##### 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 June 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
    
    04-3557612(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 30 Massachusetts Avenue, North Andover, MA
    
    01845(Address of principal executive offices)
    
    (Zip Code)
 (978) 725-7500
 
  þ o
 
 Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ  o þ
  Class
    
    Outstanding as of August 6 , 2008Common Stock, par value $.10 per share
    
    4,456,441 shares




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##### 



Page:PART I  FINANCIAL INFORMATIONITEM 1
    
    FINANCIAL STATEMENTSConsolidated 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
    
    
    9-20ITEM 3
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
    
    20ITEM 4.T
    
    CONTROLS AND PROCEDURES
    
    
    20-21PART II  OTHER INFORMATIONITEM 1
    
    LEGAL PROCEEDINGS
    
    
    22ITEM 1A
    
    RISK FACTORS
    
    
    22-23ITEM 2
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    24ITEM 3
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    24ITEM 4
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    24ITEM 5
    
    OTHER INFORMATION
    
    
    24ITEM 6
    
    EXHIBITS
    
    
    24SIGNATURES
    
    
    25EXHIBIT INDEX
    
    
    26EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO
  2




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##### Table of Contents



PART 1   FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 
 June 30,
    
    
    December 31,2008
    
    
    2007(In thousands, except share data)ASSETSAssets:Cash and due from banks
    
    $
    5,702
    
    
    $
    7,494Federal funds sold
    
    
    13,067
    
    
    
    56Total cash and cash equivalents
    
    
    18,769
    
    
    
    7,550Investment securities available for sale (amortized cost of
$256,180 in 2008 and $229,885 in 2007)
    
    
    255,401
    
    
    
    230,596Federal Home Loan Bank stock, at cost
    
    
    11,683
    
    
    
    10,185Loans, net of allowance for loan losses
    
    
    404,381
    
    
    
    353,303Premises and equipment
    
    
    4,282
    
    
    
    3,590Accrued interest receivable
    
    
    2,490
    
    
    
    2,453Deferred income tax asset, net
    
    
    3,425
    
    
    
    2,485Bank-owned life insurance
    
    
    10,392
    
    
    
    10,200Other real estate owned
    
    
    692
    
    
    
    Other assets
    
    
    1,284
    
    
    
    1,289Total assets
    
    $
    712,799
    
    
    $
    621,651LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Core deposits
    
    $
    177,634
    
    
    $
    149,801Term deposits
    
    
    194,646
    
    
    
    172,282Total deposits
    
    
    372,280
    
    
    
    322,083Long-term borrowed funds
    
    
    266,303
    
    
    
    227,378Short-term borrowed funds
    
    
    11,160
    
    
    
    7,973Advance payments by borrowers for taxes and insurance
    
    
    630
    
    
    
    647Other liabilities
    
    
    3,365
    
    
    
    3,272Total liabilities
    
    
    653,738
    
    
    
    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;4,454,941 and 4,516,561 shares issued and outstanding at
June 30, 2008 and December 31, 2007, respectively
    
    
    445
    
    
    
    452Additional paid-in capital
    
    
    59,413
    
    
    
    60,382Accumulated deficit
    
    
    (326
    )
    
    
    (934
    )Accumulated other comprehensive (loss) income, net of tax
    
    
    (471
    )
    
    
    398Total stockholders equity
    
    
    59,061
    
    
    
    60,298Total liabilities and stockholders equity
    
    $
    712,799
    
    
    $
    621,651
  3




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##### Table of Contents



Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except share data)Interest and dividend income:Loans
    
    $
    6,049
    
    
    $
    5,709
    
    
    $
    12,067
    
    
    $
    11,006Investment securities available for sale
    
    
    3,356
    
    
    
    2,445
    
    
    
    6,408
    
    
    
    4,959Federal Home Loan Bank stock
    
    
    102
    
    
    
    167
    
    
    
    256
    
    
    
    327Short term interest income
    
    
    53
    
    
    
    190
    
    
    
    112
    
    
    
    312Total interest and dividend income
    
    
    9,560
    
    
    
    8,511
    
    
    
    18,843
    
    
    
    16,604Interest expense:Deposits
    
    
    2,433
    
    
    
    2,409
    
    
    
    5,046
    
    
    
    4,624Long-term borrowed funds
    
    
    2,861
    
    
    
    2,097
    
    
    
    5,606
    
    
    
    3,782Short-term borrowed funds
    
    
    41
    
    
    
    161
    
    
    
    78
    
    
    
    581Total interest expense
    
    
    5,335
    
    
    
    4,667
    
    
    
    10,730
    
    
    
    8,987Net interest income
    
    
    4,225
    
    
    
    3,844
    
    
    
    8,113
    
    
    
    7,617Provision for loan losses
    
    
    400
    
    
    
    155
    
    
    
    505
    
    
    
    215Net interest income after provision for loan losses
    
    
    3,825
    
    
    
    3,689
    
    
    
    7,608
    
    
    
    7,402Non-interest income:Deposit account fees
    
    
    267
    
    
    
    251
    
    
    
    512
    
    
    
    437Loan servicing fees, net
    
    
    35
    
    
    
    56
    
    
    
    73
    
    
    
    114Income on bank-owned life insurance
    
    
    96
    
    
    
    5
    
    
    
    192
    
    
    
    5Other income
    
    
    112
    
    
    
    122
    
    
    
    227
    
    
    
    232Total non-interest income
    
    
    510
    
    
    
    434
    
    
    
    1,004
    
    
    
    788Non-interest expense:Salaries and employee benefits
    
    
    1,631
    
    
    
    1,616
    
    
    
    3,270
    
    
    
    3,380Occupancy and equipment expense
    
    
    321
    
    
    
    303
    
    
    
    673
    
    
    
    590Data processing expense
    
    
    243
    
    
    
    244
    
    
    
    477
    
    
    
    525Professional expense
    
    
    132
    
    
    
    111
    
    
    
    262
    
    
    
    220Marketing expense
    
    
    194
    
    
    
    192
    
    
    
    246
    
    
    
    220Other expense
    
    
    461
    
    
    
    408
    
    
    
    875
    
    
    
    796Total non-interest expense
    
    
    2,982
    
    
    
    2,874
    
    
    
    5,803
    
    
    
    5,731Income before income tax expense
    
    
    1,353
    
    
    
    1,249
    
    
    
    2,809
    
    
    
    2,459Income tax expense
    
    
    410
    
    
    
    417
    
    
    
    950
    
    
    
    863Net income
    
    $
    943
    
    
    $
    832
    
    
    $
    1,859
    
    
    $
    1,596Average shares outstanding
    
    
    4,459,710
    
    
    
    4,602,331
    
    
    
    4,476,523
    
    
    
    4,600,241Common stock equivalents
    
    
    22,093
    
    
    
    28,088
    
    
    
    23,551
    
    
    
    29,385Average diluted shares outstanding
    
    
    4,481,803
    
    
    
    4,630,419
    
    
    
    4,500,074
    
    
    
    4,629,626Basic earnings per share
    
    $
    0.21
    
    
    $
    0.18
    
    
    $
    0.41
    
    
    $
    0.35Diluted earnings per share
    
    $
    0.21
    
    
    $
    0.18
    
    
    $
    0.41
    
    
    $
    0.34
  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 (Loss)
    
    
    Equity(In thousands, except share data)Balance at December 31, 2007
    
    $
    452
    
    
    $
    60,382
    
    
    $
    (934
    )
    
    $
    398
    
    
    $
    60,298Net income
    
    
    
    
    
    
    
    
    
    
    1,859
    
    
    
    
    
    
    
    1,859Other comprehensive income:Unrealized loss on securities
available for sale, net (tax
effect $628)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (869
    )
    
    
    (869
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    990Stock-based compensation
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    32Common stock repurchased
(64,620 shares)
    
    
    (7
    )
    
    
    (1,028
    )
    
    
    
    
    
    
    
    
    
    
    (1,035
    )Exercise of stock options
and tax benefit (3,000 shares)
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    27Dividends declared and paid
($0.28 per share)
    
    
    
    
    
    
    
    
    
    
    (1,251
    )
    
    
    
    
    
    
    (1,251
    )Balance at June 30, 2008
    
    $
    445
    
    
    $
    59,413
    
    
    $
    (326
    )
    
    $
    (471
    )
    
    $
    59,061
  5




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##### Table of Contents



Six months ended June 30,2008
    
    
    2007(In thousands)Cash flows from operating activities:Net income
    
    $
    1,859
    
    
    $
    1,596Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses
    
    
    505
    
    
    
    215Net accretion of investment securities
    
    
    (283
    )
    
    
    (32
    )Depreciation and amortization of premises and equipment
    
    
    312
    
    
    
    303(Increase) decrease in accrued interest receivable
    
    
    (37
    )
    
    
    17Deferred income tax benefit
    
    
    (312
    )
    
    
    (6
    )Stock-based compensation
    
    
    32
    
    
    
    16Increase in cash surrender value of Bank-owned life insurance
    
    
    (192
    )
    
    
    (5
    )Decrease in other assets
    
    
    5
    
    
    
    586Increase (decrease) in other liabilities
    
    
    93
    
    
    
    (572
    )Net cash provided by operating activities
    
    
    1,982
    
    
    
    2,118Cash flows from investing activities:Proceeds from maturities of investment securities available for sale
    
    
    750
    
    
    
    5,009Purchases of investment securities available for sale
    
    
    (51,210
    )
    
    
    (24
    )Purchases of Bank-owned life insurance
    
    
    
    
    
    
    (5,000
    )Redemption of FHLBB stock
    
    
    
    
    
    
    65Purchases of FHLBB stock
    
    
    (1,498
    )
    
    
    (204
    )Principal payments of investment securities available for sale
    
    
    24,441
    
    
    
    12,089Increase in loans, net
    
    
    (52,275
    )
    
    
    (45,002
    )(Purchases) reductions of premises and equipment
    
    
    (1,004
    )
    
    
    35Net cash used in investing activities
    
    
    (80,796
    )
    
    
    (33,032
    )Cash flows from financing activities:Net increase in deposits
    
    
    50,197
    
    
    
    19,050Additions to long-term borrowed funds
    
    
    58,000
    
    
    
    119,000Payments on long-term borrowed funds
    
    
    (19,075
    )
    
    
    (70,071
    )Net (increase) decrease in short-term borrowed funds
    
    
    3,187
    
    
    
    (30,668
    )Increase in advance payments by borrowers
    
    
    (17
    )
    
    
    (9
    )Dividends paid
    
    
    (1,251
    )
    
    
    (1,288
    )Proceeds from exercise of stock options
    
    
    27
    
    
    
    108Tax benefit from exercise of stock options
    
    
    
    
    
    
    22Common stock repurchased
    
    
    (1,035
    )
    
    
    (154
    )Net cash provided by financing activities
    
    
    90,033
    
    
    
    35,990Net increase in cash and cash equivalents
    
    
    11,219
    
    
    
    5,076Cash and cash equivalents, beginning of period
    
    
    7,550
    
    
    
    18,767Cash and cash equivalents, end of period
    
    $
    18,769
    
    
    $
    23,843Cash paid during the period for:Interest on deposits
    
    $
    5,037
    
    
    $
    4,624Interest on borrowed funds
    
    
    5,617
    
    
    
    4,363Income taxes
    
    
    1,494
    
    
    
    863Supplemental noncash investing and financing activities:Transfers to other real estate owned
    
    
    692
    
    
    
    
  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
  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
    
    $
    18,113
    
    
    $
    236,857
    
    
    $
    431
    
    
    $
    255,401Non-recurring:Impaired loans
    
    
    
    
    
    
    
    
    
    
    1,313
    
    
    
    1,313Other real estate owned
    
    
    
    
    
    
    
    
    
    
    692
    
    
    
    692Total assets
    
    $
    18,113
    
    
    $
    236,857
    
    
    $
    2,436
    
    
    $
    257,406
  Six months ended June 30, 2008Investments(In thousands)Balance as of January 1, 2008
    
    $
    431Total realized/unrealized gains (losses)
included in net income
    
    
    Balance as of June 30, 2008
    
    $
    431Change 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
 Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133
 8




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##### Table of Contents



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
  Investments:
     10




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##### Table of Contents



6/30/08
    
    
    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
    
    $
    5,582
    
    
    $
    2
    
    
    $
    (8
    )
    
    $
    5,576
    
    
    $
    5,589
    
    
    $
    4
    
    
    $
    (52
    )
    
    $
    5,541Government-sponsored
enterprise obligations
    
    
    19,124
    
    
    
    53
    
    
    
    (41
    )
    
    
    19,136
    
    
    
    15,748
    
    
    
    95
    
    
    
    (33
    )
    
    
    15,810U.S. Treasury and government
sponsored enterprise obligations
    
    
    24,706
    
    
    
    55
    
    
    
    (49
    )
    
    
    24,712
    
    
    
    21,337
    
    
    
    99
    
    
    
    (85
    )
    
    
    21,351Mortgage-backed securities
    
    
    161,562
    
    
    
    1,018
    
    
    
    (980
    )
    
    
    161,600
    
    
    
    134,969
    
    
    
    2,208
    
    
    
    (474
    )
    
    
    136,703Collateralized mortgage obligations
    
    
    49,937
    
    
    
    251
    
    
    
    (336
    )
    
    
    49,852
    
    
    
    60,660
    
    
    
    169
    
    
    
    (682
    )
    
    
    60,147Collateralized mortgage obligations
and mortgage-backed securities
    
    
    211,499
    
    
    
    1,269
    
    
    
    (1,316
    )
    
    
    211,452
    
    
    
    195,629
    
    
    
    2,377
    
    
    
    (1,156
    )
    
    
    196,850Corporate obligations
    
    
    6,402
    
    
    
    
    
    
    
    (133
    )
    
    
    6,269
    
    
    
    6,373
    
    
    
    30
    
    
    
    (583
    )
    
    
    5,820Mutual funds
    
    
    1,000
    
    
    
    
    
    
    
    (55
    )
    
    
    945
    
    
    
    1,000
    
    
    
    
    
    
    
    (41
    )
    
    
    959Equity securities
    
    
    12,580
    
    
    
    
    
    
    
    (557
    )
    
    
    12,023
    
    
    
    5,546
    
    
    
    70
    
    
    
    
    
    
    
    5,616Corporate obligations and
other investment securities
    
    
    19,982
    
    
    
    
    
    
    
    (745
    )
    
    
    19,237
    
    
    
    12,919
    
    
    
    100
    
    
    
    (624
    )
    
    
    12,395Total investment securities
available for sale
    
    $
    256,187
    
    
    $
    1,324
    
    
    $
    (2,110
    )
    
    $
    255,401
    
    
    $
    229,885
    
    
    $
    2,576
    
    
    $
    (1,865
    )
    
    $
    230,596
 Loans:
   6/30/08
    
    
    12/31/07(In thousands)Residential mortgage loans
    
    $
    100,176
    
    
    $
    79,743Home equity lines and loans
    
    
    22,693
    
    
    
    23,046Consumer loans
    
    
    918
    
    
    
    1,007Total retail loans
    
    
    123,787
    
    
    
    103,796Construction loans
    
    
    55,450
    
    
    
    47,885Commercial real estate loans
    
    
    205,543
    
    
    
    177,968Commercial loans
    
    
    24,839
    
    
    
    28,464Total corporate loans
    
    
    285,832
    
    
    
    254,317Total loans
    
    
    409,619
    
    
    
    358,113Allowance for loan losses
    
    
    (5,238
    )
    
    
    (4,810
    )Total loans, net
    
    $
    404,381
    
    
    $
    353,303
 11




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##### Table of Contents



Allowance For Loan Losses:
  Three months ended
    
    
    Six months ended6/30/08
    
    
    6/30/07
    
    
    6/30/08
    
    
    6/30/07(In thousands)Beginning balance
    
    $
    4,874
    
    
    $
    4,366
    
    
    $
    4,810
    
    
    $
    4,309Provision for loan losses
    
    
    400
    
    
    
    155
    
    
    
    505
    
    
    
    215Recoveries on loans previously charged-off
    
    
    1
    
    
    
    2
    
    
    
    2
    
    
    
    7Loans charged-off
    
    
    (37
    )
    
    
    (6
    )
    
    
    (79
    )
    
    
    (14
    )Ending balance
    
    $
    5,238
    
    
    $
    4,517
    
    
    $
    5,238
    
    
    $
    4,517
   Risk Assets:
    6/30/08
    
    
    12/31/07
    
    
    6/30/07(Dollars in thousands)Non-performing loans
    
    $
    1,455
    
    
    $
    1,523
    
    
    $
    153Other real estate owned
    
    
    692
    
    
    
    
    
    
    
    Total risk assets
    
    $
    2,147
    
    
    $
    1,523
    
    
    $
    153Risk assets as a percent of total loans and OREO
    
    
    0.52
    %
    
    
    0.43
    %
    
    
    0.05
    %Risk assets as a percent of total assets
    
    
    0.30
    %
    
    
    0.24
    %
    
    
    0.03
    %
 12




---



##### Table of Contents



Deposits:
   6/30/08
    
    
    12/31/07(In thousands)NOW accounts
    
    $
    18,551
    
    
    $
    17,877Demand deposit accounts
    
    
    32,591
    
    
    
    28,851Savings accounts
    
    
    41,196
    
    
    
    28,452Money market accounts
    
    
    85,296
    
    
    
    74,621Core deposits
    
    
    177,634
    
    
    
    149,801Brokered certificates of deposit
    
    
    20,461
    
    
    
    5,461Certificates of deposit
    
    
    174,185
    
    
    
    166,821Term deposits
    
    
    194,646
    
    
    
    172,282Total deposits
    
    $
    372,280
    
    
    $
    322,083
 Borrowed Funds:
   6/30/08
    
    
    12/31/07(In thousands)Long-term borrowed funds:FHLBB long-term advances
    
    $
    226,303
    
    
    $
    202,378Wholesale repurchase agreements
    
    
    40,000
    
    
    
    25,000266,303
    
    
    
    227,378Short-term borrowed funds:FHLBB Ideal Way advances
    
    
    
    
    
    
    800FHLBB short-term advances
    
    
    6,000
    
    
    
    Customer repurchase agreements
    
    
    5,160
    
    
    
    7,17311,160
    
    
    
    7,973Total borrowed funds
    
    $
    277,463
    
    
    $
    235,351
 13




---



##### Table of Contents



RESULTS OF OPERATIONS
 THREE MONTHS ENDED JUNE 30, 2008 AND 2007
 SUMMARY
  Net Interest Income From Operations:
  Interest Income:
    Interest Expense:
    14




---



##### Table of Contents



Provision for Loan Losses:
  Non-Interest Income:
  Non-Interest Expense:
  Income Taxes:
  Change in Massachusetts Tax Rates:
  15




---



##### Table of Contents



Three months ended
    
    
    Three months ended6/30/08
    
    
    6/30/07Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    InterestBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)AssetsInvestment securities:Short-term investments
    
    $
    11,547
    
    
    $
    53
    
    
    
    1.85
    %
    
    $
    14,603
    
    
    $
    190
    
    
    
    5.22
    %U. S. Treasury and government-
sponsored enterprise obligations
    
    
    24,997
    
    
    
    252
    
    
    
    4.05
    
    
    
    37,732
    
    
    
    370
    
    
    
    3.93Corporate and other
investment securities
    
    
    30,944
    
    
    
    447
    
    
    
    5.81
    
    
    
    18,876
    
    
    
    280
    
    
    
    5.95Collateralized mortgage
obligations and mortgage-backed securities
    
    
    214,700
    
    
    
    2,759
    
    
    
    5.17
    
    
    
    161,599
    
    
    
    1,962
    
    
    
    4.87Total investment securities
    
    
    282,188
    
    
    
    3,511
    
    
    
    5.00
    
    
    
    232,810
    
    
    
    2,802
    
    
    
    4.83Loans:Residential real estate
    
    
    93,086
    
    
    
    1,306
    
    
    
    5.64
    
    
    
    71,270
    
    
    
    1,003
    
    
    
    5.64Equity
    
    
    22,564
    
    
    
    291
    
    
    
    5.19
    
    
    
    20,187
    
    
    
    322
    
    
    
    6.40Consumer
    
    
    951
    
    
    
    16
    
    
    
    6.77
    
    
    
    849
    
    
    
    14
    
    
    
    6.61Total retail loans
    
    
    116,601
    
    
    
    1,613
    
    
    
    5.56
    
    
    
    92,306
    
    
    
    1,339
    
    
    
    5.82Construction
    
    
    52,068
    
    
    
    808
    
    
    
    6.24
    
    
    
    53,210
    
    
    
    1,225
    
    
    
    9.23Commercial real estate
    
    
    192,564
    
    
    
    3,237
    
    
    
    6.76
    
    
    
    152,448
    
    
    
    2,770
    
    
    
    7.29Commercial
    
    
    25,822
    
    
    
    391
    
    
    
    6.09
    
    
    
    18,465
    
    
    
    375
    
    
    
    8.15Total corporate loans
    
    
    270,454
    
    
    
    4,436
    
    
    
    6.60
    
    
    
    224,123
    
    
    
    4,370
    
    
    
    7.82Total loans
    
    
    387,055
    
    
    
    6,049
    
    
    
    6.29
    
    
    
    316,429
    
    
    
    5,709
    
    
    
    7.24Total interest-earning assets
    
    
    669,243
    
    
    
    9,560
    
    
    
    5.75
    %
    
    
    549,239
    
    
    
    8,511
    
    
    
    6.22
    %Allowance for loan losses
    
    
    (4,915
    )
    
    
    
    
    
    
    
    
    
    
    (4,401
    )Other assets
    
    
    26,551
    
    
    
    
    
    
    
    
    
    
    
    16,742Total assets
    
    $
    690,879
    
    
    
    
    
    
    
    
    
    
    $
    561,580Liabilities and Stockholders
EquityDeposits:NOW and super NOW accounts
    
    $
    18,175
    
    
    $
    9
    
    
    
    0.20
    %
    
    $
    18,567
    
    
    $
    8
    
    
    
    0.17
    %Regular savings accounts
    
    
    37,513
    
    
    
    105
    
    
    
    1.13
    
    
    
    31,848
    
    
    
    39
    
    
    
    0.49Money market accounts
    
    
    77,978
    
    
    
    412
    
    
    
    2.13
    
    
    
    73,849
    
    
    
    557
    
    
    
    3.03Certificates of deposit
and escrow
    
    
    185,723
    
    
    
    1,907
    
    
    
    4.13
    
    
    
    152,343
    
    
    
    1,805
    
    
    
    4.75Total interest-bearing deposits
    
    
    319,389
    
    
    
    2,433
    
    
    
    3.06
    
    
    
    276,607
    
    
    
    2,409
    
    
    
    3.49Borrowed funds:Long-term borrowed funds
    
    
    269,173
    
    
    
    2,861
    
    
    
    4.27
    
    
    
    179,658
    
    
    
    2,097
    
    
    
    4.68Short-term borrowed funds
    
    
    9,703
    
    
    
    41
    
    
    
    1.70
    
    
    
    13,847
    
    
    
    161
    
    
    
    4.66Total borrowed funds
    
    
    278,876
    
    
    
    2,902
    
    
    
    4.19
    
    
    
    193,505
    
    
    
    2,258
    
    
    
    4.68Total interest-bearing liabilities
    
    
    598,265
    
    
    
    5,335
    
    
    
    3.59
    %
    
    
    470,112
    
    
    
    4,667
    
    
    
    3.98
    %Non-interest-bearing deposits
    
    
    29,185
    
    
    
    
    
    
    
    
    
    
    
    29,809Other liabilities
    
    
    2,840
    
    
    
    
    
    
    
    
    
    
    
    2,873Total liabilities
    
    
    630,290
    
    
    
    
    
    
    
    
    
    
    
    502,794Stockholders equity
    
    
    60,589
    
    
    
    
    
    
    
    
    
    
    
    58,786Total liabilities and
stockholders equity
    
    $
    690,879
    
    
    
    
    
    
    
    
    
    
    $
    561,580Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.16
    %
    
    
    
    
    
    
    
    
    
    
    2.24
    %Net interest income
    
    
    
    
    
    $
    4,225
    
    
    
    
    
    
    
    
    
    
    $
    3,844Net interest margin on average
earning assets
    
    
    
    
    
    
    
    
    
    
    2.54
    %
    
    
    
    
    
    
    
    
    
    
    2.81
    %
 16




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##### Table of Contents



SIX MONTHS ENDED JUNE 30, 2008 AND 2007
 SUMMARY
  Net Interest Income From Operations:
  Interest Income:
    Interest Expense:
    17




---



##### Table of Contents



Provision for Loan Losses:
  Non-Interest Income:
  Non-Interest Expense:
  Income Taxes:
  Change in Massachusetts Tax Rates:
  18




---



##### Table of Contents



Six months ended
    
    
    Six months ended6/30/08
    
    
    6/30/07Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    InterestBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)AssetsInvestment securities:Short-term investments
    
    $
    9,579
    
    
    $
    112
    
    
    
    2.35
    %
    
    $
    11,920
    
    
    $
    312
    
    
    
    5.28
    %U. S. Treasury and government-
sponsored enterprise obligations
    
    
    24,213
    
    
    
    497
    
    
    
    4.13
    
    
    
    39,042
    
    
    
    762
    
    
    
    3.94Corporate and other
investment securities
    
    
    27,259
    
    
    
    824
    
    
    
    6.08
    
    
    
    18,869
    
    
    
    552
    
    
    
    5.90Collateralized mortgage
obligations and mortgage-backed securities
    
    
    209,497
    
    
    
    5,343
    
    
    
    5.13
    
    
    
    164,319
    
    
    
    3,972
    
    
    
    4.87Total investment securities
    
    
    270,548
    
    
    
    6,776
    
    
    
    5.04
    
    
    
    234,150
    
    
    
    5,598
    
    
    
    4.82Loans:Residential real estate
    
    
    87,826
    
    
    
    2,467
    
    
    
    5.65
    
    
    
    70,870
    
    
    
    1,988
    
    
    
    5.66Equity
    
    
    22,504
    
    
    
    612
    
    
    
    5.47
    
    
    
    20,110
    
    
    
    629
    
    
    
    6.31Consumer
    
    
    953
    
    
    
    34
    
    
    
    7.17
    
    
    
    880
    
    
    
    30
    
    
    
    6.87Total retail loans
    
    
    111,283
    
    
    
    3,113
    
    
    
    5.63
    
    
    
    91,860
    
    
    
    2,647
    
    
    
    5.81Construction
    
    
    48,917
    
    
    
    1,639
    
    
    
    6.74
    
    
    
    49,736
    
    
    
    2,303
    
    
    
    9.34Commercial real estate
    
    
    187,680
    
    
    
    6,443
    
    
    
    6.90
    
    
    
    148,733
    
    
    
    5,402
    
    
    
    7.32Commercial
    
    
    26,861
    
    
    
    872
    
    
    
    6.53
    
    
    
    16,041
    
    
    
    654
    
    
    
    8.22Total corporate loans
    
    
    263,458
    
    
    
    8,954
    
    
    
    6.83
    
    
    
    214,510
    
    
    
    8,359
    
    
    
    7.86Total loans
    
    
    374,741
    
    
    
    12,067
    
    
    
    6.48
    
    
    
    306,370
    
    
    
    11,006
    
    
    
    7.24Total interest-earning assets
    
    
    645,289
    
    
    
    18,843
    
    
    
    5.87
    %
    
    
    540,520
    
    
    
    16,604
    
    
    
    6.19
    %Allowance for loan losses
    
    
    (4,882
    )
    
    
    
    
    
    
    
    
    
    
    (4,364
    )Other assets
    
    
    25,510
    
    
    
    
    
    
    
    
    
    
    
    16,513Total assets
    
    $
    665,917
    
    
    
    
    
    
    
    
    
    
    $
    552,669Liabilities and
Stockholders EquityDeposits:NOW and super NOW accounts
    
    $
    17,697
    
    
    $
    17
    
    
    
    0.19
    %
    
    $
    18,178
    
    
    $
    16
    
    
    
    0.18
    %Regular savings accounts
    
    
    33,544
    
    
    
    149
    
    
    
    0.89
    
    
    
    32,368
    
    
    
    80
    
    
    
    0.50Money market accounts
    
    
    76,829
    
    
    
    943
    
    
    
    2.47
    
    
    
    73,628
    
    
    
    1,082
    
    
    
    2.96Certificates of deposit
and escrow
    
    
    179,966
    
    
    
    3,937
    
    
    
    4.40
    
    
    
    149,497
    
    
    
    3,446
    
    
    
    4.65Total interest-bearing deposits
    
    
    308,036
    
    
    
    5,046
    
    
    
    3.29
    
    
    
    273,671
    
    
    
    4,624
    
    
    
    3.41Borrowed funds:Long-term borrowed funds
    
    
    257,164
    
    
    
    5,606
    
    
    
    4.38
    
    
    
    164,291
    
    
    
    3,782
    
    
    
    4.64Short-term borrowed funds
    
    
    8,309
    
    
    
    78
    
    
    
    1.89
    
    
    
    23,590
    
    
    
    581
    
    
    
    4.97Total borrowed funds
    
    
    265,473
    
    
    
    5,684
    
    
    
    4.31
    
    
    
    187,881
    
    
    
    4,363
    
    
    
    4.68Total interest-bearing liabilities
    
    
    573,509
    
    
    
    10,730
    
    
    
    3.76
    %
    
    
    461,552
    
    
    
    8,987
    
    
    
    3.93
    %Non-interest-bearing deposits
    
    
    28,576
    
    
    
    
    
    
    
    
    
    
    
    29,449Other liabilities
    
    
    3,008
    
    
    
    
    
    
    
    
    
    
    
    3,290Total liabilities
    
    
    605,093
    
    
    
    
    
    
    
    
    
    
    
    494,291Stockholders equity
    
    
    60,824
    
    
    
    
    
    
    
    
    
    
    
    58,378Total liabilities and
stockholders equity
    
    $
    665,917
    
    
    
    
    
    
    
    
    
    
    $
    552,669Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.11
    %
    
    
    
    
    
    
    
    
    
    
    2.26
    %Net interest income
    
    
    
    
    
    $
    8,113
    
    
    
    
    
    
    
    
    
    
    $
    7,617Net interest margin on
average earning assets
    
    
    
    
    
    
    
    
    
    
    2.53
    %
    
    
    
    
    
    
    
    
    
    
    2.84
    %
 19




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES:
         
 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  
 ITEM 4.T: CONTROLS AND PROCEDURES
  20




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##### Table of Contents



21




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##### 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.
    22




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##### Table of Contents



The Company may need to recognize a significant 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) if the fair values of those securities do not
recover in the future.
   23




---



##### Table of Contents



(a)
    
    None.(b)
    
    None.(c)
    
    The following table sets forth information with respect to any purchase made by or on
behalf of LSB Corporation or any affiliated purchaser, as defined in 204.10b-18(a)(3)
under the Securities Exchange Act of 1934, of shares of LSB Corporation common stock during
the indicated periods:
 Issuer Purchases of Equity SecuritiesTotal number of shares
    
    
    Maximum number ofWeighted
    
    
    purchased as part of
    
    
    shares that may yet beTotal number of
    
    
    average price paid
    
    
    publicly announced
    
    
    purchased under the2008
    
    shares purchased
    
    
    per share
    
    
    plans or programs
    
    
    plans or program (1)Apr.  Apr. 30
    
    
    18,000
    
    
    $
    15.73
    
    
    
    18,000
    
    
    
    75,024May 1  May 31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,024Jun. 1  Jun. 30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,024Total
    
    
    18,000
    
    
    $
    15.73
    
    
    
    18,000
    
    
    
    75,024
 
 (1)
    
    On April 26, 2007, the Company announced a common stock repurchase program to repurchase up to
230,000 shares. During 2007, 90,356 shares were repurchased. The Company has placed no deadline
on the duration of the repurchase program. 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 six
months of 2008. Excluding the ESOP shares, there were no shares purchased other than disclosed
above. 
   
   
  (a)
    
    None(b)
    
    None
 
  Number
    
    Description31.1
    
    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.
 24




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##### Table of Contents



LSB CORPORATIONAugust 12, 2008
    /s/ Gerald T. MulliganGerald T. MulliganPresident and
Chief Executive OfficerAugust 12, 2008
    /s/ Diane L. WalkerDiane L. WalkerExecutive Vice President, Treasurer and
Chief Financial Officer 25




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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
    
    
    2731.2
    
    Certification of Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    2832.1
    
    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
    
    
    2932.2
    
    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
    
    
    30
 26