##### 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, 2006
 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
  þ o
  o o þ
  o þ
  Class
    
    Outstanding as of August 2, 2006Common Stock, par value $.10 per share
    
    4,548,867 shares




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##### Table of Contents



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
    
    
    7-10ITEM 2
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    10-22ITEM 3
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
    
    22ITEM 4
    
    CONTROLS AND PROCEDURES
    
    
    22PART II  OTHER INFORMATIONITEM 1
    
    LEGAL PROCEEDINGS
    
    
    23ITEM 1A
    
    RISK FACTORS
    
    
    23ITEM 2
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    23ITEM 3
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    23ITEM 4
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    23ITEM 5
    
    OTHER INFORMATION
    
    
    23ITEM 6
    
    EXHIBITS
    
    
    24SIGNATURES
    
    
    25EXHIBIT INDEX
    
    
    26Ex-10.1 Special Speration Plan as of August 10, 2006Ex-10.2 Special Termination Agreement / Gerald T. MulliganEx-10.3 Special Termination Agreement / Michael J. EckerEx-10.4 Special Termination Agreement / Stephen B. JonesEx-10.5 Special Termination Agreement / Diane L. WalkerEx-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEOEx-32.2 Section 906 Certification of CFO
 2




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##### Table of Contents



PART 1  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
  
   June 30,
    
    
    December 31,2006
    
    
    2005(In thousands, except share data)ASSETSAssets:Cash and due from banks
    
    $
    9,073
    
    
    $
    10,489Federal funds sold
    
    
    7,559
    
    
    
    198Total cash and cash equivalents
    
    
    16,632
    
    
    
    10,687Investment securities held to maturity (market value of
$208,615 in 2005)
    
    
    
    
    
    
    213,683Investment securities available for sale (amortized cost of
$239,500 in 2006 and $47,554 in 2005)
    
    
    232,305
    
    
    
    46,363Federal Home Loan Bank stock, at cost
    
    
    9,359
    
    
    
    10,097Loans, net of allowance for loan losses
    
    
    243,819
    
    
    
    230,485Bank premises and equipment
    
    
    3,370
    
    
    
    3,251Accrued interest receivable
    
    
    2,022
    
    
    
    2,458Current income tax receivable
    
    
    536
    
    
    
    Deferred income tax asset
    
    
    6,401
    
    
    
    3,446Other assets
    
    
    1,441
    
    
    
    1,330Total assets
    
    $
    515,885
    
    
    $
    521,800LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Deposits
    
    $
    304,882
    
    
    $
    303,087Borrowed funds
    
    
    150,856
    
    
    
    153,380Advance payments by borrowers for taxes and insurance
    
    
    497
    
    
    
    506Other liabilities
    
    
    5,467
    
    
    
    4,905Total liabilities
    
    
    461,702
    
    
    
    461,878Stockholders 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;
4,548,867 and 4,464,033 shares issued and outstanding at
June 30, 2006 and December 31, 2005, respectively
    
    
    455
    
    
    
    446Additional paid-in capital
    
    
    60,807
    
    
    
    59,856Retained earnings (accumulated deficit)
    
    
    (2,620
    )
    
    
    326Accumulated other comprehensive loss, net of tax
    
    
    (4,459
    )
    
    
    (706
    )Total stockholders equity
    
    
    54,183
    
    
    
    59,922Total liabilities and stockholders equity
    
    $
    515,885
    
    
    $
    521,800
  3




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##### Table of Contents



Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except share data)Interest and dividend income:Loans
    
    $
    4,277
    
    
    $
    3,705
    
    
    $
    8,226
    
    
    $
    7,277Investment securities held to maturity
    
    
    
    
    
    
    2,144
    
    
    
    
    
    
    
    4,058Investment securities available for sale
    
    
    2,661
    
    
    
    516
    
    
    
    5,100
    
    
    
    1,040Federal Home Loan Bank stock
    
    
    8
    
    
    
    107
    
    
    
    131
    
    
    
    191Short term interest income
    
    
    101
    
    
    
    23
    
    
    
    126
    
    
    
    38Total interest and dividend income
    
    
    7,047
    
    
    
    6,495
    
    
    
    13,583
    
    
    
    12,604Interest expense:Deposits
    
    
    1,702
    
    
    
    1,190
    
    
    
    3,248
    
    
    
    2,256Borrowed funds
    
    
    2,042
    
    
    
    1,774
    
    
    
    3,737
    
    
    
    3,263Total interest expense
    
    
    3,744
    
    
    
    2,964
    
    
    
    6,985
    
    
    
    5,519Net interest income
    
    
    3,303
    
    
    
    3,531
    
    
    
    6,598
    
    
    
    7,085Provision for loan losses
    
    
    30
    
    
    
    
    
    
    
    30
    
    
    
    Net interest income after provision for loan losses
    
    
    3,273
    
    
    
    3,531
    
    
    
    6,568
    
    
    
    7,085Non-interest income (loss):Loan servicing fees
    
    
    34
    
    
    
    38
    
    
    
    41
    
    
    
    76Deposit account fees
    
    
    189
    
    
    
    212
    
    
    
    398
    
    
    
    419Gain on sales of mortgage loans, net
    
    
    3
    
    
    
    11
    
    
    
    7
    
    
    
    22Loss on sales of investment securities
    
    
    (2,417
    )
    
    
    
    
    
    
    (2,417
    )
    
    
    Other income
    
    
    117
    
    
    
    126
    
    
    
    227
    
    
    
    235Total non-interest income (loss)
    
    
    (2,074
    )
    
    
    387
    
    
    
    (1,744
    )
    
    
    752Non-interest expense:Salaries and employee benefits
    
    
    1,936
    
    
    
    1,608
    
    
    
    4,004
    
    
    
    3,184Occupancy and equipment expenses
    
    
    494
    
    
    
    224
    
    
    
    823
    
    
    
    479Data processing expenses
    
    
    263
    
    
    
    217
    
    
    
    496
    
    
    
    438Marketing expenses
    
    
    417
    
    
    
    89
    
    
    
    455
    
    
    
    160Professional expenses
    
    
    201
    
    
    
    192
    
    
    
    364
    
    
    
    296Other expenses
    
    
    838
    
    
    
    430
    
    
    
    1,231
    
    
    
    784Total non-interest expenses
    
    
    4,149
    
    
    
    2,760
    
    
    
    7,373
    
    
    
    5,341Income (loss) before income tax expense (benefit)
    
    
    (2,950
    )
    
    
    1,158
    
    
    
    (2,549
    )
    
    
    2,496Income tax expense (benefit)
    
    
    (1,008
    )
    
    
    400
    
    
    
    (867
    )
    
    
    879Net income (loss)
    
    $
    (1,942
    )
    
    $
    758
    
    
    $
    (1,682
    )
    
    $
    1,617Average shares outstanding
    
    
    4,539,834
    
    
    
    4,423,467
    
    
    
    4,518,045
    
    
    
    4,394,673Common stock equivalents
    
    
    50,449
    
    
    
    82,011
    
    
    
    54,959
    
    
    
    124,442Average diluted shares outstanding
    
    
    4,590,283
    
    
    
    4,505,478
    
    
    
    4,573,004
    
    
    
    4,519,115Basic earnings (loss) per share
    
    $
    (0.43
    )
    
    $
    0.17
    
    
    $
    (0.37
    )
    
    $
    0.37Diluted earnings (loss) per share
    
    $
    (0.42
    )
    
    $
    0.17
    
    
    $
    (0.37
    )
    
    $
    0.36
  4




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##### Table of Contents



(Accumulated
    
    
    AccumulatedAdditional
    
    
    Deficit)/
    
    
    Other
    
    
    TotalCommon
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    Equity(In thousands, except per share data)Balance at December 31, 2004
    
    $
    434
    
    
    $
    59,145
    
    
    $
    (1,347
    )
    
    $
    (394
    )
    
    $
    57,838Net income
    
    
    
    
    
    
    
    
    
    
    4,157
    
    
    
    
    
    
    
    4,157Other comprehensive income:Unrealized loss on securities
available for sale, net (tax effect $211)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (312
    )
    
    
    (312
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,845Exercise of stock options
    
    
    12
    
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    512Tax benefit of stock options exercised
    
    
    
    
    
    
    211
    
    
    
    
    
    
    
    
    
    
    
    211Dividends declared and paid
($0.56 per share)
    
    
    
    
    
    
    
    
    
    
    (2,484
    )
    
    
    
    
    
    
    (2,484
    )Balance at December 31, 2005
    
    $
    446
    
    
    $
    59,856
    
    
    $
    326
    
    
    $
    (706
    )
    
    $
    59,922
 (Accumulated
    
    
    AccumulatedAdditional
    
    
    Deficit)/
    
    
    Other
    
    
    TotalCommon
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    Equity(In thousands, except per share data)Balance at December 31, 2005
    
    $
    446
    
    
    $
    59,856
    
    
    $
    326
    
    
    $
    (706
    )
    
    $
    59,922Net income (loss)
    
    
    
    
    
    
    
    
    
    
    (1,682
    )
    
    
    
    
    
    
    (1,682
    )Other comprehensive income:Unrealized loss on securities
available for sale, net (tax effect $2,251)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,753
    )
    
    
    (3,753
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,435
    )Stock-based compensation
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    64Exercise of stock options
    
    
    9
    
    
    
    830
    
    
    
    
    
    
    
    
    
    
    
    839Tax benefit of stock options exercised
    
    
    
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    57Dividends declared and paid
($0.28 per share)
    
    
    
    
    
    
    
    
    
    
    (1,264
    )
    
    
    
    
    
    
    (1,264
    )Balance at June 30, 2006
    
    $
    455
    
    
    $
    60,807
    
    
    $
    (2,620
    )
    
    $
    (4,459
    )
    
    $
    54,183
  5




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##### Table of Contents



Six Months Ended June 30,2006
    
    
    2005(In thousands)Cash flows from operating activities:Net income (loss)
    
    $
    (1,682
    )
    
    $
    1,617Adjustments to reconcile net income to net cash provided by
operating activities:Provision for loan loss
    
    
    30
    
    
    
    Gains on sales of mortgage loans
    
    
    (7
    )
    
    
    (22
    )Losses on sales of investment securities available for sale
    
    
    2,417
    
    
    
    Net amortization of investment securities
    
    
    562
    
    
    
    804Depreciation of premises and equipment
    
    
    402
    
    
    
    222Loans originated for sale
    
    
    (1,042
    )
    
    
    (2,930
    )Proceeds from sales of mortgage loans
    
    
    1,521
    
    
    
    2,340Decrease in accrued interest receivable
    
    
    436
    
    
    
    454Deferred income tax benefit
    
    
    (704
    )
    
    
    (221
    )Stock-based compensation
    
    
    64
    
    
    
    (Increase) decrease in other assets
    
    
    (647
    )
    
    
    455Decrease in advance payments by borrowers
    
    
    (9
    )
    
    
    (30
    )Increase (decrease) in other liabilities
    
    
    562
    
    
    
    (215
    )Net cash provided by operating activities
    
    
    1,903
    
    
    
    2,474Cash flows from investing activities:Proceeds from maturities of investment securities held to maturity
    
    
    2,900
    
    
    
    36,970Proceeds from maturities of investment securities available for sale
    
    
    10,000
    
    
    
    25,000Sales of investment securities available for sale
    
    
    78,457
    
    
    
    Purchases of investment securities held to maturity
    
    
    
    
    
    
    (55,494
    )Purchases of mortgage-backed securities held to maturity
    
    
    
    
    
    
    (22,654
    )Purchases of investment securities available for sale
    
    
    (20,265
    )
    
    
    (14,199
    )Purchases of mortgage-backed securities available for sale
    
    
    (63,545
    )
    
    
    Purchase of other equity securities available for sale
    
    
    (107
    )
    
    
    (72
    )Purchases of Federal Home Loan Bank stock
    
    
    
    
    
    
    (2,210
    )Redemption of FHLB stock
    
    
    738
    
    
    
    Principal payments of securities held to maturity
    
    
    4,680
    
    
    
    11,633Principal payments of securities available for sale
    
    
    6,638
    
    
    
    2,346Tax benefit from exercise of stock options
    
    
    
    
    
    
    211Increase in loans, net
    
    
    (13,836
    )
    
    
    (5,480
    )Purchases of Bank premises and equipment
    
    
    (521
    )
    
    
    (95
    )Net cash used in investing activities
    
    
    5,139
    
    
    
    (24,044
    )Cash flows from financing activities:Net (decrease) increase in deposits
    
    
    1,795
    
    
    
    8,036Additions to Federal Home Loan Bank advances
    
    
    20,000
    
    
    
    43,900Payments on Federal Home Loan Bank advances
    
    
    (50,273
    )
    
    
    (32,067
    )Net increase (decrease) in agreements to repurchase securities
    
    
    1,749
    
    
    
    (275
    )Net increase in other borrowed funds
    
    
    26,000
    
    
    
    7,000Dividends paid
    
    
    (1,264
    )
    
    
    (1,235
    )Proceeds from exercise of stock options
    
    
    839
    
    
    
    94Excess tax benefit from exercise of stock options
    
    
    57
    
    
    
    Net cash provided by financing activities
    
    
    (1,097
    )
    
    
    25,453Net increase in cash and cash equivalents
    
    
    5,945
    
    
    
    3,883Cash and cash equivalents, beginning of period
    
    
    10,687
    
    
    
    7,402Cash and cash equivalents, end of period
    
    $
    16,632
    
    
    $
    11,285Cash paid during the period for:Interest on deposits
    
    $
    3,247
    
    
    $
    2,263Interest on borrowed funds
    
    
    3,773
    
    
    
    3,204Income taxes
    
    
    891
    
    
    
    1,550Supplemental schedule of non-cash activities:Change in valuation of investment securities available for sale, net
    
    
    (3,753
    )
    
    
    (50
    )
  6




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##### Table of Contents



CumulativeAwards, Net ofAuthorized Option Awards
    
    Stock Awards
    
    Expirations1986 Plan
    
    
    720,500
    
    
    
    N/A
    
    
    
    430,2501997 Plan
    
    
    449,500
    
    
    
    N/A
    
    
    
    427,8502006 Plan
    
    
    400,000
    
    
    
    
    
    
    
    1,570,000
    
    
    
    
    
    
    
    858,100
  7




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##### Table of Contents



Accounting for Stock Issued
to Employees Accounting for Stock-Based Compensation
 Share-Based Payment
     8




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##### Table of Contents



Three months ended
    
    
    Six months ended6/30/05
    
    
    6/30/05(In thousands, except share data)Net income:As Reported
    
    $
    758
    
    
    $
    1,617Less: Pro forma stock based compensation cost (net of taxes)
    
    
    (30
    )
    
    
    (60
    )Pro forma
    
    $
    728
    
    
    $
    1,557Basic earnings per share:As Reported
    
    $
    0.17
    
    
    $
    0.37Pro forma
    
    
    0.16
    
    
    
    0.35Diluted earnings per share:As Reported
    
    $
    0.17
    
    
    $
    0.36Pro forma
    
    
    0.16
    
    
    
    0.35
   2006Weighted
    
    Wtd. Avg.
    
    AggregateAverage
    
    Remaining
    
    IntrinsicOption
    
    Exercise
    
    Contractual
    
    ValueShares
    
    Price ($)
    
    Term (years)
    
    ($000)Balance, January 1
    
    
    349,100
    
    
    $
    12.88
    
    
    
    5.4Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (103,025
    )
    
    $
    11.22
    
    
    
    5.7Forfeited
    
    
    (6,675
    )
    
    $
    16.77
    
    
    
    7.7Expired
    
    
    
    
    
    
    
    
    
    
    Balance, June 30
    
    
    239,400
    
    
    $
    13.48
    
    
    
    5.2
    
    
    $
    948Options exercisable at June 30
    
    
    219,825
    
    
    $
    13.18
    
    
    
    5.0
    
    
    $
    936Weighted average grant date fair
value of options granted
    
    
    
    
    
    
    
    
    
    
    
   Nonvested Shares Issued Under the PlansStock Options
    
    Restricted Stock AwardsWeighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageGrant Date
    
    
    
    
    
    Grant DateShares
    
    Fair Value
    
    Shares
    
    Fair ValueNonvested at January 1, 2006
    
    
    55,050
    
    
    $
    16.84
    
    
    
    
    
    
    $
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vested
    
    
    (28,800
    )
    
    $
    16.88
    
    
    
    
    
    
    
    Forfeited
    
    
    (6,675
    )
    
    $
    16.77
    
    
    
    
    
    
    
    Nonvested at June 30, 2006
    
    
    19,575
    
    
    $
    16.80
    
    
    
    
    
    
    $
    
 9




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##### Table of Contents



Three months ended
    
    
    Six months ended6/30/06
    
    
    6/30/05
    
    
    6/30/06
    
    
    6/30/05(In thousands)Service cost
    
    $
    89
    
    
    $
    86
    
    
    $
    177
    
    
    $
    173Interest cost
    
    
    120
    
    
    
    108
    
    
    
    240
    
    
    
    215Expected return on plan assets
    
    
    (145
    )
    
    
    (135
    )
    
    
    (290
    )
    
    
    (271
    )Net amortization and deferrals
    
    
    (1
    )
    
    
    (1
    )
    
    
    (2
    )
    
    
    (2
    )Net periodic pension cost
    
    $
    63
    
    
    $
    58
    
    
    $
    125
    
    
    $
    115
   
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
  Critical Accounting Policies & Estimates
  10




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##### Table of Contents



EXECUTIVE LEVEL OVERVIEW
      FINANCIAL CONDITION
 SUMMARY
  Investments:
    11




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##### Table of Contents



6/30/06
    
    
    12/31/05Amortized
    
    
    Unrealized
    
    
    Market
    
    
    Amortized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    Value
    
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)
    
    
    (In thousands)Investment securities
available for sale:U.S. treasury bonds
    
    $
    5,112
    
    
    $
    
    
    
    $
    (539
    )
    
    $
    4,573
    
    
    $
    5,119
    
    
    $
    
    
    
    $
    (350
    )
    
    $
    4,769Federal agency bonds
    
    
    41,024
    
    
    
    
    
    
    
    (987
    )
    
    
    40,037
    
    
    
    9,932
    
    
    
    
    
    
    
    (265
    )
    
    
    9,667U.S. treasury & federal
agency bonds
    
    
    46,136
    
    
    
    
    
    
    
    (1,526
    )
    
    
    44,610
    
    
    
    15,051
    
    
    
    
    
    
    
    (615
    )
    
    
    14,436Corporate bonds
    
    
    7,469
    
    
    
    2
    
    
    
    (68
    )
    
    
    7,403
    
    
    
    3,181
    
    
    
    
    
    
    
    (135
    )
    
    
    3,046Municipal bonds
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mutual funds
    
    
    1,000
    
    
    
    
    
    
    
    (74
    )
    
    
    926
    
    
    
    1,000
    
    
    
    
    
    
    
    (45
    )
    
    
    955Other investments/equity
securities
    
    
    284
    
    
    
    63
    
    
    
    
    
    
    
    347
    
    
    
    240
    
    
    
    
    
    
    
    (7
    )
    
    
    233Other investment securities
    
    
    10,253
    
    
    
    65
    
    
    
    (142
    )
    
    
    10,176
    
    
    
    4,421
    
    
    
    
    
    
    
    (187
    )
    
    
    4,234Asset-backed securities/CMO
    
    
    77,645
    
    
    
    1
    
    
    
    (2,511
    )
    
    
    75,135
    
    
    
    24,662
    
    
    
    9
    
    
    
    (342
    )
    
    
    24,329Mortgaged-backed securities
    
    
    105,466
    
    
    
    42
    
    
    
    (3,124
    )
    
    
    102,384
    
    
    
    3,420
    
    
    
    10
    
    
    
    (66
    )
    
    
    3,364ABS/CMO/MBS
    
    
    183,111
    
    
    
    43
    
    
    
    (5,635
    )
    
    
    177,519
    
    
    
    28,082
    
    
    
    19
    
    
    
    (408
    )
    
    
    27,693Total investment securities
available for sale
    
    $
    239,500
    
    
    $
    108
    
    
    $
    (7,303
    )
    
    $
    232,305
    
    
    $
    47,554
    
    
    $
    19
    
    
    $
    (1,210
    )
    
    $
    46,363Investment securities held
to maturity:U.S. treasury bonds
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Federal agency bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,017
    
    
    
    56
    
    
    
    (1,944
    )
    
    
    85,129U.S. treasury & federal
agency bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,017
    
    
    
    56
    
    
    
    (1,944
    )
    
    
    85,129Corporate bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,143
    
    
    
    11
    
    
    
    (280
    )
    
    
    7,874Commercial paper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,881
    
    
    
    
    
    
    
    
    
    
    
    2,881Municipal bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,526
    
    
    
    
    
    
    
    (14
    )
    
    
    1,512Mutual funds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other investments/equity
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,550
    
    
    
    11
    
    
    
    (294
    )
    
    
    12,267Asset-backed securities/CMO
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,415
    
    
    
    4
    
    
    
    (1,679
    )
    
    
    68,740Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,701
    
    
    
    40
    
    
    
    (1,262
    )
    
    
    42,479ABS/CMO/MBS
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114,116
    
    
    
    44
    
    
    
    (2,941
    )
    
    
    111,219Total investment securities held
to maturity
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    213,683
    
    
    $
    111
    
    
    $
    (5,179
    )
    
    $
    208,615
 Loans:
  12




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##### Table of Contents



6/30/06
    
    
    12/31/05(In thousands)Residential mortgage loans
    
    $
    65,096
    
    
    $
    62,659Equity loans
    
    
    12,392
    
    
    
    10,412Consumer loans
    
    
    558
    
    
    
    468Total retail loans
    
    
    78,046
    
    
    
    73,539Construction loans
    
    
    32,736
    
    
    
    24,137Commercial real estate loans
    
    
    128,737
    
    
    
    127,617Commercial loans
    
    
    8,484
    
    
    
    9,318Total corporate loans
    
    
    169,957
    
    
    
    161,072Total loans
    
    
    248,003
    
    
    
    234,611Allowance for loan losses
    
    
    (4,184
    )
    
    
    (4,126
    )Total loans, net
    
    $
    243,819
    
    
    $
    230,485
 Allowance For Loan Losses:
  Three months ended
    
    
    Six months ended6/30/06
    
    
    6/30/05
    
    
    6/30/06
    
    
    6/30/05(In thousands)Beginning balance
    
    $
    4,160
    
    
    $
    4,139
    
    
    $
    4,126
    
    
    $
    4,140Provision charged to operations
    
    
    30
    
    
    
    
    
    
    
    30
    
    
    
    Recoveries on loans previously charged-off
    
    
    2
    
    
    
    2
    
    
    
    40
    
    
    
    5Loans charged-off
    
    
    (8
    )
    
    
    (6
    )
    
    
    (12
    )
    
    
    (10
    )Ending balance
    
    $
    4,184
    
    
    $
    4,135
    
    
    $
    4,184
    
    
    $
    4,135
   Risk Assets:
  13




---



##### Table of Contents



6/30/06
    
    
    12/31/05
    
    
    6/30/05(Dollars in thousands)Non-performing loans
    
    $
    92
    
    
    $
    32
    
    
    $
    33Other real estate owned
    
    
    
    
    
    
    
    
    
    
    Total risk assets
    
    $
    92
    
    
    $
    32
    
    
    $
    33Risk assets as a percent of total loans
    
    
    0.04
    %
    
    
    0.01
    %
    
    
    0.01
    %Risk assets as a percent of total assets
    
    
    0.02
    %
    
    
    0.01
    %
    
    
    0.01
    %
 Deposits:
   6/30/06
    
    
    12/31/05(In thousands)NOW and Super NOW accounts
    
    $
    36,487
    
    
    $
    38,349Demand deposit accounts
    
    
    18,281
    
    
    
    18,912Savings accounts
    
    
    37,823
    
    
    
    41,941Money market investment accounts
    
    
    76,888
    
    
    
    76,594Certificates of deposit
    
    
    135,403
    
    
    
    127,291Total deposits
    
    $
    304,882
    
    
    $
    303,087
 Borrowings:
   6/30/06
    
    
    12/31/05(In thousands)Federal Home Loan Bank advances
    
    $
    91,588
    
    
    $
    121,861FHLB short-term borrowings
    
    
    53,000
    
    
    
    27,000Customer repurchase agreements
    
    
    6,268
    
    
    
    4,519Total borrowings
    
    $
    150,856
    
    
    $
    153,380
 14




---



##### Table of Contents



RESULTS OF OPERATIONS
 THREE MONTHS ENDED JUNE 30, 2006 AND 2005
 SUMMARY
  Net Interest Income From Operations:
  15




---



##### Table of Contents



Three months ended
    
    
    Three months ended6/30/06
    
    
    6/30/05Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    InterestBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)ASSETSInvestment securities:Short-term investments
    
    $
    7,971
    
    
    $
    101
    
    
    
    5.08
    %
    
    $
    2,963
    
    
    $
    22
    
    
    
    2.98
    %U. S. Government and
federal agency bonds
    
    
    81,359
    
    
    
    673
    
    
    
    3.32
    
    
    
    111,165
    
    
    
    829
    
    
    
    2.99Corporate and municipal bonds
and other securities
    
    
    25,092
    
    
    
    153
    
    
    
    2.45
    
    
    
    28,914
    
    
    
    270
    
    
    
    3.75Collateralized mortgage
obligations and mortgage-backed securities
    
    
    161,109
    
    
    
    1,843
    
    
    
    4.59
    
    
    
    163,137
    
    
    
    1,669
    
    
    
    4.10Total investment securities
    
    
    275,531
    
    
    
    2,770
    
    
    
    4.03
    
    
    
    306,179
    
    
    
    2,790
    
    
    
    3.65Loans:Residential real estate
    
    
    64,002
    
    
    
    875
    
    
    
    5.48
    
    
    
    60,463
    
    
    
    795
    
    
    
    5.27Equity
    
    
    11,081
    
    
    
    173
    
    
    
    6.26
    
    
    
    9,128
    
    
    
    115
    
    
    
    5.05Consumer
    
    
    550
    
    
    
    9
    
    
    
    6.56
    
    
    
    662
    
    
    
    10
    
    
    
    6.06Total retail loans
    
    
    75,633
    
    
    
    1,057
    
    
    
    5.61
    
    
    
    70,253
    
    
    
    920
    
    
    
    5.25Construction
    
    
    33,240
    
    
    
    753
    
    
    
    9.09
    
    
    
    17,828
    
    
    
    317
    
    
    
    7.13Commercial real estate
    
    
    128,832
    
    
    
    2,301
    
    
    
    7.16
    
    
    
    133,831
    
    
    
    2,267
    
    
    
    6.79Commercial
    
    
    8,259
    
    
    
    166
    
    
    
    8.06
    
    
    
    12,439
    
    
    
    201
    
    
    
    6.48Total corporate loans
    
    
    170,331
    
    
    
    3,220
    
    
    
    7.58
    
    
    
    164,098
    
    
    
    2,785
    
    
    
    6.81Total loans
    
    
    245,964
    
    
    
    4,277
    
    
    
    6.97
    
    
    
    234,351
    
    
    
    3,705
    
    
    
    6.34Total interest-earning assets
    
    
    521,495
    
    
    
    7,047
    
    
    
    5.42
    %
    
    
    540,530
    
    
    
    6,495
    
    
    
    4.82
    %Allowance for loan losses
    
    
    (4,174
    )
    
    
    
    
    
    
    
    
    
    
    (4,152
    )Other assets
    
    
    22,190
    
    
    
    
    
    
    
    
    
    
    
    18,375Total assets
    
    $
    539,511
    
    
    
    
    
    
    
    
    
    
    $
    554,753LIABILITIES AND STOCKHOLDERS
EQUITYDeposits:NOW and Super NOW accounts
    
    $
    35,544
    
    
    $
    11
    
    
    
    0.12
    %
    
    $
    38,812
    
    
    $
    12
    
    
    
    0.12
    %Regular savings accounts
    
    
    39,442
    
    
    
    49
    
    
    
    0.50
    
    
    
    46,138
    
    
    
    57
    
    
    
    0.50Money market investment
accounts
    
    
    79,102
    
    
    
    443
    
    
    
    2.25
    
    
    
    79,748
    
    
    
    325
    
    
    
    1.63Certificates of deposit
and escrow
    
    
    131,735
    
    
    
    1,199
    
    
    
    3.65
    
    
    
    119,610
    
    
    
    796
    
    
    
    2.67Total interest bearing deposits
    
    
    285,823
    
    
    
    1,702
    
    
    
    2.39
    
    
    
    284,308
    
    
    
    1,190
    
    
    
    1.68Borrowed funds:Other borrowed funds
    
    
    58,341
    
    
    
    711
    
    
    
    4.89
    
    
    
    75,349
    
    
    
    552
    
    
    
    2.94FHLB Advances
    
    
    116,874
    
    
    
    1,331
    
    
    
    4.57
    
    
    
    115,573
    
    
    
    1,222
    
    
    
    4.24Total borrowed funds
    
    
    175,215
    
    
    
    2,042
    
    
    
    4.67
    
    
    
    190,922
    
    
    
    1,774
    
    
    
    3.73Total interest bearing liabilities
    
    
    461,038
    
    
    
    3,744
    
    
    
    3.26
    %
    
    
    475,230
    
    
    
    2,964
    
    
    
    2.50
    %Non-interest bearing deposits
    
    
    17,202
    
    
    
    
    
    
    
    
    
    
    
    18,430Other liabilities
    
    
    4,512
    
    
    
    
    
    
    
    
    
    
    
    3,064Total liabilities
    
    
    482,752
    
    
    
    
    
    
    
    
    
    
    
    496,724Stockholders equity
    
    
    56,759
    
    
    
    
    
    
    
    
    
    
    
    58,029Total liabilities and
stockholders equity
    
    $
    539,511
    
    
    
    
    
    
    
    
    
    
    $
    554,753Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.16
    %
    
    
    
    
    
    
    
    
    
    
    2.32
    %Net interest income
    
    
    
    
    
    $
    3,303
    
    
    
    
    
    
    
    
    
    
    $
    3,531Net interest margin on average
earning assets
    
    
    
    
    
    
    
    
    
    
    2.54
    %
    
    
    
    
    
    
    
    
    
    
    2.62
    %
 16




---



##### Table of Contents



Interest Income:
    Interest Expense:
    Provision for Loan Losses:
  Non-Interest Income (Loss):
  17




---



##### Table of Contents



Non-Interest Expense:
  Income Taxes:
  SIX MONTHS ENDED JUNE 30, 2006 AND 2005
 SUMMARY
  Net Interest Income From Operations:
  18




---



##### Table of Contents



Six months ended
    
    
    Six months ended6/30/06
    
    
    6/30/05Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    InterestBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)ASSETSInvestment securities:Short-term investments
    
    $
    5,173
    
    
    $
    126
    
    
    
    4.91
    %
    
    $
    2,722
    
    
    $
    38
    
    
    
    2.82
    %U. S. Government and
federal agency bonds
    
    
    91,801
    
    
    
    1,480
    
    
    
    3.25
    
    
    
    120,352
    
    
    
    1,873
    
    
    
    3.14Corporate and municipal bonds
and other securities
    
    
    25,435
    
    
    
    390
    
    
    
    3.09
    
    
    
    27,811
    
    
    
    508
    
    
    
    3.68Collateralized mortgage
obligations and mortgage-backed securities
    
    
    153,141
    
    
    
    3,361
    
    
    
    4.43
    
    
    
    144,853
    
    
    
    2,908
    
    
    
    4.05Total investment securities
    
    
    275,550
    
    
    
    5,357
    
    
    
    3.92
    
    
    
    295,738
    
    
    
    5,327
    
    
    
    3.63Loans:Residential real estate
    
    
    63,563
    
    
    
    1,696
    
    
    
    5.38
    
    
    
    60,269
    
    
    
    1,578
    
    
    
    5.28Equity
    
    
    10,862
    
    
    
    333
    
    
    
    6.18
    
    
    
    8,931
    
    
    
    219
    
    
    
    4.94Consumer
    
    
    541
    
    
    
    17
    
    
    
    6.34
    
    
    
    684
    
    
    
    20
    
    
    
    5.90Total retail loans
    
    
    74,966
    
    
    
    2,046
    
    
    
    5.50
    
    
    
    69,884
    
    
    
    1,817
    
    
    
    5.24Construction
    
    
    30,050
    
    
    
    1,324
    
    
    
    8.89
    
    
    
    16,697
    
    
    
    576
    
    
    
    6.96Commercial real estate
    
    
    128,036
    
    
    
    4,518
    
    
    
    7.12
    
    
    
    133,750
    
    
    
    4,458
    
    
    
    6.72Commercial
    
    
    8,656
    
    
    
    338
    
    
    
    7.87
    
    
    
    13,703
    
    
    
    426
    
    
    
    6.27Total corporate loans
    
    
    166,742
    
    
    
    6,180
    
    
    
    7.47
    
    
    
    164,150
    
    
    
    5,460
    
    
    
    6.71Total loans
    
    
    241,708
    
    
    
    8,226
    
    
    
    6.86
    
    
    
    234,034
    
    
    
    7,277
    
    
    
    6.27Total interest-earning assets
    
    
    517,258
    
    
    
    13,583
    
    
    
    5.30
    %
    
    
    529,772
    
    
    
    12,604
    
    
    
    4.80
    %Allowance for loan losses
    
    
    (4,160
    )
    
    
    
    
    
    
    
    
    
    
    (4,153
    )Other assets
    
    
    19,686
    
    
    
    
    
    
    
    
    
    
    
    17,827Total assets
    
    $
    532,784
    
    
    
    
    
    
    
    
    
    
    $
    543,446LIABILITIES AND STOCKHOLDERS
EQUITYDeposits:NOW and Super NOW accounts
    
    $
    35,963
    
    
    $
    22
    
    
    
    0.12
    %
    
    $
    38,490
    
    
    $
    23
    
    
    
    0.12
    %Regular savings accounts
    
    
    40,223
    
    
    
    99
    
    
    
    0.50
    
    
    
    45,751
    
    
    
    112
    
    
    
    0.49Money market investment
accounts
    
    
    79,473
    
    
    
    873
    
    
    
    2.22
    
    
    
    80,829
    
    
    
    569
    
    
    
    1.42Certificates of deposit
and escrow
    
    
    129,765
    
    
    
    2,254
    
    
    
    3.50
    
    
    
    119,614
    
    
    
    1,552
    
    
    
    2.62Total interest bearing deposits
    
    
    285,424
    
    
    
    3,248
    
    
    
    2.29
    
    
    
    284,684
    
    
    
    2,256
    
    
    
    1.60Borrowed funds:Other borrowed funds
    
    
    45,962
    
    
    
    1,076
    
    
    
    4.72
    
    
    
    63,792
    
    
    
    868
    
    
    
    2.74FHLB Advances
    
    
    121,300
    
    
    
    2,661
    
    
    
    4.42
    
    
    
    116,487
    
    
    
    2,395
    
    
    
    4.15Total borrowed funds
    
    
    167,262
    
    
    
    3,737
    
    
    
    4.51
    
    
    
    180,279
    
    
    
    3,263
    
    
    
    3.65Total interest bearing liabilities
    
    
    452,686
    
    
    
    6,985
    
    
    
    3.11
    %
    
    
    464,963
    
    
    
    5,519
    
    
    
    2.39
    %Non-interest bearing deposits
    
    
    17,320
    
    
    
    
    
    
    
    
    
    
    
    17,333Other liabilities
    
    
    4,494
    
    
    
    
    
    
    
    
    
    
    
    3,214Total liabilities
    
    
    474,500
    
    
    
    
    
    
    
    
    
    
    
    485,510Stockholders equity
    
    
    58,284
    
    
    
    
    
    
    
    
    
    
    
    57,936Total liabilities and
stockholders equity
    
    $
    532,784
    
    
    
    
    
    
    
    
    
    
    $
    543,446Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.19
    %
    
    
    
    
    
    
    
    
    
    
    2.41
    %Net interest income
    
    
    
    
    
    $
    6,598
    
    
    
    
    
    
    
    
    
    
    $
    7,085Net interest margin on average
earning assets
    
    
    
    
    
    
    
    
    
    
    2.57
    %
    
    
    
    
    
    
    
    
    
    
    2.70
    %
 19




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##### Table of Contents



Interest Income:
    Interest Expense:
    Provision for Loan Losses:
  Non-Interest Income:
  Non-Interest Expense:
  20




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##### Table of Contents



Income Taxes:
  Liquidity and Capital Resources:
      21




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##### Table of Contents



ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  
 ITEM 4: CONTROLS AND PROCEDURES
   22




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##### Table of Contents



Special Termination Agreements
    Special Separation Plan
  23




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##### Table of Contents



Number
    
    Description10.1
    
    Special Separation Plan as of August 10, 2006.10.2
    
    Special Termination Agreement between LSB Corporation and Gerald T. Mulligan dated
August 10, 2006.10.3
    
    Special Termination Agreement between LSB Corporation and Michael J. Ecker dated
August 10, 2006.10.4
    
    Special Termination Agreement between LSB Corporation and Stephen B. Jones dated
August 10, 2006.10.5
    
    Special Termination Agreement between LSB Corporation and Diane L. Walker dated
August 10, 2006.31.1
    
    Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as added by
Section
906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
added by Section
906 of the Sarbanes-Oxley Act of 2002.
 24




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##### Table of Contents



LSB CORPORATIONAugust 11, 2006
    
    /s/ Gerald T. MulliganGerald T. MulliganPresident andChief Executive OfficerAugust 11, 2006
    
    /s/ Diane L. WalkerDiane L. WalkerSenior Vice PresidentChief Financial Officer
 25




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##### Table of Contents



LSB CORPORATION AND SUBSIDIARY
  
 EXHIBIT INDEX
 10.1
    
    Special Separation Plan as of August 10, 2006.10.2
    
    Special Termination Agreement between LSB Corporation and Gerald T. Mulligan
dated August 10, 2006.10.3
    
    Special Termination Agreement between LSB Corporation and Michael J. Ecker
dated August 10, 2006.10.4
    
    Special Termination Agreement between LSB Corporation and Stephen B. Jones
dated August 10, 2006.10.5
    
    Special Termination Agreement between LSB Corporation and Diane L. Walker
dated August 10, 2006.31.1
    
    Certification of Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
added by Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    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
 26