
Financial Statements. 3




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LSB CORPORATION AND SUBSIDIARY 
   Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(In Thousands, Except Share Data)Interest and dividend income:Loans
    
    $
    3,252
    
    
    $
    3,740
    
    
    $
    6,555
    
    
    $
    7,688Investment securities held to maturity
    
    
    1,709
    
    
    
    1,048
    
    
    
    3,378
    
    
    
    2,177Investment securities available for sale
    
    
    458
    
    
    
    463
    
    
    
    886
    
    
    
    956Federal Home Loan Bank stock
    
    
    36
    
    
    
    44
    
    
    
    72
    
    
    
    95Other interest and dividend income
    
    
    6
    
    
    
    19
    
    
    
    12
    
    
    
    60Total interest and dividend income
    
    
    5,461
    
    
    
    5,314
    
    
    
    10,903
    
    
    
    10,976Interest expense:Deposits
    
    
    870
    
    
    
    1,096
    
    
    
    1,698
    
    
    
    2,246Federal Home Loan Bank advances
    
    
    1,110
    
    
    
    1,181
    
    
    
    2,162
    
    
    
    2,384Other borrowed funds
    
    
    112
    
    
    
    34
    
    
    
    247
    
    
    
    75Securities sold under agreements to repurchase
    
    
    3
    
    
    
    5
    
    
    
    7
    
    
    
    10Total interest expense
    
    
    2,095
    
    
    
    2,316
    
    
    
    4,114
    
    
    
    4,715Net interest income
    
    
    3,366
    
    
    
    2,998
    
    
    
    6,789
    
    
    
    6,261Provision (credit) for loan losses
    
    
    (300
    )
    
    
    
    
    
    
    (300
    )
    
    
    Net interest income after provision (credit) for loan losses
    
    
    3,666
    
    
    
    2,998
    
    
    
    7,089
    
    
    
    6,261Non-interest income:Loan servicing fees
    
    
    123
    
    
    
    (50
    )
    
    
    143
    
    
    
    (180
    )Deposit account fees
    
    
    230
    
    
    
    180
    
    
    
    432
    
    
    
    343Gains on sales of mortgage loans
    
    
    58
    
    
    
    165
    
    
    
    69
    
    
    
    314Lawsuit judgment collected
    
    
    2,275
    
    
    
    
    
    
    
    2,275
    
    
    
    Other income
    
    
    94
    
    
    
    88
    
    
    
    183
    
    
    
    186Total non-interest income
    
    
    2,780
    
    
    
    383
    
    
    
    3,102
    
    
    
    663Non-interest expense:Salaries and employee benefits
    
    
    1,627
    
    
    
    1,420
    
    
    
    3,249
    
    
    
    3,071Occupancy and equipment expenses
    
    
    242
    
    
    
    202
    
    
    
    439
    
    
    
    422Professional expenses
    
    
    216
    
    
    
    162
    
    
    
    331
    
    
    
    363Data processing expenses
    
    
    232
    
    
    
    179
    
    
    
    432
    
    
    
    360Other expenses
    
    
    454
    
    
    
    409
    
    
    
    808
    
    
    
    828Total non-interest expenses
    
    
    2,771
    
    
    
    2,372
    
    
    
    5,259
    
    
    
    5,044Income before income tax expense
    
    
    3,675
    
    
    
    1,009
    
    
    
    4,932
    
    
    
    1,880Income tax expense
    
    
    1,318
    
    
    
    374
    
    
    
    1,789
    
    
    
    695Net income
    
    $
    2,357
    
    
    $
    635
    
    
    $
    3,143
    
    
    $
    1,185Average shares outstanding
    
    
    4,303,588
    
    
    
    4,204,362
    
    
    
    4,283,613
    
    
    
    4,209,335Average diluted shares outstanding
    
    
    4,443,898
    
    
    
    4,364,480
    
    
    
    4,437,404
    
    
    
    4,361,182Basic earnings per share
    
    $
    0.55
    
    
    $
    0.15
    
    
    $
    0.73
    
    
    $
    0.28Diluted earnings per share
    
    $
    0.53
    
    
    $
    0.15
    
    
    $
    0.71
    
    
    $
    0.27
 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 Share Data)Balance at December 31, 2002
    
    $
    439
    
    
    $
    57,845
    
    
    $
    (3,168
    )
    
    $
    (1,736
    )
    
    $
    679
    
    
    $
    54,059Net income
    
    
    
    
    
    
    
    
    
    
    1,185
    
    
    
    
    
    
    
    
    
    
    
    1,185Other comprehensive income:Unrealized loss on securities
available for sale (tax effect $7)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    (14
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,171Exercise of stock options
    
    
    4
    
    
    
    173
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177Dividends declared and paid
($0.24 per share)
    
    
    
    
    
    
    
    
    
    
    (1,009
    )
    
    
    
    
    
    
    
    
    
    
    (1,009
    )Purchase of 82,800 shares of Treasury
Stock, at cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,022
    )
    
    
    
    
    
    
    (1,022
    )Balance at June 30, 2003
    
    $
    443
    
    
    $
    58,018
    
    
    $
    (2,992
    )
    
    $
    (2,758
    )
    
    $
    665
    
    
    $
    53,376
 Retained
    
    
    
    
    
    AccumulatedAdditional
    
    Earnings/
    
    
    
    
    
    Other
    
    TotalCommon
    
    Paid-In
    
    (Accumulated
    
    Treasury
    
    Comprehensive
    
    StockholdersStock
    
    Capital
    
    Deficit)
    
    Stock
    
    Income (loss)
    
    EquityBalance at December 31, 2003
    
    $
    445
    
    
    $
    58,350
    
    
    $
    (1,055
    )
    
    $
    (2,758
    )
    
    $
    20
    
    
    $
    55,002Net income
    
    
    
    
    
    
    
    
    
    
    3,143
    
    
    
    
    
    
    
    
    
    
    
    3,143Other comprehensive income:Unrealized loss on securities
available for sale (tax effect $284)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (418
    )
    
    $
    (418
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,725Exercise of stock options
    
    
    8
    
    
    
    353
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    361Dividends declared and paid
($0.26 per share)
    
    
    
    
    
    
    
    
    
    
    (1,112
    )
    
    
    
    
    
    
    
    
    
    
    (1,112
    )Balance at June 30, 2004
    
    $
    453
    
    
    $
    58,703
    
    
    $
    976
    
    
    $
    (2,758
    )
    
    $
    (398
    )
    
    $
    56,976
 The accompanying notes are an integral part of these unaudited Consolidated
Financial Statements. 5




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LSB CORPORATION AND SUBSIDIARY 
   Six months endedJune 30,2004
    
    2003(In Thousands)Cash flows from operating activities:Net income
    
    $
    3,143
    
    
    $
    1,185Adjustments to reconcile net income to net cash provided by operating activities:Credit for loan losses
    
    
    (300
    )
    
    
    Gains on sales of mortgage loans
    
    
    (69
    )
    
    
    (314
    )Net amortization of investment securities
    
    
    878
    
    
    
    1,005Loss on sale of investment securities available for sale
    
    
    
    
    
    
    14Depreciation of premises and equipment
    
    
    212
    
    
    
    224Loans originated for sale
    
    
    (3,374
    )
    
    
    (17,043
    )Proceeds from sales of mortgage loans
    
    
    3,781
    
    
    
    15,968(Increase) decrease in accrued interest receivable
    
    
    (70
    )
    
    
    313Decrease in deferred income tax asset
    
    
    845
    
    
    
    570Decrease in other assets
    
    
    256
    
    
    
    413Increase (decrease) in advance payments by borrowers
    
    
    39
    
    
    
    (48
    )(Decrease) increase in other liabilities
    
    
    (999
    )
    
    
    184Net cash provided by operating activities
    
    
    4,342
    
    
    
    2,471Cash flows from investing activities:Proceeds from sale of mortgage-backed securities available for sale
    
    
    
    
    
    
    5,684Proceeds from maturities of investment securities held to maturity
    
    
    13,800
    
    
    
    155,600Proceeds from maturities of investment securities available for sale
    
    
    9,585
    
    
    
    7,000Purchases of investment securities held to maturity
    
    
    (24,356
    )
    
    
    (168,107
    )Purchases of mortgage-backed securities held to maturity
    
    
    
    
    
    
    (17,937
    )Purchases of investment securities available for sale
    
    
    (19,981
    )
    
    
    (16,712
    )Purchase of mutual fund available for sale
    
    
    
    
    
    
    (1,000
    )Purchases of mortgage-backed securities available for sale
    
    
    
    
    
    
    (14,775
    )Purchases of Federal Home Loan Bank stock
    
    
    (1,101
    )
    
    
    Principal payments of securities held to maturity
    
    
    10,334
    
    
    
    22,477Principal payments of securities available for sale
    
    
    2,480
    
    
    
    5,180(Increase) decrease in loans, net
    
    
    (728
    )
    
    
    29,226Purchases of Bank premises and equipment
    
    
    (771
    )
    
    
    (47
    )Net cash (used in) provided by investing activities
    
    
    (10,738
    )
    
    
    6,589Cash flows from financing activities:Net increase in deposits
    
    
    17,184
    
    
    
    873Additions to Federal Home Loan Bank advances
    
    
    32,345
    
    
    
    Payments on Federal Home Loan Bank advances
    
    
    (15,050
    )
    
    
    (7,920
    )Net increase (decrease) in agreements to repurchase securities
    
    
    673
    
    
    
    (1,256
    )Net decrease in other borrowed funds
    
    
    (26,000
    )
    
    
    (1,293
    )Treasury stock purchased
    
    
    
    
    
    
    (1,022
    )Dividends paid
    
    
    (1,112
    )
    
    
    (1,009
    )Proceeds from exercise of stock options
    
    
    361
    
    
    
    177Net cash provided by (used in) financing activities
    
    
    8,401
    
    
    
    (11,450
    )Net increase (decrease) in cash and cash equivalents
    
    
    2,005
    
    
    
    (2,390
    )Cash and cash equivalents, beginning of period
    
    
    8,761
    
    
    
    16,769Cash and cash equivalents, end of period
    
    $
    10,766
    
    
    $
    14,379Cash paid during the period for:Interest on deposits
    
    $
    1,696
    
    
    $
    2,245Interest on borrowed funds
    
    
    2,430
    
    
    
    2,515Income taxes
    
    
    2,884
    
    
    
    245Supplemental Schedule of non-cash activities:Net change in valuation of investment securities available for sale
    
    
    (702
    )
    
    
    (21
    )
 The accompanying notes are an integral part of these unaudited Consolidated
Financial Statements. 6




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##### Table of Contents



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. 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, income taxes and mortgage servicing
rights. 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, 2003 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 proforma amounts for the three months and six months
ended June 30, and are presented in the table which follows: Three months ended
    
    Six months ended6/30/04
    
    6/30/03
    
    6/30/04
    
    6/30/03(In Thousands, Except Share Data)Net income:As Reported
    
    $
    2,357
    
    
    $
    635
    
    
    $
    3,143
    
    
    $
    1,185Less: Pro forma stock based compensation cost (net of taxes)
    
    
    (104
    )
    
    
    (45
    )
    
    
    (208
    )
    
    
    (89
    )Pro forma
    
    $
    2,253
    
    
    $
    590
    
    
    $
    2,935
    
    
    $
    1,096Basic earnings per share:As Reported
    
    $
    0.55
    
    
    $
    0.15
    
    
    $
    0.73
    
    
    $
    0.28Pro forma
    
    
    0.52
    
    
    
    0.14
    
    
    
    0.69
    
    
    
    0.26Diluted earnings per share:As Reported
    
    $
    0.53
    
    
    $
    0.15
    
    
    $
    0.71
    
    
    $
    0.27Pro forma
    
    
    0.51
    
    
    
    0.14
    
    
    
    0.66
    
    
    
    0.25
 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 2004; expected volatility of 28.9%, expected
average life of 8 years, and risk-free interest rates of 3.4% and expected
dividend yield of 3.08%. 7




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##### Table of Contents



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 expects to contribute approximately $372 thousand
during the Plan Year ending at October 31, 2004. Net pension cost components for the three months and six months ended June 30,
follow: Three months ended
    
    Six months ended6/30/04
    
    6/30/03
    
    6/30/04
    
    6/30/03(In Thousands)Service cost
    
    $
    103
    
    
    $
    88
    
    
    $
    207
    
    
    $
    177Interest cost
    
    
    105
    
    
    
    102
    
    
    
    211
    
    
    
    204Expected return on plan assets
    
    
    (121
    )
    
    
    (106
    )
    
    
    (242
    )
    
    
    (212
    )Net amortization and deferrals
    
    
    (1
    )
    
    
    (1
    )
    
    
    (2
    )
    
    
    (2
    )Net periodic pension cost
    
    $
    86
    
    
    $
    83
    
    
    $
    174
    
    
    $
    167
 4. CONTINGENCIES The Bank was awarded a $4.2 million judgment against a debtor in 1997. The
judgment was appealed and the Bank prevailed in this matter in Appeals Court.
On February 13, 2002, the defendant filed bankruptcy under Chapter 7
(liquidation). Post-judgment interest accrues from the date of the judgment to
February 13, 2002 and approximates $1.9 million. However, collectibility of
post-judgment interest in addition to the $4.2 million award has not yet been
determined. Bids of approximately $3.3 million for the major assets were approved by the
Bankruptcy Court on October 14, 2002. The net amount to be received by the
Bank after taxes and bankruptcy expenses is not known at this time. However,
it is not likely that the full $4.2 million judgment and post-judgment interest
of $1.9 million will be collected. On June 15, 2004 the Company reported in a press release the receipt of $2.5
million on a U.S. Bankruptcy Judges Order on the Trustees Motion for
authorization to make an interim distribution to the Bank. The $2.5 million
distribution has been received and recorded as income by the Bank on June 15,
2004. The Bank has agreed to return any of the interim distribution as would be
necessary to pay additional taxes imposed on the bankruptcy estate in the event
reserves set aside for expenses and taxes are insufficient. The Company first
reported the Bankruptcy Trustees Motion seeking authorization from the U.S.
Bankruptcy Judge for an interim distribution to creditors in a press release
dated February 26, 2004. The diluted earnings per share impact of the interim
distribution is approximately $0.35 per share based on average dilutive shares
outstanding during the quarter ended June 30, 2004. It is managements opinion the timing and final amount to be collected can not
be determined at this time. Accordingly, no recognition beyond the interim
distribution has been recorded in the Companys Consolidated Financial
Statements at June 30, 2004. 5. RECENT ACCOUNTING DEVELOPMENTS In December 2003, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 03-3 (SOP 03-3): Accounting for
Certain Loans or Debt Securities Acquired in a Transfer. 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 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. This SOP is effective for loans acquired after December 31, 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. 8




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##### Table of Contents



5. RECENT ACCOUNTING DEVELOPMENTS (Continued) Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB)
No. 105  Application of Accounting Principles to Loan Commitments.In March
2004, the SEC issued SAB No. 105. SAB No. 105 summarizes the views of the SEC
regarding the application of Generally Accepted Accounting Principles (GAAP)
to loan commitments for mortgage loans that will be held for sale accounted for
as derivatives. The guidance requires the measurement at fair value of such
loan commitments include only the difference between the guaranteed interest
rate in the loan commitment and a market interest rate; future cash flows
related to servicing the loan or the customer relationship should not be
recorded as a part of the loan commitment derivative. SAB No. 105 is effective
for sold loan commitments accounted for as derivatives entered into beginning
April 1, 2004. The Company adopted this SAB on April 1, 2004. The adoption of
SAB No. 105 did not have an impact on the Company as the Company was valuing
loan commitments to be accounted for as derivatives consistent with this
guidance. 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 June 2004, the FASBs EITF issued 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. EITF 03-1 is effective for periods beginning after
June 15, 2004. The Company does not believe the adoption of EITF 03-1 will have
a material impact on the Companys financial position or results of operations. 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 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) in this report that are subject to risks and
uncertainties. Forward-looking statements include information concerning
possible or assumed future results of operations of the Company and projected
or anticipated benefits or events related to other future developments
involving the Company or the industry in which it operates. When verbs in the
present tense such as believes, expects, seeks, 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 report and in the documents which we
incorporate by reference in this report, could affect the future financial
results of the Company and could cause the results to differ materially from
those expressed in or incorporated by reference in this report. Without
limitation, those factors include fluctuations in interest rates, inflation,
government regulations and economic conditions and competition, as well as,
possible infrastructure disruptions due to weather, terrorist activity,
computer capacity overload or other factors in the geographic and business
areas in which the Company conducts its operations. As a result of such risks
and uncertainties, the Companys actual results may differ materially from such
forward-looking statements. The Company does not undertake, and specifically
disclaims any obligation to publicly release revisions to any such
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements. EXECUTIVE LEVEL OVERVIEW The Companys financial results are dependent on the following areas of the
income statement: net interest income, provision for loan losses, non-interest
income, non-interest expense and provision for income taxes. Net interest
income is the primary earnings of the Company and the main focus of management.
Net interest income is the difference between interest earned on loans and
investment securities and interest paid on deposits and borrowings. Deposits
and borrowings have short durations and the cost of these funds do not
necessarily rise and fall in tandem with 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 the Asset and Liability Management Committee
(ALCO) meetings 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 allocation of capital resources. Loan
quality has a direct impact on the amount of provisions for loan losses the
Company reports. Non-interest income includes various fees. Maintenance of 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 various 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 or implemented tax
strategies of the Company. Changes in the statutory tax rates and the earnings
of the Company, the Bank and its subsidiaries, would effect the
amount of income taxes reported. 10




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##### Table of Contents



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. The Company had
total assets of $476.3 million at June 30, 2004 compared to $466.1 million at
December 31, 2003. The increase in asset size at June 30, 2004 from December
31, 2003 is mainly attributable to an increase of $6.6 million in investment
securities, $2.7 million in Federal funds sold and $1.1 million in Federal Home
Loan Bank stock. The funding for these assets came from an increase in
deposits of $17.2 million. Deposit growth was also used to pay down borrowed
funds of $8.0 million as they became due during 2004. 
 INVESTMENTS The investment securities portfolio totaled $239.4 million or 50.3% of total
assets at June 30, 2004, compared to $232.9 million, or 50.0% of total assets
at December 31, 2003, an increase of $6.5 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 and payments on mortgage-backed securities. Funds received were
reinvested in U.S. Government Agency Obligations. The increase in investment
securities was the result of the utilization of funds from deposit growth. The following table reflects the components and carrying values of the
investment securities portfolio at June 30, 2004 and December 31, 2003: 6/30/04
    
    12/31/03(In Thousands)Investment securities held to maturity (at amortized cost):US Government Agency obligations
    
    $
    102,423
    
    
    $
    94,798Mortgage-backed securities
    
    
    34,740
    
    
    
    39,467Asset-backed securities
    
    
    32,101
    
    
    
    32,735Corporate obligations
    
    
    12,885
    
    
    
    15,662Municipal obligations
    
    
    1,600
    
    
    
    1,624Total investment securities held to maturity
    
    $
    183,749
    
    
    $
    184,286Investment securities available for sale (at market value):US Treasury obligations
    
    $
    4,667
    
    
    $
    4,795US Government Agency obligations
    
    
    36,061
    
    
    
    21,479Mortgage-backed securities
    
    
    5,530
    
    
    
    6,862Asset-backed securities
    
    
    5,205
    
    
    
    8,091Corporate obligations
    
    
    3,107
    
    
    
    6,228Mutual Funds
    
    
    956
    
    
    
    969Equity securities
    
    
    161
    
    
    
    168Total investment securities available for sale
    
    $
    55,687
    
    
    $
    48,592Total investment securities portfolio
    
    $
    239,436
    
    
    $
    232,878
 11




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##### Table of Contents



LOANS The following table reflects the loan portfolio at June 30, 2004 and December 31, 2003: 6/30/04
    
    12/31/03(In Thousands)Residential mortgage loans
    
    $
    58,749
    
    
    $
    57,017Loans held for sale
    
    
    
    
    
    
    338Equity loans
    
    
    10,441
    
    
    
    10,236Construction loans
    
    
    11,622
    
    
    
    16,040Commercial real estate loans
    
    
    118,309
    
    
    
    112,503Commercial loans
    
    
    12,361
    
    
    
    14,805Consumer loans
    
    
    659
    
    
    
    564Total loans
    
    
    212,141
    
    
    
    211,503Allowance for loan losses
    
    
    (4,168
    )
    
    
    (4,220
    )Total loans, net
    
    $
    207,973
    
    
    $
    207,283
 Total loans increased to $212.1 million or 44.5% of total assets at June 30,
2004 from $211.5 million or 45.4% of total assets at December 31, 2003. The
residential mortgage loan balances have remained fairly level compared to
year-end 2003, however, the refinancing activity of existing mortgages and
sales into the secondary market has slowed during the first six months of 2004.
Construction loans have declined $4.4 million due to the completion of some
projects which have been transferred into the commercial real estate portfolio.
Commercial real estate loans have increased $5.8 million due to increased
borrowers demand for this type of loan and the completion of $3.0 million in
construction loans transferred to commercial real estate loans. 
 ALLOWANCE FOR LOAN LOSSES The following table summarizes changes in the allowance for loan losses for the
three months and six months ended June 30, 2004 and 2003: Three months ended
    
    Six months ended6/30/04
    
    6/30/03
    
    6/30/04
    
    6/30/03(In Thousands)Beginning balance
    
    $
    4,218
    
    
    $
    4,170
    
    
    $
    4,220
    
    
    $
    4,167Provision (credit) charged to operations
    
    
    (300
    )
    
    
    
    
    
    
    (300
    )
    
    
    Recoveries on loans previously charged-off
    
    
    254
    
    
    
    6
    
    
    
    256
    
    
    
    9Loans charged-off
    
    
    (4
    )
    
    
    
    
    
    
    (8
    )
    
    
    Ending balance
    
    $
    4,168
    
    
    $
    4,176
    
    
    $
    4,168
    
    
    $
    4,176
 In the second quarter of 2004, the Bank recognized $253 thousand of the interim
distribution of a legal judgment previously obtained by the Bank as a recovery
to the allowance for loan losses on amounts previously charged off. The Bank
also recorded a credit provision for loan losses of $300 thousand for the
quarter ended June 30, 2004. 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. 12




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##### Table of Contents



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 $106 thousand at June 30, 2004. This represents an
increase of $104 thousand from December 31, 2003. These changes were primarily
attributable to an increase in non-performing loans to $106 thousand at June
30, 2004 from zero at December 31, 2003 and $23 thousand at June 30, 2003. The
Company had no impaired loans at June 30, 2004, December 31, 2003 and June 30,
2003. The following table summarizes the Companys risk assets at June 30, 2004,
December 31, 2003 and June 30, 2003: 6/30/04
    
    12/31/03
    
    6/30/03(Dollars in Thousands)Non-performing loans
    
    $
    106
    
    
    $
    
    
    
    $
    23Other real estate owned
    
    
    
    
    
    
    2
    
    
    
    7Total risk assets
    
    $
    106
    
    
    $
    2
    
    
    $
    30Risk assets as a percent of total assets
    
    
    0.02
    %
    
    
    0.00
    %
    
    
    0.01
    %
 The following table shows the allowance for loan losses as a percent of total
loans at June 30, 2004, December 31, 2003 and June 30, 2003: 6/30/04
    
    12/31/03
    
    6/30/03(Dollars in Thousands)Allowance for loan losses
    
    $
    4,168
    
    
    $
    4,220
    
    
    $
    4,176Allowance for loan losses as a percent of total loans
    
    
    1.96
    %
    
    
    2.00
    %
    
    
    1.94
    %
 The allowance for loan losses has remained fairly consistent at approximately
$4.2 million at the end of June 30, 2004, December 31, 2003 and June 30, 2003.
However, the allowance for loan losses as a percent of total loans has
decreased to 1.96% at June 30, 2004 down from 2.00% at December 31, 2003. Due
to a slight increase in total loans outstanding at June 30, 2004 compared to
December 31, 2003, the ratio of the allowance for loan loss as a percent of
total loans has decreased slightly. 
 DEPOSITS Total interest bearing deposits amounted to $273.9 million at June 30, 2004
compared to $258.4 million at December 31, 2003, an increase of $15.5 million.
The change from December 31, 2003 is due primarily to increases in certificates
of deposit, money market investment and NOW accounts. All other deposit
categories experienced slight increases. The following table reflects the components of interest bearing deposits at June 30, 2004 and December 31, 2003: 6/30/04
    
    12/31/03(In Thousands)NOW and Super NOW accounts
    
    $
    39,446
    
    
    $
    36,108Savings accounts
    
    
    46,304
    
    
    
    44,324Money market investment accounts
    
    
    80,190
    
    
    
    76,148Certificates of deposit
    
    
    80,027
    
    
    
    74,184Retirement accounts
    
    
    27,976
    
    
    
    27,666Total interest bearing deposits
    
    $
    273,943
    
    
    $
    258,430
 13




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##### Table of Contents



RESULTS OF OPERATIONS 
 THREE MONTHS ENDED JUNE 30, 2004 AND 2003 OVERVIEW The Company reported net income of $2.4 million or $0.53 diluted earnings per
share and $635 thousand or $0.15 diluted earnings per share for the three
months ended June 30, 2004 and 2003, respectively. The net income increase of
$1.7 million was due primarily to the receipt of $2.5 million on a U.S.
Bankruptcy Judges order on the Trustees Motion for authorization to make an
interim distribution in a case in which the Companys wholly owned subsidiary,
Lawrence Savings Bank (the Bank), is a secured creditor. The impact to
earnings after provision for taxes approximates $1.6 million. The diluted
earnings per share impact of the interim distribution is approximately $0.35
per share based on average diluted shares outstanding during the quarter ended
June 30, 2004. The Bank recorded a credit provision for loan losses of $300
thousand for the quarter ended June 30, 2004, as a result of the recognition of
$253 thousand of the interim distribution as a recovery to the allowance for
loan losses on amounts previously charged off. Net income for the three months ended June 30, 2004 increased, aside from the
lawsuit judgment collected noted above, due to net interest income increasing
$368 thousand and non-interest income increasing by $122 thousand. Offsetting
these increases were non-interest expenses rising $399 thousand and an increase
in the provision for income taxes of $944 thousand primarily attributed to the
lawsuit judgment recovery. NET INTEREST INCOME FROM OPERATIONS Net interest income for the three months ended June 30, 2004 and 2003 increased
by $368 thousand or 12.3% to $3.4 million from $3.0 million, respectively. The
net interest rate spread increased to 2.60% for the quarter ended June 30, 2004
from 2.51% for the same quarter of 2003. Interest income in the second
quarter of 2004 experienced an overall increase due to a higher average
investment securities balances outstanding from the second quarter of 2003,
offset by lower average loan balances and a declining interest rate environment
on loans. Interest expense incurred a similar decline in interest rates
resulting in lower rates paid on deposits and borrowed funds; however, the
rates paid on borrowed funds have declined at a slower pace than rates paid on
deposits. The following table presents the components of net interest income and net
interest rate spread for the three months ended June 30, 2004 and 2003: Income/Expense
    
    Yield/RateThree Months Ended6/30/04
    
    6/30/03
    
    6/30/04
    
    6/30/03(Dollars in Thousands)Interest income and average yield:Loans
    
    $
    3,252
    
    
    $
    3,740
    
    
    
    6.04
    %
    
    
    6.66
    %Investments, mortgage-backed securities
and other earning assets
    
    
    2,209
    
    
    
    1,574
    
    
    
    3.45
    
    
    
    3.24Total
    
    
    5,461
    
    
    
    5,314
    
    
    
    4.64
    
    
    
    5.07Interest expense and average rate paid:Deposits
    
    
    870
    
    
    
    1,096
    
    
    
    1.30
    
    
    
    1.65Federal Home Loan Bank advances
    
    
    1,110
    
    
    
    1,181
    
    
    
    4.47
    
    
    
    5.19Securities sold under agreements to
repurchase and other borrowed funds
    
    
    115
    
    
    
    39
    
    
    
    1.08
    
    
    
    3.16Total
    
    
    2,095
    
    
    
    2,316
    
    
    
    2.04
    
    
    
    2.56Net interest income
    
    $
    3,366
    
    
    $
    2,998Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.60
    %
    
    
    2.51
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.86
    %
    
    
    2.86
    %
 14




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##### Table of Contents



INTEREST INCOME Interest income for the second quarter of 2004 was $5.5 million as compared to
$5.3 million for the same quarter of 2003. The increase of $147 thousand in
interest income is primarily due to $534 thousand recognized from higher
average investment securities balances, coupled with slightly higher yields on
investment securities resulting in an increase of $101 thousand in interest
income. Partially offsetting these increases were lower yields and lower
average loan balances which decreased interest income by $356 thousand and $132
thousand, respectively. Yields on loans were 6.04% and 6.66% for the quarters ended June 30, 2004 and
2003, respectively. The impact to interest income due to lower loan yields was
$356 thousand. Lower average loan balances of $216.5 million versus $225.3
million for the quarters ended June 30, 2004 and 2003, respectively, decreased
interest income by $132 thousand. The following table lists the components of loan interest income for the three
months ended June 30, 2004 and 2003: Three months ended6/30/04
    
    6/30/03(In Thousands)Residential mortgage loans
    
    $
    768
    
    
    $
    855Loans held for sale
    
    
    14
    
    
    
    57Equity loans
    
    
    124
    
    
    
    137Construction loans
    
    
    191
    
    
    
    296Commercial real estate loans
    
    
    1,952
    
    
    
    2,003Commercial loans
    
    
    192
    
    
    
    382Consumer loans
    
    
    11
    
    
    
    10Total loan interest income
    
    $
    3,252
    
    
    $
    3,740
 Yields on investment securities were 3.45% and 3.24% for the quarters ended
June 30, 2004 and 2003, respectively, increasing interest income by $101
thousand. Higher average investment securities balances of $257.2 million
during the second quarter of 2004 versus $195.1 million for the same period in
2003 increased interest income by $534 thousand. 
 INTEREST EXPENSE Interest expense for the second quarter of 2004 totaled $2.1 million, a
decrease of $221 thousand from the same quarter of 2003. This decrease is
primarily due to lower rates paid on interest bearing liabilities, which
impacted interest expense by $428 thousand. Average balances of interest
bearing liabilities increased resulting in $207 thousand in additional interest
expense. Rates on deposits were 1.30% and 1.65% for the quarters ended June 30, 2004 and
2003, respectively. This decrease resulted in interest expense decreasing by
$235 thousand. Average deposit balances were $269.8 million for the second
quarter of 2004 versus $267.1 million for the same period in 2003, which
resulted in a $9 thousand increase to interest expense. The following table lists the components of deposit interest expense for the
three months ended June 30, 2004 and 2003: Three months ended6/30/04
    
    6/30/03(In Thousands)NOW and Super NOW accounts
    
    $
    9
    
    
    $
    10Savings deposit accounts
    
    
    42
    
    
    
    56Money market investment accounts
    
    
    240
    
    
    
    229Certificates of deposit
    
    
    370
    
    
    
    560Retirement accounts
    
    
    209
    
    
    
    241Total deposit interest expense
    
    $
    870
    
    
    $
    1,096
 Rates on FHLB advances were 4.47% and 5.19% for the second quarters of 2004 and
2003, respectively. The decrease in rates paid on FHLB advances decreased
interest expense by $167 thousand. The average balances of FHLB advances
increased to $99.9 million in the second quarter 2004 from $91.3 million for
the second quarter of 2003, which resulted in an increase in interest expense
of $96 thousand. 15




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##### Table of Contents



Rates on repurchase agreements and other borrowed funds (which includes FHLB
advances less than 90 days) were 1.08% and 3.16% for the second quarters of
2004 and 2003, respectively. The decrease in rates paid on these interest
bearing liabilities resulted in interest expense decreasing by $26 thousand.
The average balance increased to $43.0 million in 2004 from $4.9 million in
2003 which increased interest expense by $102 thousand. PROVISION FOR LOAN LOSSES The Company booked a credit provision for loan losses in the amount of $300
thousand in the second quarter of 2004 due to a recovery of $253 thousand to
the allowance for loan losses and the continued low level of non-performing
loans. The Company made no provision for loan losses in 2003. The absence of a
provision for loan losses in 2003 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 approximately $4.2 million at June 30,
2004 and December 31, 2003. The coverage of the allowance for loan losses has
decreased slightly to 1.96% at June 30, 2004 from 2.00% at December 31, 2003. NON-INTEREST INCOME Non-interest income amounted to $2.8 million and $383 thousand for the quarters
ended June 30, 2004 and 2003, respectively. The increase was primarily
attributable to the lawsuit judgment collected of $2.5 million of which $2.3
million was reported as non-interest income in the second quarter of 2004.
Excluding the lawsuit judgment collected, non-interest income increased $122
thousand compared to the second quarter of 2003. Loan fee income increased to
$123 thousand in 2004 compared to loan fee loss of $50 thousand in 2003. The
increase in loan fees for the second quarter of 2004 can be attributed to an
increase of $55 thousand in prepayment penalties on commercial real estate loan
payoffs and to an increase in fair value on mortgage servicing rights (MSR)
for which $52 thousand was a decrease to the valuation allowance in 2004
compared to provision for losses of $72 thousand in the second quarter of 2003.
The reason for higher provisions for losses on MSR in 2003 is due to higher
than normal prepayment speeds used in the fair value calculation of MSR
experienced by the Company in 2003 compared to 2004. Deposit account fees
increased $50 thousand to $230 thousand in the second quarter of 2004 due to an
increase in NOW account fees of $41 thousand attributable to a new service the
Company offered in 2004. Partially offsetting these increases was a decrease
in gains on sales of mortgage loans declining to $58 thousand from $165
thousand in the second quarter of 2004 and 2003, respectively, due to a
reduction in loan sales. NON-INTEREST EXPENSE Non-interest expense totaled $2.8 million compared to $2.4 million for the
quarters ended June 30, 2004 and 2003, respectively. Salaries and employee
benefits increased by $207 thousand in the second quarter 2004 compared to the
second quarter in 2003 mainly due to normal salary increases and the addition
to headcount for the new Salem, New Hampshire branch. Occupancy and equipment
expenses totaled $242 thousand in 2004, an increase of $40 thousand over 2003
mainly due to higher depreciation expenses associated with assets no longer
used by the Company. Professional expenses increased to $216 thousand in the
second quarter 2004 compared to $162 thousand in the same period in 2003
primarily due to higher legal expenses associated with the lawsuit judgment
collection and consulting expenses. Data processing expenses increased to $232
thousand in the second quarter of 2004 compared to $179 thousand in the same
quarter in 2003 due to an increase in service bureau charges associated with
telecommunication improvements. Other expenses increased to $454 thousand in
2004s second quarter compared to $409 thousand in the same period in 2003.
Other expenses increased mainly due to an increase in marketing expenses
relating to the new Salem, New Hampshire branch. INCOME TAXES The Company reported an income tax expense of $1.3 million for the quarter
ended June 30, 2004 or an effective income tax rate of 35.9%. This compares to
an income tax expense of $374 thousand for the quarter ended June 30, 2003 or
effective income tax rate of 37.1%. The increase of $944 thousand in the
provision for income taxes is primarily attributed to the lawsuit judgment
recovery. The decrease in the effective income tax rate in 2004 from 2003 is
due to lower provisions for income taxes associated with tax exempt loans held
by the Company. 16




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##### Table of Contents



RESULTS OF OPERATIONS 
 SIX MONTHS ENDED JUNE 30, 2004 AND 2003 OVERVIEW The Bank reported net income of $3.1 million or $0.71 diluted earnings per
share and $1.2 million or $0.27 diluted earnings per share for the six months
ended June 30, 2004 and 2003, respectively. During the first six months of
2004, net income increased $2.0 million mainly attributable to the lawsuit
judgment collected. Net interest income and non-interest income increased by
$528 thousand and $164 thousand, respectively. Partially offsetting these
revenues were increases in non-interest expenses of $215 thousand and the
provision for income taxes by $1.1 million attributable to the recovery
previously mentioned. NET INTEREST INCOME FROM OPERATIONS Net interest income for the six months ended June 30, 2004 and 2003 totaled
$6.8 million and $6.3 million, respectively. The net interest rate spread
increased slightly to 2.67% from 2.65%. The rates paid on interest bearing
liabilities decreased more rapidly than the yield on interest bearing assets.
The following table presents the components of net interest income and net
interest spread: Income/Expense
    
    Yield/RateSix Months Ended6/30/04
    
    6/30/03
    
    6/30/04
    
    6/30/03(Dollars in Thousands)Interest income and average yield:Loans
    
    $
    6,555
    
    
    $
    7,688
    
    
    
    6.09
    %
    
    
    6.74
    %Investments, mortgage-backed securities
and other earning assets
    
    
    4,348
    
    
    
    3,288
    
    
    
    3.51
    
    
    
    3.48Total
    
    
    10,903
    
    
    
    10,976
    
    
    
    4.71
    
    
    
    5.26Interest expense and average rate paid:Deposits
    
    
    1,698
    
    
    
    2,246
    
    
    
    1.29
    
    
    
    1.70Federal Home Loan Bank advances
    
    
    2,162
    
    
    
    2,384
    
    
    
    4.78
    
    
    
    5.19Securities sold under agreements to
repurchase and other borrowed funds
    
    
    254
    
    
    
    85
    
    
    
    1.06
    
    
    
    3.27Total
    
    
    4,114
    
    
    
    4,715
    
    
    
    2.04
    
    
    
    2.61Net interest income
    
    $
    6,789
    
    
    $
    6,261Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.67
    %
    
    
    2.65
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.94
    %
    
    
    3.00
    %
 
 INTEREST INCOME Interest income for the first six months of 2004 was $10.9 million as compared
to $11.0 million for the same period of 2003. The decrease in interest income
of $73 thousand is due mainly to lower yields on loans reducing interest income
by $722 thousand. Lower average loan balances also contributed to the decrease
by $411 thousand. Partially offsetting these decreases were higher average
investment securities balances and higher yields increasing interest income by
$1.0 million and $43 thousand, respectively. Yields on loans were 6.09% and 6.74% for the six months ended June 30, 2004 and
2003, respectively. The impact on interest income due to lower yields was $722
thousand. Lower average loan balances of $216.3 million in 2004 versus $229.9
million in 2003 resulted in interest income decreasing by $411 thousand. 17




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##### Table of Contents



The following table lists the components of loan interest income for the six
months ended June 30, 2004 and 2003: Six months ended6/30/04
    
    6/30/03(In Thousands)Residential mortgage loans
    
    $
    1,546
    
    
    $
    1,796Loans held for sale
    
    
    20
    
    
    
    84Equity loans
    
    
    257
    
    
    
    297Construction loans
    
    
    397
    
    
    
    635Commercial real estate loans
    
    
    3,896
    
    
    
    4,071Commercial loans
    
    
    417
    
    
    
    783Consumer loans
    
    
    22
    
    
    
    22Total loan interest income
    
    $
    6,555
    
    
    $
    7,688
 Yields on investment securities increased to 3.51% for the six months ended
June 30, 2004. This compares to yields on investment securities of 3.48% for
the same period in 2003. This resulted in interest income increasing by $43
thousand. Higher average investment securities balances of $248.8 million in
2004 versus $190.6 million in 2003 resulted in interest income increasing by
$1.0 million. 
 INTEREST EXPENSE Interest expense for the first six months of 2004 and 2003 was $4.1 million and
$4.7 million, respectively. The decrease of $601 thousand in interest expense
is primarily due to lower rates paid on deposits and other interest bearing
liabilities, which decreased interest expense by $789 thousand. Interest
expense decreased $39 thousand due to lower average deposit and FHLB advances
balances. Higher average balances of repurchase agreements and other borrowed
funds increased interest expense by $227 thousand. Rates on deposits were 1.29% and 1.70% for the first six months of 2004 and
2003 respectively. This decrease resulted in interest expense decreasing by
$546 thousand. Average deposit balances were $265.6 million in 2004 down from
$265.9 million in 2003, which had a nominal impact on interest expense. The following table lists the components of deposit interest expense for the
six months ended June 30, 2004 and 2003: Six months ended6/30/04
    
    6/30/03(In Thousands)NOW and Super NOW accounts
    
    $
    19
    
    
    $
    20Savings deposit accounts
    
    
    82
    
    
    
    113Money market investment accounts
    
    
    476
    
    
    
    467Certificates of deposit
    
    
    702
    
    
    
    1,154Retirement accounts
    
    
    419
    
    
    
    492Total deposit interest expense
    
    $
    1,698
    
    
    $
    2,246
 Rates on FHLB advances were 4.78% and 5.19% resulting in interest expense
decreasing by $185 thousand in 2004 from 2003. The average balances from these
interest bearing liabilities decreased to $91.0 million in 2004 from $92.6
million in 2003, which decreased interest expense by $37 thousand. Rates paid on repurchase agreements and other borrowed funds were 1.06% and
3.27% for the first six months of 2004 and 2003, respectively. This rate
decrease resulted in a decrease of $58 thousand in interest expense. The
average balances of repurchase agreements and other borrowed funds increased to
$48.2 million for the first half in 2004 compared to $5.2 million for the same
period in 2003 resulting in an increase of $227 thousand in interest expense. 18




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##### Table of Contents



PROVISION FOR LOAN LOSSES The Company booked a credit provision for loan losses in the amount of $300
thousand for the six months ended June 30, 2004 due to the $253 thousand
recovery to the allowance for loan losses and the continued low level of
non-performing loans. The Company made no provision for loan losses in 2003.
The absence of a provision for loan losses in 2003 was due to the overall asset
quality of the Company and low level of delinquent loans. NON-INTEREST INCOME Non-interest income amounted to $3.1 million and $663 thousand for the six
months ended June 30, 2004 and 2003, respectively. The increase, net of the
lawsuit judgment collected, totaled $164 thousand. The change in non-interest
income is the result of loan fee income of $143 thousand versus loan fee loss
of $180 thousand in the first six months of 2003. Deposit account fees
increased to $432 thousand from $343 thousand derived from a new service
offered in 2004. Gains on sales of mortgage loans declined to $69 thousand from
$314 thousand in 2003 due to a reduction in the amount of loans sold. Other
income declined in the first six months of 2004 to $183 thousand from $186
thousand in 2003 due to a reduction in debit card fees. NON-INTEREST EXPENSE Non-interest expense increased to $5.3 million for the six months ended June
30, 2004, compared to $5.0 million in 2003. The increase in non-interest
expense is attributable to an increase in salaries and employee benefits to
$3.2 million in 2004 up by $178 thousand over the same period in 2003 due to
normal salary increases and an increase in headcount due to the new Salem, New
Hampshire branch. Occupancy and equipment expenses have risen to $439 thousand
for the first six months in 2004 from $422 thousand in 2003 due to increased
depreciation expenses. Professional expense decreased to $331 thousand for the
six months in 2004 from $363 thousand over the same period in 2003 as the
Banks legal expenses and consulting fees decreased. Data processing expense
increased to $432 thousand from $360 thousand resulting from an increase in
service bureau charges. INCOME TAXES The Bank reported an income tax expense of $1.8 million and $695 thousand for
the first six months ended June 30, 2004 and 2003, respectively, representing
an effective tax rate of 36.3% and 37.0%, respectively. The increase in the
provision for income taxes of $1.1 million was primarily attributable to the
previously mentioned lawsuit recovery. 
 LIQUIDITY AND CAPITAL RESOURCES The Companys primary source of funds is cash dividends from its wholly-owned
subsidiary, Lawrence Savings Bank (the Bank). The Bank paid dividends to the
Company in the amount of $1.1 million and $500 thousand during the first six
months of 2004 and 2003, respectively. The Company made cash payments of
dividends to shareholders in the amount of $1.1 million and $1.0 million in the
first half of 2004 and 2003, 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 also has a $5 million unsecured Federal funds line of credit. 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 have been designated as
such. The Banks borrowing capacity at the FHLB at June 30, 2004 was $179.7
million of which $122.2 million has been borrowed. At June 30, 2004, the Companys stockholders equity was $57.0 million as
compared to $55.0 million at December 31, 2003. The change during the first
six months of 2004 occurred due to net income of $3.1 million and $361 thousand
from the exercise of stock options. Stockholders equity was reduced by the
declaration of cash dividends to shareholders of $1.1 million and a decrease in
the market value of investment securities available for sale, net of taxes by
$418 thousand. The Companys leverage ratio at June 30, 2004 and December 31,
2003 was 11.63% and 12.11%, respectively. The Companys and the Banks total
risk based capital ratios were 20.99% and 20.63% at June 30, 2004,
respectively, compared with 20.50% and 20.25% at December 31, 2003,
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. 19




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##### Table of Contents



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 19 and
20 of the LSB Corporations Annual Report for the fiscal year ended December
31, 2003. 
 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 subsidiaries
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. 20




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##### Table of Contents



PART II  OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS The Company is involved in various legal proceedings incidental to its
business. Other than the following matter, management does not believe
resolution of such litigation will have a material effect on the financial
condition and operating results of the Company. The Bank was awarded a $4.2 million judgment against a debtor in 1997. The
judgment was appealed and the Bank prevailed in this matter in Appeals Court.
On February 13, 2002, the defendant filed bankruptcy under Chapter 7
(liquidation). Post-judgment interest accrues from the date of the judgment to
February 13, 2002 and approximates $1.9 million. However, collectibility of
post-judgment interest in addition to the $4.2 million award has not yet been
determined. Bids of approximately $3.3 million for the major assets of the debtor were
approved by the Bankruptcy Court on October 14, 2002. The net amount to be
received by the Bank after taxes and bankruptcy expenses is not known at this
time. However, it is not likely that the full $4.2 million judgment and
post-judgment interest of $1.9 million will be collected. On June 15, 2004 the Company reported in a press release the receipt of $2.5
million on a U.S. Bankruptcy Judges Order on the Trustees Motion for
authorization to make an interim distribution to the Bank. The $2.5 million
distribution has been received and recorded as income by the Bank on June 15,
2004. The Bank has agreed to return any of the interim distribution as would be
necessary to pay additional taxes imposed on the bankruptcy estate in the event
reserves set aside for expenses and taxes are insufficient. The Company first
reported the Bankruptcy Trustees Motion seeking authorization from the U.S.
Bankruptcy Judge for an interim distribution to creditors in a press release
dated February 26, 2004. The diluted earnings per share impact of the interim
distribution is approximately $0.35 per share based on average dilutive shares
outstanding during the quarter ended June 30, 2004. It is managements opinion the timing and final amount to be collected can not
be determined at this time. Accordingly, no recognition beyond the interim
distribution has been recorded in the Companys Consolidated Financial
Statements at June 30, 2004. For further information, please refer to the discussion under the caption
CONTINGENCIES on page 41 of the Corporations Annual Report for the fiscal
year ended December 31, 2003, which is hereby incorporated herein by reference. 
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 4, 2004, the Company held its Annual Meeting. The stockholders elected each of the following three individuals as Class B
directors of the Company to serve until the 2007 Annual Meeting, with the
following votes cast: Broker non-votesNominees
    
    For
    
    Withheld
    
    and AbstentionsMalcolm W. Brawn
    
    
    3,779,744
    
    
    
    23,821
    
    
    
    0Neil H. Cullen
    
    
    3,780,744
    
    
    
    22,821
    
    
    
    0Richard Hart Harrington
    
    
    3,768,840
    
    
    
    34,725
    
    
    
    0
 The following directors of the Company continued as directors after the 2004
Annual Meeting: Eugene A. Beliveau, Kathleen Boshar Reynolds, Thomas J. Burke,
Byron R. Cleveland, Jr., Robert F. Hatem, Marsha A. McDonough and Paul A.
Miller 21




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##### Table of Contents



ITEM 5. OTHER INFORMATION None. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  a.
    
    Exhibits. Please see the Exhibit Index attached hereto.  b.
    
    Reports on Form 8-K. The following is a list of Form 8-K filed by LSB Corporation with
the Securities and
Exchange Commission during the quarter ended
June 30, 2004: Date Filed
    
    Items reportedApril 19, 2004
    
    LSB Corporations press release announcing the Companys earnings for the three
months ended March 31, 2004.April 26, 2004
    
    LSB Corporations press release announcing the
Companys dividend to shareholders for
the second quarter 2004.May 5, 2004
    
    LSB Corporations press release regarding the Companys Annual Meeting of
stockholders held May 4, 2004.June 16, 2004
    
    LSB Corporations press release announcing the Companys Interim Distribution
received by a Bank Subsidiary of $2.5 million.
 22




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##### Table of Contents



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 CORPORATION AND SUBSIDIARYAugust 12, 2004
    
    /s/ Paul A. MillerPaul A. MillerPresident andChief Executive OfficerAugust 12, 2004
    
    /s/ John E. SharlandJohn E. SharlandSenior Vice PresidentChief Financial Officer
 23




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##### Table of Contents



LSB CORPORATION AND SUBSIDIARY Quarterly Report on Form 10-Q For Quarter Ended June 30, 2004 
 EXHIBIT INDEX Page31.1
    
    Certification of Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    2531.2
    
    Certification of Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    2632.1
    
    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
    
    
    2732.2
    
    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
    
    
    28
 24