##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20529
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
 For the quarterly period ended September 30, 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
    
    04-3557612(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification Number)
 30 Massachusetts Avenue, North Andover, MA
    
    01845(Address of principal executive offices)
    
    (Zip Code)
 
 (978) 725-7500
  þ o
  o o þ
  o þ
  Class
    
    Outstanding as of November 2, 2006Common Stock, par value $.10 per share
    
    4,573,117 shares




---



##### 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
    
    
    7-11ITEM 2
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
    
    
    11-23ITEM 3
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
    
    23ITEM 4
    
    CONTROLS AND PROCEDURES
    
    
    23PART II  OTHER INFORMATIONITEM 1
    
    LEGAL PROCEEDINGS
    
    
    24ITEM 1A
    
    RISK FACTORS
    
    
    24ITEM 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 Certification of CEO Section 302EX-31.2 Certification of CFO Section 302EX-32.1 Certification of CEO Section 1350, as added by Section 906EX-32.2 Certification of CFO Section 1350, as added by Section 906
 2




---



##### Table of Contents



PART 1   FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 
 September 30,
    
    
    December 31,2006
    
    
    2005(In thousands, except share data)ASSETSAssets:Cash and due from banks
    
    $
    9,018
    
    
    $
    10,489Federal funds sold
    
    
    2,354
    
    
    
    198Total cash and cash equivalents
    
    
    11,372
    
    
    
    10,687Investment securities held to maturity (market value of
$208,615 in 2005)
    
    
    
    
    
    
    213,683Investment securities available for sale (amortized cost of
$231,701 in 2006 and $47,554 in 2005)
    
    
    228,384
    
    
    
    46,363Federal Home Loan Bank stock, at cost
    
    
    9,347
    
    
    
    10,097Loans, net of allowance for loan losses
    
    
    260,372
    
    
    
    230,485Bank premises and equipment
    
    
    3,665
    
    
    
    3,251Accrued interest receivable
    
    
    2,290
    
    
    
    2,458Current income tax receivable
    
    
    328
    
    
    
    Deferred income tax asset
    
    
    4,488
    
    
    
    3,446Other assets
    
    
    1,339
    
    
    
    1,330Total assets
    
    $
    521,585
    
    
    $
    521,800LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Deposits
    
    $
    301,810
    
    
    $
    303,087Borrowed funds
    
    
    157,377
    
    
    
    153,380Advance payments by borrowers for taxes and insurance
    
    
    636
    
    
    
    506Other liabilities
    
    
    4,650
    
    
    
    4,905Total liabilities
    
    
    464,473
    
    
    
    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;
4,573,117 and 4,464,033 shares issued and outstanding at
September 30, 2006 and December 31, 2005, respectively
    
    
    457
    
    
    
    446Additional paid-in capital
    
    
    61,190
    
    
    
    59,856Retained earnings (accumulated deficit)
    
    
    (2,449
    )
    
    
    326Accumulated other comprehensive loss, net of tax
    
    
    (2,086
    )
    
    
    (706
    )Total stockholders equity
    
    
    57,112
    
    
    
    59,922Total liabilities and stockholders equity
    
    $
    521,585
    
    
    $
    521,800
  3




---



##### Table of Contents



Three months ended
    
    
    Nine months endedSept. 30,
    
    
    Sept. 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except share data)Interest and dividend income:Loans
    
    $
    4,568
    
    
    $
    3,789
    
    
    $
    12,794
    
    
    $
    11,066Investment securities held to maturity
    
    
    
    
    
    
    2,078
    
    
    
    1,925
    
    
    
    6,136Investment securities available for sale
    
    
    2,631
    
    
    
    465
    
    
    
    5,805
    
    
    
    1,505Federal Home Loan Bank stock
    
    
    273
    
    
    
    108
    
    
    
    404
    
    
    
    299Short term interest income
    
    
    81
    
    
    
    27
    
    
    
    207
    
    
    
    65Total interest and dividend income
    
    
    7,553
    
    
    
    6,467
    
    
    
    21,135
    
    
    
    19,071Interest expense:Deposits
    
    
    1,990
    
    
    
    1,339
    
    
    
    5,238
    
    
    
    3,595Borrowed funds
    
    
    1,934
    
    
    
    1,673
    
    
    
    5,670
    
    
    
    4,936Total interest expense
    
    
    3,924
    
    
    
    3,012
    
    
    
    10,908
    
    
    
    8,531Net interest income
    
    
    3,629
    
    
    
    3,455
    
    
    
    10,227
    
    
    
    10,540Provision for loan losses
    
    
    30
    
    
    
    
    
    
    
    60
    
    
    
    Net interest income after provision for loan losses
    
    
    3,599
    
    
    
    3,455
    
    
    
    10,167
    
    
    
    10,540Non-interest income (loss):Loan servicing fees
    
    
    24
    
    
    
    33
    
    
    
    66
    
    
    
    109Deposit account fees
    
    
    188
    
    
    
    220
    
    
    
    586
    
    
    
    639Gain on sales of mortgage loans, net
    
    
    
    
    
    
    13
    
    
    
    6
    
    
    
    35Loss on sales of investment securities
    
    
    
    
    
    
    
    
    
    
    (2,417
    )
    
    
    Other income
    
    
    115
    
    
    
    115
    
    
    
    341
    
    
    
    350Total non-interest income (loss)
    
    
    327
    
    
    
    381
    
    
    
    (1,418
    )
    
    
    1,133Non-interest expense:Salaries and employee benefits
    
    
    1,656
    
    
    
    1,524
    
    
    
    5,660
    
    
    
    4,708Occupancy and equipment expenses
    
    
    263
    
    
    
    229
    
    
    
    1,087
    
    
    
    708Data processing expenses
    
    
    250
    
    
    
    230
    
    
    
    745
    
    
    
    668Marketing expenses
    
    
    18
    
    
    
    70
    
    
    
    473
    
    
    
    230Professional expenses
    
    
    113
    
    
    
    111
    
    
    
    464
    
    
    
    407Other expenses
    
    
    345
    
    
    
    343
    
    
    
    1,588
    
    
    
    1,127Total non-interest expenses
    
    
    2,645
    
    
    
    2,507
    
    
    
    10,017
    
    
    
    7,848Income (loss) before income tax expense (benefit)
    
    
    1,281
    
    
    
    1,329
    
    
    
    (1,268
    )
    
    
    3,825Income tax expense (benefit)
    
    
    473
    
    
    
    472
    
    
    
    (394
    )
    
    
    1,351Net income (loss)
    
    $
    808
    
    
    $
    857
    
    
    $
    (874
    )
    
    $
    2,474Average shares outstanding
    
    
    4,559,260
    
    
    
    4,455,652
    
    
    
    4,531,934
    
    
    
    4,415,223Common stock equivalents
    
    
    38,123
    
    
    
    76,434
    
    
    
    49,256
    
    
    
    108,213Average diluted shares outstanding
    
    
    4,597,383
    
    
    
    4,532,086
    
    
    
    4,581,190
    
    
    
    4,523,436Basic earnings (loss) per share
    
    $
    0.18
    
    
    $
    0.19
    
    
    $
    (0.19
    )
    
    $
    0.56Diluted earnings (loss) per share
    
    $
    0.18
    
    
    $
    0.19
    
    
    $
    (0.19
    )
    
    $
    0.55
  4




---



##### 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 loss
    
    
    
    
    
    
    
    
    
    
    (874
    )
    
    
    
    
    
    
    (874
    )Other comprehensive income:Unrealized loss on securities
available for sale, net (tax effect $746)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,380
    )
    
    
    (1,380
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,254
    )Stock-based compensation
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    
    
    
    
    95Exercise of stock options
    
    
    11
    
    
    
    1,148
    
    
    
    
    
    
    
    
    
    
    
    1,159Tax benefit of stock options exercised
    
    
    
    
    
    
    91
    
    
    
    
    
    
    
    
    
    
    
    91Dividends declared and paid
($0.42 per share)
    
    
    
    
    
    
    
    
    
    
    (1,901
    )
    
    
    
    
    
    
    (1,901
    )Balance at September 30, 2006
    
    $
    457
    
    
    $
    61,190
    
    
    $
    (2,449
    )
    
    $
    (2,086
    )
    
    $
    57,112
  5




---



##### Table of Contents



Nine months ended September 30,2006
    
    
    2005(In thousands)Cash flows from operating activities:Net income (loss)
    
    $
    (874
    )
    
    $
    2,474Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan loss
    
    
    60
    
    
    
    Gains on sales of mortgage loans
    
    
    (6
    )
    
    
    (35
    )Losses on sales of investment securities available for sale
    
    
    2,417
    
    
    
    Net amortization of investment securities
    
    
    577
    
    
    
    1,123Depreciation of premises and equipment
    
    
    496
    
    
    
    330Loans originated for sale
    
    
    (1,043
    )
    
    
    (3,437
    )Proceeds from sales of mortgage loans
    
    
    1,521
    
    
    
    3,322Decrease in accrued interest receivable
    
    
    168
    
    
    
    134Deferred income tax benefit
    
    
    (296
    )
    
    
    (222
    )Stock-based compensation
    
    
    95
    
    
    
    Tax benefit from exercise of stock options
    
    
    
    
    
    
    211(Increase) decrease in other assets
    
    
    (337
    )
    
    
    224Increase in advance payments by borrowers
    
    
    130
    
    
    
    122Decrease in other liabilities
    
    
    (255
    )
    
    
    (172
    )Net cash provided by operating activities
    
    
    2,653
    
    
    
    4,074Cash flows from investing activities:Proceeds from maturities of investment securities held to maturity
    
    
    2,900
    
    
    
    47,970Proceeds from maturities of investment securities available for sale
    
    
    11,500
    
    
    
    25,000Sales of investment securities available for sale
    
    
    78,457
    
    
    
    Purchases of investment securities held to maturity
    
    
    
    
    
    
    (65,952
    )Purchases of mortgage-backed securities held to maturity
    
    
    
    
    
    
    (23,971
    )Purchases of investment securities available for sale
    
    
    (20,265
    )
    
    
    (14,198
    )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
    
    
    750
    
    
    
    Principal payments of investment securities held to maturity
    
    
    4,680
    
    
    
    19,697Principal payments of investment securities available for sale
    
    
    12,922
    
    
    
    3,959Increase in loans, net
    
    
    (30,419
    )
    
    
    (877
    )Purchases of Bank premises and equipment
    
    
    (910
    )
    
    
    (176
    )Net cash used in investing activities
    
    
    (4,037
    )
    
    
    (10,830
    )Cash flows from financing activities:Net (decrease) increase in deposits
    
    
    (1,277
    )
    
    
    9,370Additions to Federal Home Loan Bank advances
    
    
    37,000
    
    
    
    48,900Payments on Federal Home Loan Bank advances
    
    
    (55,308
    )
    
    
    (32,103
    )Net increase in agreements to repurchase securities
    
    
    1,305
    
    
    
    686Net increase (decrease) in other borrowed funds
    
    
    21,000
    
    
    
    (13,000
    )Dividends paid
    
    
    (1,901
    )
    
    
    (1,859
    )Proceeds from exercise of stock options
    
    
    1,159
    
    
    
    512Excess tax benefit from exercise of stock options
    
    
    91
    
    
    
    Net cash provided by financing activities
    
    
    2,069
    
    
    
    12,506Net increase in cash and cash equivalents
    
    
    685
    
    
    
    5,750Cash and cash equivalents, beginning of period
    
    
    10,687
    
    
    
    7,402Cash and cash equivalents, end of period
    
    $
    11,372
    
    
    $
    13,152Cash paid during the period for:Interest on deposits
    
    $
    5,233
    
    
    $
    3,601Interest on borrowed funds
    
    
    5,588
    
    
    
    4,918Income taxes
    
    
    906
    
    
    
    1,810Cash received during the year for:Income taxes
    
    
    192
    
    
    
    215Supplemental schedule of non-cash activities:Change in valuation of investment securities available for sale, net
    
    
    (1,380
    )
    
    
    (310
    )
  6




---



##### 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




---



##### Table of Contents



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




---



##### Table of Contents



Three months ended
    
    
    Nine months ended9/30/05
    
    
    9/30/05(In thousands, except share data)Net income:As reported
    
    $
    857
    
    
    $
    2,474Less: pro forma stock based compensation cost (net of taxes)
    
    
    (31
    )
    
    
    (91
    )Pro forma
    
    $
    826
    
    
    $
    2,383Basic earnings per share:As reported
    
    $
    0.19
    
    
    $
    0.56Pro forma
    
    
    0.19
    
    
    
    0.54Diluted earnings per share:As reported
    
    $
    0.19
    
    
    $
    0.55Pro forma
    
    
    0.18
    
    
    
    0.53
   2006Weighted
    
    Wtd. Avg.
    
    AggregateAverage
    
    Remaining
    
    IntrinsicOption
    
    Exercise
    
    Contractual
    
    ValueShares
    
    Price ($)
    
    Term (years)
    
    ($000)Balance, January 1
    
    
    349,100
    
    
    $
    12.88
    
    
    
    5.4Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (127,275
    )
    
    $
    11.59
    
    
    
    5.2Forfeited
    
    
    (10,425
    )
    
    $
    16.77
    
    
    
    7.7Expired
    
    
    
    
    
    
    
    
    
    
    Balance, September 30
    
    
    211,400
    
    
    $
    13.46
    
    
    
    5.4
    
    
    $
    748Options exercisable at Sept. 30
    
    
    193,325
    
    
    $
    13.14
    
    
    
    5.2
    
    
    $
    746Weighted average grant date fair
value of options granted
    
    
    n/a
    
    
    
    n/a
   Nonvested Shares Issued Under the PlansStock OptionsWeightedAverageGrant DateShares
    
    Fair ValueNonvested at January 1, 2006
    
    
    55,050
    
    
    $
    16.84Granted
    
    
    
    
    
    
    Vested
    
    
    (28,800
    )
    
    $
    16.88Forfeited
    
    
    (8,175
    )
    
    $
    16.77Nonvested at September 30, 2006
    
    
    18,075
    
    
    $
    16.80
 9




---



##### Table of Contents



Three months ended
    
    

Nine months ended9/30/06
    
    
    9/30/05
    
    
    9/30/06
    
    
    9/30/05(In thousands)Service cost
    
    $
    89
    
    
    $
    87
    
    
    $
    265
    
    
    $
    260Interest cost
    
    
    120
    
    
    
    107
    
    
    
    360
    
    
    
    322Expected return on plan assets
    
    
    (145
    )
    
    
    (136
    )
    
    
    (435
    )
    
    
    (407
    )Net amortization and deferrals
    
    
    (1
    )
    
    
    (1
    )
    
    
    (3
    )
    
    
    (3
    )Net periodic pension cost
    
    $
    63
    
    
    $
    57
    
    
    $
    187
    
    
    $
    172
    Employers Accounting for Defined Benefit Pension and Other Postretirement Plans
  10




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
  Critical Accounting Policies & Estimates
  EXECUTIVE LEVEL OVERVIEW
  11




---



##### Table of Contents



FINANCIAL CONDITION
 SUMMARY
  Investments:
    12




---



##### Table of Contents



9/30/06
    
    
    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
    
    $
    5,108
    
    
    $
    
    
    
    $
    (384
    )
    
    $
    4,724
    
    
    $
    5,119
    
    
    $
    
    
    
    $
    (350
    )
    
    $
    4,769Federal agency bonds
    
    
    40,863
    
    
    
    27
    
    
    
    (612
    )
    
    
    40,278
    
    
    
    9,932
    
    
    
    
    
    
    
    (265
    )
    
    
    9,667U.S. treasury & federal
agency bonds
    
    
    45,971
    
    
    
    27
    
    
    
    (996
    )
    
    
    45,002
    
    
    
    15,051
    
    
    
    
    
    
    
    (615
    )
    
    
    14,436Corporate bonds
    
    
    7,483
    
    
    
    47
    
    
    
    (2
    )
    
    
    7,528
    
    
    
    3,181
    
    
    
    
    
    
    
    (135
    )
    
    
    3,046Municipal bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mutual funds
    
    
    1,000
    
    
    
    
    
    
    
    (52
    )
    
    
    948
    
    
    
    1,000
    
    
    
    
    
    
    
    (45
    )
    
    
    955Other investments/equity
securities
    
    
    284
    
    
    
    
    
    
    
    
    
    
    
    284
    
    
    
    240
    
    
    
    
    
    
    
    (7
    )
    
    
    233Other investment securities
    
    
    8,767
    
    
    
    47
    
    
    
    (54
    )
    
    
    8,760
    
    
    
    4,421
    
    
    
    
    
    
    
    (187
    )
    
    
    4,234Asset-backed securities/CMO
    
    
    75,073
    
    
    
    82
    
    
    
    (1,535
    )
    
    
    73,620
    
    
    
    24,662
    
    
    
    9
    
    
    
    (342
    )
    
    
    24,329Mortgaged-backed securities
    
    
    101,890
    
    
    
    527
    
    
    
    (1,415
    )
    
    
    101,002
    
    
    
    3,420
    
    
    
    10
    
    
    
    (66
    )
    
    
    3,364ABS/CMO/MBS
    
    
    176,963
    
    
    
    609
    
    
    
    (2,950
    )
    
    
    174,622
    
    
    
    28,082
    
    
    
    19
    
    
    
    (408
    )
    
    
    27,693Total investment securities
available for sale
    
    $
    231,701
    
    
    $
    683
    
    
    $
    (4,000
    )
    
    $
    228,384
    
    
    $
    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
    )
    
    $
    208,615Total investment securities
    
    $
    231,701
    
    
    $
    683
    
    
    $
    (4,000
    )
    
    $
    228,384
    
    
    $
    261,237
    
    
    $
    130
    
    
    $
    (6,389
    )
    
    $
    254,978
 13




---



##### Table of Contents



Loans:
   9/30/06
    
    
    12/31/05(In thousands)Residential mortgage loans
    
    $
    68,731
    
    
    $
    62,659Equity loans
    
    
    18,688
    
    
    
    10,412Consumer loans
    
    
    675
    
    
    
    468Total retail loans
    
    
    88,094
    
    
    
    73,539Construction loans
    
    
    33,112
    
    
    
    24,137Commercial real estate loans
    
    
    133,688
    
    
    
    127,617Commercial loans
    
    
    9,692
    
    
    
    9,318Total corporate loans
    
    
    176,492
    
    
    
    161,072Total loans
    
    
    264,586
    
    
    
    234,611Allowance for loan losses
    
    
    (4,214
    )
    
    
    (4,126
    )Total loans, net
    
    $
    260,372
    
    
    $
    230,485
 Allowance For Loan Losses:
  Three months ended
    
    
    Nine months ended9/30/06
    
    
    9/30/05
    
    
    9/30/06
    
    
    9/30/05(In thousands)Beginning balance
    
    $
    4,184
    
    
    $
    4,135
    
    
    $
    4,126
    
    
    $
    4,140Provision charged to operations
    
    
    30
    
    
    
    
    
    
    
    60
    
    
    
    Recoveries on loans previously charged-off
    
    
    9
    
    
    
    3
    
    
    
    49
    
    
    
    8Loans charged-off
    
    
    (9
    )
    
    
    (5
    )
    
    
    (21
    )
    
    
    (15
    )Ending balance
    
    $
    4,214
    
    
    $
    4,133
    
    
    $
    4,214
    
    
    $
    4,133
   14




---



##### Table of Contents



Risk Assets:
    9/30/06
    
    
    12/31/05
    
    
    9/30/05(Dollars in thousands)Non-performing loans
    
    $
    1,142
    
    
    $
    32
    
    
    $
    33Other real estate owned
    
    
    
    
    
    
    
    
    
    
    Total risk assets
    
    $
    1,142
    
    
    $
    32
    
    
    $
    33Risk assets as a percent of total loans
    
    
    0.43
    %
    
    
    0.01
    %
    
    
    0.01
    %Risk assets as a percent of total assets
    
    
    0.22
    %
    
    
    0.01
    %
    
    
    0.01
    %
 Deposits:
   9/30/06
    
    
    12/31/05(In thousands)NOW and super NOW accounts
    
    $
    17,184
    
    
    $
    38,349Demand deposit accounts
    
    
    32,219
    
    
    
    18,912Savings accounts
    
    
    36,127
    
    
    
    41,941Money market investment accounts
    
    
    74,589
    
    
    
    76,594Certificates of deposit
    
    
    141,691
    
    
    
    127,291Total deposits
    
    $
    301,810
    
    
    $
    303,087
 Borrowings:
  15




---



##### Table of Contents



9/30/06
    
    
    12/31/05(In thousands)Federal Home Loan Bank advances
    
    $
    103,553
    
    
    $
    121,861FHLB short-term borrowings
    
    
    48,000
    
    
    
    27,000Customer repurchase agreements
    
    
    5,824
    
    
    
    4,519Total borrowings
    
    $
    157,377
    
    
    $
    153,380
 RESULTS OF OPERATIONS
 THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 SUMMARY
  Net Interest Income From Operations:
  16




---



##### Table of Contents



Three months ended
    
    
    Three months ended9/30/06
    
    
    9/30/05Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    InterestBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)AssetsInvestment securities:Short-term investments
    
    $
    6,010
    
    
    $
    81
    
    
    
    5.35
    %
    
    $
    3,234
    
    
    $
    28
    
    
    
    3.43
    %U. S. Government and
federal agency bonds
    
    
    44,731
    
    
    
    428
    
    
    
    3.80
    
    
    
    102,480
    
    
    
    803
    
    
    
    3.11Corporate and municipal bonds
and other securities
    
    
    18,085
    
    
    
    388
    
    
    
    8.51
    
    
    
    28,313
    
    
    
    268
    
    
    
    3.76Collateralized mortgage
obligations and mortgage-
backed securities
    
    
    176,111
    
    
    
    2,088
    
    
    
    4.70
    
    
    
    154,523
    
    
    
    1,579
    
    
    
    4.05Total investment securities
    
    
    244,937
    
    
    
    2,985
    
    
    
    4.83
    
    
    
    288,550
    
    
    
    2,678
    
    
    
    3.68Loans:Residential real estate
    
    
    66,345
    
    
    
    911
    
    
    
    5.45
    
    
    
    60,746
    
    
    
    784
    
    
    
    5.12Equity
    
    
    15,786
    
    
    
    243
    
    
    
    6.11
    
    
    
    9,647
    
    
    
    129
    
    
    
    5.31Consumer
    
    
    812
    
    
    
    12
    
    
    
    5.86
    
    
    
    605
    
    
    
    9
    
    
    
    5.90Total retail loans
    
    
    82,943
    
    
    
    1,166
    
    
    
    5.58
    
    
    
    70,998
    
    
    
    922
    
    
    
    5.15Construction
    
    
    33,411
    
    
    
    800
    
    
    
    9.50
    
    
    
    20,609
    
    
    
    396
    
    
    
    7.62Commercial real estate
    
    
    132,606
    
    
    
    2,414
    
    
    
    7.22
    
    
    
    131,214
    
    
    
    2,249
    
    
    
    6.80Commercial
    
    
    9,025
    
    
    
    188
    
    
    
    8.26
    
    
    
    12,855
    
    
    
    222
    
    
    
    6.85Total corporate loans
    
    
    175,042
    
    
    
    3,402
    
    
    
    7.71
    
    
    
    164,678
    
    
    
    2,867
    
    
    
    6.91Total loans
    
    
    257,985
    
    
    
    4,568
    
    
    
    7.02
    
    
    
    235,676
    
    
    
    3,789
    
    
    
    6.38Total interest-earning assets
    
    
    502,922
    
    
    
    7,553
    
    
    
    5.96
    %
    
    
    524,226
    
    
    
    6,467
    
    
    
    4.89
    %Allowance for loan losses
    
    
    (4,200
    )
    
    
    
    
    
    
    
    
    
    
    (4,168
    )Other assets
    
    
    18,871
    
    
    
    
    
    
    
    
    
    
    
    19,518Total assets
    
    $
    517,593
    
    
    
    
    
    
    
    
    
    
    $
    539,576Liabilities and Stockholders
EquityDeposits:NOW and Super NOW accounts
    
    $
    22,200
    
    
    $
    8
    
    
    
    0.14
    %
    
    $
    39,571
    
    
    $
    12
    
    
    
    0.12
    %Regular savings accounts
    
    
    36,995
    
    
    
    46
    
    
    
    0.49
    
    
    
    44,541
    
    
    
    56
    
    
    
    0.50Money market investment
accounts
    
    
    75,856
    
    
    
    552
    
    
    
    2.89
    
    
    
    81,141
    
    
    
    385
    
    
    
    1.88Certificates of deposit
and escrow
    
    
    139,678
    
    
    
    1,384
    
    
    
    3.93
    
    
    
    123,469
    
    
    
    886
    
    
    
    2.85Total interest bearing deposits
    
    
    274,729
    
    
    
    1,990
    
    
    
    2.87
    
    
    
    288,722
    
    
    
    1,339
    
    
    
    1.84Borrowed funds:Other borrowed funds
    
    
    57,694
    
    
    
    762
    
    
    
    5.24
    
    
    
    49,594
    
    
    
    424
    
    
    
    3.39FHLB Advances
    
    
    96,631
    
    
    
    1,172
    
    
    
    4.81
    
    
    
    118,487
    
    
    
    1,249
    
    
    
    4.18Total borrowed funds
    
    
    154,325
    
    
    
    1,934
    
    
    
    4.97
    
    
    
    168,081
    
    
    
    1,673
    
    
    
    3.95Total interest bearing liabilities
    
    
    429,054
    
    
    
    3,924
    
    
    
    3.63
    %
    
    
    456,803
    
    
    
    3,012
    
    
    
    2.62
    %Non-interest bearing deposits
    
    
    28,524
    
    
    
    
    
    
    
    
    
    
    
    20,949Other liabilities
    
    
    4,994
    
    
    
    
    
    
    
    
    
    
    
    3,374Total liabilities
    
    
    462,572
    
    
    
    
    
    
    
    
    
    
    
    481,126Stockholders equity
    
    
    55,021
    
    
    
    
    
    
    
    
    
    
    
    58,450Total liabilities and
stockholders equity
    
    $
    517,593
    
    
    
    
    
    
    
    
    
    
    $
    539,576Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.33
    %
    
    
    
    
    
    
    
    
    
    
    2.27
    %Net interest income
    
    
    
    
    
    $
    3,629
    
    
    
    
    
    
    
    
    
    
    $
    3,455Net interest margin on average
earning assets
    
    
    
    
    
    
    
    
    
    
    2.86
    %
    
    
    
    
    
    
    
    
    
    
    2.61
    %
 17




---



##### Table of Contents



Interest Income:
    Interest Expense:
    Provision for Loan Losses:
  Non-Interest Income:
  18




---



##### Table of Contents



Non-Interest Expense:
  Income Taxes:
  NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 SUMMARY
  Net Interest Income From Operations:
  19




---



##### Table of Contents



Nine months ended
    
    
    Nine months ended9/30/06
    
    
    9/30/05Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    InterestBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)AssetsInvestment securities:Short-term investments
    
    $
    5,456
    
    
    $
    207
    
    
    
    5.07
    %
    
    $
    2,895
    
    
    $
    66
    
    
    
    3.05
    %U. S. Government and
federal agency bonds
    
    
    75,939
    
    
    
    1,908
    
    
    
    3.36
    
    
    
    114,329
    
    
    
    2,676
    
    
    
    3.13Corporate and municipal bonds
and other securities
    
    
    22,957
    
    
    
    779
    
    
    
    4.54
    
    
    
    27,980
    
    
    
    776
    
    
    
    3.71Collateralized mortgage
obligations and mortgage-backed securities
    
    
    160,883
    
    
    
    5,447
    
    
    
    4.53
    
    
    
    148,111
    
    
    
    4,487
    
    
    
    4.05Total investment securities
    
    
    265,235
    
    
    
    8,341
    
    
    
    4.20
    
    
    
    293,315
    
    
    
    8,005
    
    
    
    3.65Loans:Residential real estate
    
    
    64,501
    
    
    
    2,607
    
    
    
    5.40
    
    
    
    60,430
    
    
    
    2,362
    
    
    
    5.23Equity
    
    
    12,521
    
    
    
    576
    
    
    
    6.15
    
    
    
    9,172
    
    
    
    348
    
    
    
    5.07Consumer
    
    
    632
    
    
    
    29
    
    
    
    6.13
    
    
    
    657
    
    
    
    29
    
    
    
    5.90Total retail loans
    
    
    77,654
    
    
    
    3,212
    
    
    
    5.53
    
    
    
    70,259
    
    
    
    2,739
    
    
    
    5.21Construction
    
    
    31,182
    
    
    
    2,124
    
    
    
    9.11
    
    
    
    18,015
    
    
    
    972
    
    
    
    7.21Commercial real estate
    
    
    129,577
    
    
    
    6,932
    
    
    
    7.15
    
    
    
    132,896
    
    
    
    6,707
    
    
    
    6.75Commercial
    
    
    8,780
    
    
    
    526
    
    
    
    8.01
    
    
    
    13,417
    
    
    
    648
    
    
    
    6.46Total corporate loans
    
    
    169,539
    
    
    
    9,582
    
    
    
    7.56
    
    
    
    164,328
    
    
    
    8,327
    
    
    
    6.77Total loans
    
    
    247,193
    
    
    
    12,794
    
    
    
    6.92
    
    
    
    234,587
    
    
    
    11,066
    
    
    
    6.31Total interest-earning assets
    
    
    512,428
    
    
    
    21,135
    
    
    
    5.51
    %
    
    
    527,902
    
    
    
    19,071
    
    
    
    4.83
    %Allowance for loan losses
    
    
    (4,174
    )
    
    
    
    
    
    
    
    
    
    
    (4,151
    )Other assets
    
    
    19,410
    
    
    
    
    
    
    
    
    
    
    
    18,391Total assets
    
    $
    527,664
    
    
    
    
    
    
    
    
    
    
    $
    542,142Liabilities and Stockholders
EquityDeposits:NOW and Super NOW accounts
    
    $
    31,325
    
    
    $
    30
    
    
    
    0.13
    %
    
    $
    38,854
    
    
    $
    35
    
    
    
    0.12
    %Regular savings accounts
    
    
    39,123
    
    
    
    146
    
    
    
    0.50
    
    
    
    45,334
    
    
    
    168
    
    
    
    0.50Money market investment
accounts
    
    
    78,254
    
    
    
    1,425
    
    
    
    2.43
    
    
    
    80,934
    
    
    
    954
    
    
    
    1.58Certificates of deposit
and escrow
    
    
    133,105
    
    
    
    3,637
    
    
    
    3.65
    
    
    
    120,914
    
    
    
    2,438
    
    
    
    2.70Total interest bearing deposits
    
    
    281,807
    
    
    
    5,238
    
    
    
    2.49
    
    
    
    286,036
    
    
    
    3,595
    
    
    
    1.68Borrowed funds:Other borrowed funds
    
    
    49,916
    
    
    
    1,838
    
    
    
    4.92
    
    
    
    59,007
    
    
    
    1,292
    
    
    
    2.93FHLB Advances
    
    
    112,986
    
    
    
    3,832
    
    
    
    4.53
    
    
    
    117,161
    
    
    
    3,644
    
    
    
    4.16Total borrowed funds
    
    
    162,902
    
    
    
    5,670
    
    
    
    4.65
    
    
    
    176,168
    
    
    
    4,936
    
    
    
    3.75Total interest bearing liabilities
    
    
    444,709
    
    
    
    10,908
    
    
    
    3.28
    %
    
    
    462,204
    
    
    
    8,531
    
    
    
    2.47
    %Non-interest bearing deposits
    
    
    21,108
    
    
    
    
    
    
    
    
    
    
    
    18,561Other liabilities
    
    
    4,661
    
    
    
    
    
    
    
    
    
    
    
    3,268Total liabilities
    
    
    470,478
    
    
    
    
    
    
    
    
    
    
    
    484,033Stockholders equity
    
    
    57,186
    
    
    
    
    
    
    
    
    
    
    
    58,109Total liabilities and
stockholders equity
    
    $
    527,664
    
    
    
    
    
    
    
    
    
    
    $
    542,142Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.23
    %
    
    
    
    
    
    
    
    
    
    
    2.36
    %Net interest income
    
    
    
    
    
    $
    10,227
    
    
    
    
    
    
    
    
    
    
    $
    10,540Net interest margin on average
earning assets
    
    
    
    
    
    
    
    
    
    
    2.67
    %
    
    
    
    
    
    
    
    
    
    
    2.67
    %
 20




---



##### Table of Contents



Interest Income:
    Interest Expense:
    Provision for Loan Losses:
  Non-Interest Income:
  Non-Interest Expense:
  21




---



##### Table of Contents



Income Taxes:
  Liquidity and Capital Resources:
     22




---



##### Table of Contents



ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  
 ITEM 4: CONTROLS AND PROCEDURES
   23




---



##### Table of Contents



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 2002.32.2
    
    
    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




---



##### Table of Contents



LSB CORPORATIONNovember 13, 2006
    /s/ Gerald T. MulliganGerald T. MulliganPresident and
Chief Executive OfficerNovember 13, 2006
    /s/ Diane L. WalkerDiane L. WalkerSenior Vice President
Chief Financial Officer 25




---



##### Table of Contents



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