LSB (LSBX) 10-Q 2004 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20529

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the quarterly period ended June 30, 2004

o Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the transition period from ___ to ___

Commission File Number 000-32955

LSB Corporation

(Exact name of Registrant as specified in its Charter)

Massachusetts
(State or other jurisdiction of
incorporation or organization) 04-3557612
(I.R.S. Employer
Identification Number)

30 Massachusetts Avenue, North Andover, MA
(Address of principal executive offices) 01845
(Zip Code)

(978) 725-7500
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days.

Yesx                Noo

     Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yeso                Nox

     Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class	Outstanding as of July 31, 2004
Common Stock, par value $.10 per share	4,307,442 shares

LSB CORPORATION AND SUBSIDIARY

INDEX

	Page
PART I — FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS:
Consolidated Balance Sheets		3
Consolidated Statements of Income		4
Consolidated Statements of Changes in Stockholders’ Equity		5
Consolidated Statements of Cash Flows		6
Notes to Consolidated Financial Statements		7-9
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
Financial Condition:
Investment Portfolio		11
Loan Portfolio		12
Allowance for Loan Losses		12
Risk Assets		13
Deposits		13
Results of Operations:
Three months ended June 30, 2004 and 2003		14
Loan Interest Income		15
Deposit Interest Expense		15
Six months ended June 30, 2004 and 2003		17
Loan Interest Income		18
Deposit Interest Expense		18
Liquidity and Capital Resources		19
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK		20
ITEM 4 CONTROLS AND PROCEDURES		20
PART II — OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS		21
ITEM 2 CHANGES IN SECURITIES		21
ITEM 3 DEFAULTS UPON SENIOR SECURITIES		21
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		21
ITEM 5 OTHER INFORMATION		22
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K		22
SIGNATURES		23
EXHIBIT INDEX		24
EX-31.1 SECTION 302 CERTIFICATION OF C.E.O.
EX-31.2 SECTION 302 CERTIFICATION OF C.F.O.
EX-32.1 SECTION 906 CERTIFICATION OF C.E.O.
EX-32.2 SECTION 906 CERTIFICATION OF C.F.O.

2

PART 1 — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LSB CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	June 30,			December 31,
	2004			2003
	(In Thousands, Except Share Data)
ASSETS
Assets:
Cash and due from banks	$	7,221		$	7,872
Federal funds sold		3,545			889
Total cash and cash equivalents		10,766			8,761
Investment securities held to maturity (market value of $181,329 in 2004 and $184,592 in 2003)		183,749			184,286
Investment securities available for sale (amortized cost of $56,368 in 2004 and $48,571 in 2003)		55,687			48,592
Federal Home Loan Bank stock, at cost		7,694			6,593
Loans, net of allowance for loan losses		207,973			207,283
Bank premises and equipment		3,434			2,875
Accrued interest receivable		2,622			2,552
Deferred income tax asset		2,958			3,519
Other assets		1,391			1,647
Total assets	$	476,274		$	466,108
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Interest bearing deposits	$	273,943		$	258,430
Non-interest bearing deposits		15,781			14,110
Federal Home Loan Bank advances		96,161			78,866
Other borrowed funds		26,000			52,000
Securities sold under agreements to repurchase		3,159			2,486
Advance payments by borrowers for taxes and insurance		489			450
Other liabilities		3,765			4,764
Total liabilities		419,298			411,106
Stockholders’ equity:
Preferred stock, $.10 par value per share:
5,000,000 shares authorized, none issued		—			—
Common stock, $.10 par value per share;
20,000,000 shares authorized; 4,526,742 and 4,454,262 shares issued at June 30, 2004 and December 31, 2003, respectively, and 4,307,442 and 4,234,962 shares outstanding at June 30, 2004 and December 31, 2003, respectively		453			445
Additional paid-in capital		58,703			58,350
Retained earnings (accumulated deficit)		976			(1,055	)
Treasury stock, at cost (219,300 shares)		(2,758	)		(2,758	)
Accumulated other comprehensive (loss) income		(398	)		20
Total stockholders’ equity		56,976			55,002
Total liabilities and stockholders’ equity	$	476,274		$	466,108

The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.

3

LSB CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	Three months ended						Six months ended
	June 30,						June 30,
	2004			2003			2004			2003
	(In Thousands, Except Share Data)
Interest and dividend income:
Loans	$	3,252		$	3,740		$	6,555		$	7,688
Investment securities held to maturity		1,709			1,048			3,378			2,177
Investment securities available for sale		458			463			886			956
Federal Home Loan Bank stock		36			44			72			95
Other interest and dividend income		6			19			12			60
Total interest and dividend income		5,461			5,314			10,903			10,976
Interest expense:
Deposits		870			1,096			1,698			2,246
Federal Home Loan Bank advances		1,110			1,181			2,162			2,384
Other borrowed funds		112			34			247			75
Securities sold under agreements to repurchase		3			5			7			10
Total interest expense		2,095			2,316			4,114			4,715
Net interest income		3,366			2,998			6,789			6,261
Provision (credit) for loan losses		(300	)		—			(300	)		—
Net interest income after provision (credit) for loan losses		3,666			2,998			7,089			6,261
Non-interest income:
Loan servicing fees		123			(50	)		143			(180	)
Deposit account fees		230			180			432			343
Gains on sales of mortgage loans		58			165			69			314
Lawsuit judgment collected		2,275			—			2,275			—
Other income		94			88			183			186
Total non-interest income		2,780			383			3,102			663
Non-interest expense:
Salaries and employee benefits		1,627			1,420			3,249			3,071
Occupancy and equipment expenses		242			202			439			422
Professional expenses		216			162			331			363
Data processing expenses		232			179			432			360
Other expenses		454			409			808			828
Total non-interest expenses		2,771			2,372			5,259			5,044
Income before income tax expense		3,675			1,009			4,932			1,880
Income tax expense		1,318			374			1,789			695
Net income	$	2,357		$	635		$	3,143		$	1,185
Average shares outstanding		4,303,588			4,204,362			4,283,613			4,209,335
Average diluted shares outstanding		4,443,898			4,364,480			4,437,404			4,361,182
Basic earnings per share	$	0.55		$	0.15		$	0.73		$	0.28
Diluted earnings per share	$	0.53		$	0.15		$	0.71		$	0.27

The accompanying notes are an integral part of these unaudited Consolidated Financial Statements

4

LSB CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(UNAUDITED)

											Accumulated
			Additional								Other			Total
	Common		Paid-In		(Accumulated			Treasury			Comprehensive			Stockholders’
	Stock		Capital		Deficit)			Stock			Income			Equity
	(In Thousands, Except Share Data)
Balance at December 31, 2002	$	439	$	57,845	$	(3,168	)	$	(1,736	)	$	679		$	54,059
Net income		—		—		1,185			—			—			1,185
Other comprehensive income:
Unrealized loss on securities available for sale (tax effect $7)		—		—		—			—			(14	)		(14	)
Total comprehensive income															1,171
Exercise of stock options		4		173		—			—			—			177
Dividends declared and paid ($0.24 per share)		—		—		(1,009	)		—			—			(1,009	)
Purchase of 82,800 shares of Treasury Stock, at cost									(1,022	)					(1,022	)
																��
Balance at June 30, 2003	$	443	$	58,018	$	(2,992	)	$	(2,758	)	$	665		$	53,376

					Retained						Accumulated
			Additional		Earnings/						Other			Total
	Common		Paid-In		(Accumulated			Treasury			Comprehensive			Stockholders’
	Stock		Capital		Deficit)			Stock			Income (loss)			Equity
Balance at December 31, 2003	$	445	$	58,350	$	(1,055	)	$	(2,758	)	$	20		$	55,002
Net income		—		—		3,143			—			—			3,143
Other comprehensive income:
Unrealized loss on securities available for sale (tax effect $284)		—		—		—			—			(418	)	$	(418	)
Total comprehensive income															2,725
Exercise of stock options		8		353		—			—			—			361
Dividends declared and paid ($0.26 per share)		—		—		(1,112	)		—			—			(1,112	)
Balance at June 30, 2004	$	453	$	58,703	$	976		$	(2,758	)	$	(398	)	$	56,976

The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.

5

LSB CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.

6

LSB CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004

(UNAUDITED)

1. BASIS OF PRESENTATION

LSB Corporation (the “Corporation” or the “Company”) is a Massachusetts corporation and the holding company of its wholly-owned subsidiary Lawrence Savings Bank (the “Bank”) a state-chartered Massachusetts savings bank. The Corporation was organized by the Bank on July 1, 2001 to be a bank holding company and to acquire all of the capital stock of the Bank.

The Corporation is supervised by the Board of Governors of the Federal Reserve System (“FRB”), and it is also subject to the jurisdiction of the Massachusetts Division of Banks, while the Bank is subject to the regulations of, and periodic examination by, the Federal Deposit Insurance Corporation (“FDIC”) and the Massachusetts Division of Banks. The Bank’s deposits are insured by the Bank Insurance Fund of the FDIC up to $100,000 per account, as defined by the FDIC, and the Depositors Insurance Fund (“DIF”) for customer deposit amounts in excess of $100,000. The Consolidated Financial Statements include the accounts of LSB Corporation and its wholly-owned consolidated subsidiary, Lawrence Savings Bank, and its wholly-owned subsidiaries, Shawsheen Security Corporation, Shawsheen Security Corporation II, Pemberton Corporation, and Spruce Wood Realty Trust. All inter-company balances and transactions have been eliminated in consolidation. The Company has one reportable operating segment. Certain amounts in prior periods have been re-classified to conform to the current presentation.

The Corporation’s Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Accordingly, management is required to make estimates and assumptions that affect amounts reported in the balance sheets and statements of income. Actual results could differ significantly from those estimates and judgments. Material estimates that are particularly susceptible to change relate to the allowance for loan losses, income taxes and mortgage servicing rights.

The interim results of consolidated income are not necessarily indicative of the results for any future interim period or for the entire year. These interim Consolidated Financial Statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the annual Consolidated Financial Statements and accompanying notes included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2003 filed with the Securities and Exchange Commission.

2. STOCK OPTIONS

The Corporation measures compensation cost for stock-based plans using the intrinsic value method. The intrinsic value method measures compensation cost, if any, as the fair market value of the Company’s stock at the grant date over the exercise price. All options granted have an exercise price equivalent to the fair market value at the date of grant and, accordingly, no compensation cost has been recorded. If the fair value based method of accounting for stock options had been used, the Company’s net income and earnings per share would have been reduced to the proforma amounts for the three months and six months ended June 30, and are presented in the table which follows:

	Three months ended						Six months ended
	6/30/04			6/30/03			6/30/04			6/30/03
	(In Thousands, Except Share Data)
Net income:
As Reported	$	2,357		$	635		$	3,143		$	1,185
Less: Pro forma stock based compensation cost (net of taxes)		(104	)		(45	)		(208	)		(89	)
Pro forma	$	2,253		$	590		$	2,935		$	1,096
Basic earnings per share:
As Reported	$	0.55		$	0.15		$	0.73		$	0.28
Pro forma		0.52			0.14			0.69			0.26
Diluted earnings per share:
As Reported	$	0.53		$	0.15		$	0.71		$	0.27
Pro forma		0.51			0.14			0.66			0.25

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2004; expected volatility of 28.9%, expected average life of 8 years, and risk-free interest rates of 3.4% and expected dividend yield of 3.08%.

7

3. DEFINED BENEFIT PLAN

The Company provides pension benefits for its employees through membership in the Savings Bank Employees’ Retirement Association (the “Plan”). The Plan is a multiple-employer, non-contributory, defined benefit plan. Bank employees become eligible after attaining 21 years of age and completing one year of service. Additionally, benefits become fully vested after three years of eligible service. The Company’s annual contribution to the Plan is based upon standards established by the Employee Retirement Income Security Act. The contribution is based on an actuarial method intended to provide not only for benefits attributable to service date, but also for those expected to be earned in the future. The Company expects to contribute approximately $372 thousand during the Plan Year ending at October 31, 2004.

Net pension cost components for the three months and six months ended June 30, follow:

	Three months ended						Six months ended
	6/30/04			6/30/03			6/30/04			6/30/03
				(In Thousands)
Service cost	$	103		$	88		$	207		$	177
Interest cost		105			102			211			204
Expected return on plan assets		(121	)		(106	)		(242	)		(212	)
Net amortization and deferrals		(1	)		(1	)		(2	)		(2	)
Net periodic pension cost	$	86		$	83		$	174		$	167

4. CONTINGENCIES

The Bank was awarded a $4.2 million judgment against a debtor in 1997. The judgment was appealed and the Bank prevailed in this matter in Appeals Court. On February 13, 2002, the defendant filed bankruptcy under Chapter 7 (liquidation). Post-judgment interest accrues from the date of the judgment to February 13, 2002 and approximates $1.9 million. However, collectibility of post-judgment interest in addition to the $4.2 million award has not yet been determined.

Bids of approximately $3.3 million for the major assets were approved by the Bankruptcy Court on October 14, 2002. The net amount to be received by the Bank after taxes and bankruptcy expenses is not known at this time. However, it is not likely that the full $4.2 million judgment and post-judgment interest of $1.9 million will be collected.

On June 15, 2004 the Company reported in a press release the receipt of $2.5 million on a U.S. Bankruptcy Judge’s Order on the Trustee’s Motion for authorization to make an interim distribution to the Bank. The $2.5 million distribution has been received and recorded as income by the Bank on June 15, 2004. The Bank has agreed to return any of the interim distribution as would be necessary to pay additional taxes imposed on the bankruptcy estate in the event reserves set aside for expenses and taxes are insufficient. The Company first reported the Bankruptcy Trustee’s Motion seeking authorization from the U.S. Bankruptcy Judge for an interim distribution to creditors in a press release dated February 26, 2004. The diluted earnings per share impact of the interim distribution is approximately $0.35 per share based on average dilutive shares outstanding during the quarter ended June 30, 2004.

It is management’s opinion the timing and final amount to be collected can not be determined at this time. Accordingly, no recognition beyond the interim distribution has been recorded in the Company’s Consolidated Financial Statements at June 30, 2004.

5. RECENT ACCOUNTING DEVELOPMENTS

In December 2003, the American Institute of Certified Public Accountants (“AICPA”) issuedStatement of Position 03-3 (“SOP 03-3”): “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”. SOP 03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality be recognized at their fair value. The excess of contractual cash flows over expected cash flows is not to be recognized as an adjustment of yield, loss accrual, or valuation allowance. Valuation allowances can not be created nor “carried over” in the initial accounting for loans acquired in a transfer. This SOP is effective for loans acquired after December 31, 2004, with early adoption encouraged. The Company does not believe the adoption of SOP 03-3 will have a material impact on the Company’s financial position or results of operations.

8

5. RECENT ACCOUNTING DEVELOPMENTS (Continued)

Securities and Exchange Commission (“SEC”)Staff Accounting Bulletin (“SAB”) No. 105 — “Application of Accounting Principles to Loan Commitments”.In March 2004, the SEC issued SAB No. 105. SAB No. 105 summarizes the views of the SEC regarding the application of Generally Accepted Accounting Principles (“GAAP”) to loan commitments for mortgage loans that will be held for sale accounted for as derivatives. The guidance requires the measurement at fair value of such loan commitments include only the difference between the guaranteed interest rate in the loan commitment and a market interest rate; future cash flows related to servicing the loan or the customer relationship should not be recorded as a part of the loan commitment derivative. SAB No. 105 is effective for sold loan commitments accounted for as derivatives entered into beginning April 1, 2004. The Company adopted this SAB on April 1, 2004. The adoption of SAB No. 105 did not have an impact on the Company as the Company was valuing loan commitments to be accounted for as derivatives consistent with this guidance.

Financial Accounting Standards Board (“FASB”). Emerging Issues Task Force (“EITF”).Issue 03-1. The Meaning of “Other-Than-Temporary Impairment and its Application to Certain Investments”. In June 2004, the FASB’s EITF issued EITF Issue 03-1. EITF 03-1 contains new guidance on other-than-temporary impairments of investment securities. The guidance dictates when impairment is deemed to exist, provides guidance on determining if impairment is other than temporary, and directs how to calculate impairment loss. Issue 03-1 also details expanded annual disclosure rules. EITF 03-1 is effective for periods beginning after June 15, 2004. The Company does not believe the adoption of EITF 03-1 will have a material impact on the Company’s financial position or results of operations.

9

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

The Company has made forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 as amended) in this report that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of operations of the Company and projected or anticipated benefits or events related to other future developments involving the Company or the industry in which it operates. When verbs in the present tense such as “believes”, “expects”, “seeks”, “anticipates”, “continues”, “attempts”, or similar expressions are used, forward-looking statements are being made. Stockholders should note that many factors, some of which are discussed elsewhere in this report and in the documents which we incorporate by reference in this report, could affect the future financial results of the Company and could cause the results to differ materially from those expressed in or incorporated by reference in this report. Without limitation, those factors include fluctuations in interest rates, inflation, government regulations and economic conditions and competition, as well as, possible infrastructure disruptions due to weather, terrorist activity, computer capacity overload or other factors in the geographic and business areas in which the Company conducts its operations. As a result of such risks and uncertainties, the Company’s actual results may differ materially from such forward-looking statements. The Company does not undertake, and specifically disclaims any obligation to publicly release revisions to any such forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

EXECUTIVE LEVEL OVERVIEW

The Company’s financial results are dependent on the following areas of the income statement: net interest income, provision for loan losses, non-interest income, non-interest expense and provision for income taxes. Net interest income is the primary earnings of the Company and the main focus of management. Net interest income is the difference between interest earned on loans and investment securities and interest paid on deposits and borrowings. Deposits and borrowings have short durations and the cost of these funds do not necessarily rise and fall in tandem with loans and investment securities. There are many risks involved in managing net interest income including, but not limited to credit risk, interest rate risk and duration risk. These risks have a direct impact on the level of net interest income. The Company manages these risks through its internal credit and underwriting function, a credit review by an outside firm and the Asset and Liability Management Committee (“ALCO”) meetings on a regular basis. The credit review process reviews loans for underwriting and grading of loan quality while ALCO reviews the liquidity, interest rate risk, duration risk and allocation of capital resources. Loan quality has a direct impact on the amount of provisions for loan losses the Company reports.

Non-interest income includes various fees. Maintenance of customers’ loan and deposit accounts generate various amounts of fee income depending on the product selected. The Company generates gains on sales of mortgage loans and receives fee income from servicing loans sold. Non-interest income is primarily impacted by the volume of customer transactions, which could change in response to changes in interest rates, pricing and competition.

Non-interest expenses include various expenses of the Company which generally are directly related to business volume and are controlled by a budget process.

Provisions for income taxes are directly related to earnings or implemented tax strategies of the Company. Changes in the statutory tax rates and the earnings of the Company, the Bank and its subsidiaries, would effect the amount of income taxes reported.

10

FINANCIAL CONDITION

OVERVIEW

The Company has maintained risk assets below 1% of total assets for the past several years. The Company maintains its commitment to servicing the banking needs of the local community in the Merrimack Valley area. The Company had total assets of $476.3 million at June 30, 2004 compared to $466.1 million at December 31, 2003. The increase in asset size at June 30, 2004 from December 31, 2003 is mainly attributable to an increase of $6.6 million in investment securities, $2.7 million in Federal funds sold and $1.1 million in Federal Home Loan Bank stock. The funding for these assets came from an increase in deposits of $17.2 million. Deposit growth was also used to pay down borrowed funds of $8.0 million as they became due during 2004.

INVESTMENTS

The investment securities portfolio totaled $239.4 million or 50.3% of total assets at June 30, 2004, compared to $232.9 million, or 50.0% of total assets at December 31, 2003, an increase of $6.5 million from year-end. The change in mix in the investment securities portfolio was the result of maturities of U.S. Government Agency obligations, maturities and payments on asset-backed securities and payments on mortgage-backed securities. Funds received were reinvested in U.S. Government Agency Obligations. The increase in investment securities was the result of the utilization of funds from deposit growth.

The following table reflects the components and carrying values of the investment securities portfolio at June 30, 2004 and December 31, 2003:

	6/30/04		12/31/03
	(In Thousands)
Investment securities held to maturity (at amortized cost):
US Government Agency obligations	$	102,423	$	94,798
Mortgage-backed securities		34,740		39,467
Asset-backed securities		32,101		32,735
Corporate obligations		12,885		15,662
Municipal obligations		1,600		1,624
Total investment securities held to maturity	$	183,749	$	184,286
Investment securities available for sale (at market value):
US Treasury obligations	$	4,667	$	4,795
US Government Agency obligations		36,061		21,479
Mortgage-backed securities		5,530		6,862
Asset-backed securities		5,205		8,091
Corporate obligations		3,107		6,228
Mutual Funds		956		969
Equity securities		161		168
Total investment securities available for sale	$	55,687	$	48,592
Total investment securities portfolio	$	239,436	$	232,878

11

LOANS

The following table reflects the loan portfolio at June 30, 2004 and December 31, 2003:

	6/30/04			12/31/03
	(In Thousands)
Residential mortgage loans	$	58,749		$	57,017
Loans held for sale		—			338
Equity loans		10,441			10,236
Construction loans		11,622			16,040
Commercial real estate loans		118,309			112,503
Commercial loans		12,361			14,805
Consumer loans		659			564
Total loans		212,141			211,503
Allowance for loan losses		(4,168	)		(4,220	)
Total loans, net	$	207,973		$	207,283

Total loans increased to $212.1 million or 44.5% of total assets at June 30, 2004 from $211.5 million or 45.4% of total assets at December 31, 2003. The residential mortgage loan balances have remained fairly level compared to year-end 2003, however, the refinancing activity of existing mortgages and sales into the secondary market has slowed during the first six months of 2004. Construction loans have declined $4.4 million due to the completion of some projects which have been transferred into the commercial real estate portfolio. Commercial real estate loans have increased $5.8 million due to increased borrowers’ demand for this type of loan and the completion of $3.0 million in construction loans transferred to commercial real estate loans.

ALLOWANCE FOR LOAN LOSSES

The following table summarizes changes in the allowance for loan losses for the three months and six months ended June 30, 2004 and 2003:

	Three months ended					Six months ended
	6/30/04			6/30/03		6/30/04			6/30/03
				(In Thousands)
Beginning balance	$	4,218		$	4,170	$	4,220		$	4,167
Provision (credit) charged to operations		(300	)		—		(300	)		—
Recoveries on loans previously charged-off		254			6		256			9
Loans charged-off		(4	)		—		(8	)		—
Ending balance	$	4,168		$	4,176	$	4,168		$	4,176

In the second quarter of 2004, the Bank recognized $253 thousand of the interim distribution of a legal judgment previously obtained by the Bank as a recovery to the allowance for loan losses on amounts previously charged off. The Bank also recorded a credit provision for loan losses of $300 thousand for the quarter ended June 30, 2004.

The balance of the allowance for loan losses reflects management’s assessment of losses and is based on a review of the risk characteristics of the loan portfolio. The Company considers many factors in determining the adequacy of the allowance for loan losses. Collateral value on a loan by loan basis, trends of loan delinquencies on a portfolio segment level, risk classification identified in the Company’s regular review of individual loans, and economic conditions are primary factors in establishing allowance levels. Management believes the allowance level is adequate to absorb estimated credit losses associated with the loan portfolio. The allowance for loan losses reflects information available to management at the end of each period.

12

RISK ASSETS

Risk assets consist of non-performing loans and other real estate owned. Non-performing loans consist of both a) loans 90 days or more past due, and b) loans placed on non-accrual because full collection of the principal balance is in doubt. Other real estate owned (OREO) is comprised of foreclosed properties where the Company has formally received title or has possession of the collateral. Properties are carried at the lower of the investment in the related loan or the estimated fair value of the property or collateral less selling costs. Fair value of such property or collateral is determined based upon independent appraisals and other relevant factors. Management periodically reviews property values and makes adjustments as required. Gains from sales of properties, net operating expenses and any subsequent provisions to increase the allowance for losses on real estate acquired by foreclosure are charged to other real estate owned expenses. Losses are charged to the allowance.

Total risk assets were $106 thousand at June 30, 2004. This represents an increase of $104 thousand from December 31, 2003. These changes were primarily attributable to an increase in non-performing loans to $106 thousand at June 30, 2004 from zero at December 31, 2003 and $23 thousand at June 30, 2003. The Company had no impaired loans at June 30, 2004, December 31, 2003 and June 30, 2003.

The following table summarizes the Company’s risk assets at June 30, 2004, December 31, 2003 and June 30, 2003:

	6/30/04			12/31/03			6/30/03
	(Dollars in Thousands)
Non-performing loans	$	106		$	—		$	23
Other real estate owned		—			2			7
Total risk assets	$	106		$	2		$	30
Risk assets as a percent of total assets		0.02	%		0.00	%		0.01	%

The following table shows the allowance for loan losses as a percent of total loans at June 30, 2004, December 31, 2003 and June 30, 2003:

	6/30/04			12/31/03			6/30/03
	(Dollars in Thousands)
Allowance for loan losses	$	4,168		$	4,220		$	4,176
Allowance for loan losses as a percent of total loans		1.96	%		2.00	%		1.94	%

The allowance for loan losses has remained fairly consistent at approximately $4.2 million at the end of June 30, 2004, December 31, 2003 and June 30, 2003. However, the allowance for loan losses as a percent of total loans has decreased to 1.96% at June 30, 2004 down from 2.00% at December 31, 2003. Due to a slight increase in total loans outstanding at June 30, 2004 compared to December 31, 2003, the ratio of the allowance for loan loss as a percent of total loans has decreased slightly.

DEPOSITS

Total interest bearing deposits amounted to $273.9 million at June 30, 2004 compared to $258.4 million at December 31, 2003, an increase of $15.5 million. The change from December 31, 2003 is due primarily to increases in certificates of deposit, money market investment and NOW accounts. All other deposit categories experienced slight increases.

The following table reflects the components of interest bearing deposits at June 30, 2004 and December 31, 2003:

	6/30/04		12/31/03
	(In Thousands)
NOW and Super NOW accounts	$	39,446	$	36,108
Savings accounts		46,304		44,324
Money market investment accounts		80,190		76,148
Certificates of deposit		80,027		74,184
Retirement accounts		27,976		27,666
Total interest bearing deposits	$	273,943	$	258,430

13

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2004 AND 2003

OVERVIEW

The Company reported net income of $2.4 million or $0.53 diluted earnings per share and $635 thousand or $0.15 diluted earnings per share for the three months ended June 30, 2004 and 2003, respectively. The net income increase of $1.7 million was due primarily to the receipt of $2.5 million on a U.S. Bankruptcy Judge’s order on the Trustee’s Motion for authorization to make an interim distribution in a case in which the Company’s wholly owned subsidiary, Lawrence Savings Bank (the “Bank”), is a secured creditor. The impact to earnings after provision for taxes approximates $1.6 million. The diluted earnings per share impact of the interim distribution is approximately $0.35 per share based on average diluted shares outstanding during the quarter ended June 30, 2004. The Bank recorded a credit provision for loan losses of $300 thousand for the quarter ended June 30, 2004, as a result of the recognition of $253 thousand of the interim distribution as a recovery to the allowance for loan losses on amounts previously charged off.

Net income for the three months ended June 30, 2004 increased, aside from the lawsuit judgment collected noted above, due to net interest income increasing $368 thousand and non-interest income increasing by $122 thousand. Offsetting these increases were non-interest expenses rising $399 thousand and an increase in the provision for income taxes of $944 thousand primarily attributed to the lawsuit judgment recovery.

NET INTEREST INCOME FROM OPERATIONS

Net interest income for the three months ended June 30, 2004 and 2003 increased by $368 thousand or 12.3% to $3.4 million from $3.0 million, respectively. The net interest rate spread increased to 2.60% for the quarter ended June 30, 2004 from 2.51% for the same quarter of 2003. Interest income in the second quarter of 2004 experienced an overall increase due to a higher average investment securities balances outstanding from the second quarter of 2003, offset by lower average loan balances and a declining interest rate environment on loans. Interest expense incurred a similar decline in interest rates resulting in lower rates paid on deposits and borrowed funds; however, the rates paid on borrowed funds have declined at a slower pace than rates paid on deposits.

The following table presents the components of net interest income and net interest rate spread for the three months ended June 30, 2004 and 2003:

	Income/Expense				Yield/Rate
	Three Months Ended
	6/30/04		6/30/03		6/30/04			6/30/03
	(Dollars in Thousands)
Interest income and average yield:
Loans	$	3,252	$	3,740		6.04	%		6.66	%
Investments, mortgage-backed securities and other earning assets		2,209		1,574		3.45			3.24
Total		5,461		5,314		4.64			5.07
Interest expense and average rate paid:
Deposits		870		1,096		1.30			1.65
Federal Home Loan Bank advances		1,110		1,181		4.47			5.19
Securities sold under agreements to repurchase and other borrowed funds		115		39		1.08			3.16
Total		2,095		2,316		2.04			2.56
Net interest income	$	3,366	$	2,998
Net interest rate spread						2.60	%		2.51	%
Net interest margin						2.86	%		2.86	%

14

INTEREST INCOME

Interest income for the second quarter of 2004 was $5.5 million as compared to $5.3 million for the same quarter of 2003. The increase of $147 thousand in interest income is primarily due to $534 thousand recognized from higher average investment securities balances, coupled with slightly higher yields on investment securities resulting in an increase of $101 thousand in interest income. Partially offsetting these increases were lower yields and lower average loan balances which decreased interest income by $356 thousand and $132 thousand, respectively.

Yields on loans were 6.04% and 6.66% for the quarters ended June 30, 2004 and 2003, respectively. The impact to interest income due to lower loan yields was $356 thousand. Lower average loan balances of $216.5 million versus $225.3 million for the quarters ended June 30, 2004 and 2003, respectively, decreased interest income by $132 thousand.

The following table lists the components of loan interest income for the three months ended June 30, 2004 and 2003:

	Three months ended
	6/30/04		6/30/03
	(In Thousands)
Residential mortgage loans	$	768	$	855
Loans held for sale		14		57
Equity loans		124		137
Construction loans		191		296
Commercial real estate loans		1,952		2,003
Commercial loans		192		382
Consumer loans		11		10
Total loan interest income	$	3,252	$	3,740

Yields on investment securities were 3.45% and 3.24% for the quarters ended June 30, 2004 and 2003, respectively, increasing interest income by $101 thousand. Higher average investment securities balances of $257.2 million during the second quarter of 2004 versus $195.1 million for the same period in 2003 increased interest income by $534 thousand.

INTEREST EXPENSE

Interest expense for the second quarter of 2004 totaled $2.1 million, a decrease of $221 thousand from the same quarter of 2003. This decrease is primarily due to lower rates paid on interest bearing liabilities, which impacted interest expense by $428 thousand. Average balances of interest bearing liabilities increased resulting in $207 thousand in additional interest expense.

Rates on deposits were 1.30% and 1.65% for the quarters ended June 30, 2004 and 2003, respectively. This decrease resulted in interest expense decreasing by $235 thousand. Average deposit balances were $269.8 million for the second quarter of 2004 versus $267.1 million for the same period in 2003, which resulted in a $9 thousand increase to interest expense.

The following table lists the components of deposit interest expense for the three months ended June 30, 2004 and 2003:

	Three months ended
	6/30/04		6/30/03
	(In Thousands)
NOW and Super NOW accounts	$	9	$	10
Savings deposit accounts		42		56
Money market investment accounts		240		229
Certificates of deposit		370		560
Retirement accounts		209		241
Total deposit interest expense	$	870	$	1,096

Rates on FHLB advances were 4.47% and 5.19% for the second quarters of 2004 and 2003, respectively. The decrease in rates paid on FHLB advances decreased interest expense by $167 thousand. The average balances of FHLB advances increased to $99.9 million in the second quarter 2004 from $91.3 million for the second quarter of 2003, which resulted in an increase in interest expense of $96 thousand.

15

Rates on repurchase agreements and other borrowed funds (which includes FHLB advances less than 90 days) were 1.08% and 3.16% for the second quarters of 2004 and 2003, respectively. The decrease in rates paid on these interest bearing liabilities resulted in interest expense decreasing by $26 thousand. The average balance increased to $43.0 million in 2004 from $4.9 million in 2003 which increased interest expense by $102 thousand.

PROVISION FOR LOAN LOSSES

The Company booked a credit provision for loan losses in the amount of $300 thousand in the second quarter of 2004 due to a recovery of $253 thousand to the allowance for loan losses and the continued low level of non-performing loans. The Company made no provision for loan losses in 2003. The absence of a provision for loan losses in 2003 was based on management’s assessment of the adequacy of the allowance based on an evaluation of the Bank’s loan portfolio and the level of non-performing loans. The balance of the allowance for loan losses has remained fairly consistent at approximately $4.2 million at June 30, 2004 and December 31, 2003. The coverage of the allowance for loan losses has decreased slightly to 1.96% at June 30, 2004 from 2.00% at December 31, 2003.

NON-INTEREST INCOME

Non-interest income amounted to $2.8 million and $383 thousand for the quarters ended June 30, 2004 and 2003, respectively. The increase was primarily attributable to the lawsuit judgment collected of $2.5 million of which $2.3 million was reported as non-interest income in the second quarter of 2004. Excluding the lawsuit judgment collected, non-interest income increased $122 thousand compared to the second quarter of 2003. Loan fee income increased to $123 thousand in 2004 compared to loan fee loss of $50 thousand in 2003. The increase in loan fees for the second quarter of 2004 can be attributed to an increase of $55 thousand in prepayment penalties on commercial real estate loan payoffs and to an increase in fair value on mortgage servicing rights (“MSR”) for which $52 thousand was a decrease to the valuation allowance in 2004 compared to provision for losses of $72 thousand in the second quarter of 2003. The reason for higher provisions for losses on MSR in 2003 is due to higher than normal prepayment speeds used in the fair value calculation of MSR experienced by the Company in 2003 compared to 2004. Deposit account fees increased $50 thousand to $230 thousand in the second quarter of 2004 due to an increase in NOW account fees of $41 thousand attributable to a new service the Company offered in 2004. Partially offsetting these increases was a decrease in gains on sales of mortgage loans declining to $58 thousand from $165 thousand in the second quarter of 2004 and 2003, respectively, due to a reduction in loan sales.

NON-INTEREST EXPENSE

Non-interest expense totaled $2.8 million compared to $2.4 million for the quarters ended June 30, 2004 and 2003, respectively. Salaries and employee benefits increased by $207 thousand in the second quarter 2004 compared to the second quarter in 2003 mainly due to normal salary increases and the addition to headcount for the new Salem, New Hampshire branch. Occupancy and equipment expenses totaled $242 thousand in 2004, an increase of $40 thousand over 2003 mainly due to higher depreciation expenses associated with assets no longer used by the Company. Professional expenses increased to $216 thousand in the second quarter 2004 compared to $162 thousand in the same period in 2003 primarily due to higher legal expenses associated with the lawsuit judgment collection and consulting expenses. Data processing expenses increased to $232 thousand in the second quarter of 2004 compared to $179 thousand in the same quarter in 2003 due to an increase in service bureau charges associated with telecommunication improvements. Other expenses increased to $454 thousand in 2004’s second quarter compared to $409 thousand in the same period in 2003. Other expenses increased mainly due to an increase in marketing expenses relating to the new Salem, New Hampshire branch.

INCOME TAXES

The Company reported an income tax expense of $1.3 million for the quarter ended June 30, 2004 or an effective income tax rate of 35.9%. This compares to an income tax expense of $374 thousand for the quarter ended June 30, 2003 or effective income tax rate of 37.1%. The increase of $944 thousand in the provision for income taxes is primarily attributed to the lawsuit judgment recovery. The decrease in the effective income tax rate in 2004 from 2003 is due to lower provisions for income taxes associated with tax exempt loans held by the Company.

16

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

OVERVIEW

The Bank reported net income of $3.1 million or $0.71 diluted earnings per share and $1.2 million or $0.27 diluted earnings per share for the six months ended June 30, 2004 and 2003, respectively. During the first six months of 2004, net income increased $2.0 million mainly attributable to the lawsuit judgment collected. Net interest income and non-interest income increased by $528 thousand and $164 thousand, respectively. Partially offsetting these revenues were increases in non-interest expenses of $215 thousand and the provision for income taxes by $1.1 million attributable to the recovery previously mentioned.

NET INTEREST INCOME FROM OPERATIONS

Net interest income for the six months ended June 30, 2004 and 2003 totaled $6.8 million and $6.3 million, respectively. The net interest rate spread increased slightly to 2.67% from 2.65%. The rates paid on interest bearing liabilities decreased more rapidly than the yield on interest bearing assets. The following table presents the components of net interest income and net interest spread:

	Income/Expense				Yield/Rate
	Six Months Ended
	6/30/04		6/30/03		6/30/04			6/30/03
	(Dollars in Thousands)
Interest income and average yield:
Loans	$	6,555	$	7,688		6.09	%		6.74	%
Investments, mortgage-backed securities and other earning assets		4,348		3,288		3.51			3.48
Total		10,903		10,976		4.71			5.26
Interest expense and average rate paid:
Deposits		1,698		2,246		1.29			1.70
Federal Home Loan Bank advances		2,162		2,384		4.78			5.19
Securities sold under agreements to repurchase and other borrowed funds		254		85		1.06			3.27
Total		4,114		4,715		2.04			2.61
Net interest income	$	6,789	$	6,261
Net interest rate spread						2.67	%		2.65	%
Net interest margin						2.94	%		3.00	%

INTEREST INCOME

Interest income for the first six months of 2004 was $10.9 million as compared to $11.0 million for the same period of 2003. The decrease in interest income of $73 thousand is due mainly to lower yields on loans reducing interest income by $722 thousand. Lower average loan balances also contributed to the decrease by $411 thousand. Partially offsetting these decreases were higher average investment securities balances and higher yields increasing interest income by $1.0 million and $43 thousand, respectively.

Yields on loans were 6.09% and 6.74% for the six months ended June 30, 2004 and 2003, respectively. The impact on interest income due to lower yields was $722 thousand. Lower average loan balances of $216.3 million in 2004 versus $229.9 million in 2003 resulted in interest income decreasing by $411 thousand.

17

The following table lists the components of loan interest income for the six months ended June 30, 2004 and 2003:

	Six months ended
	6/30/04		6/30/03
	(In Thousands)
Residential mortgage loans	$	1,546	$	1,796
Loans held for sale		20		84
Equity loans		257		297
Construction loans		397		635
Commercial real estate loans		3,896		4,071
Commercial loans		417		783
Consumer loans		22		22
Total loan interest income	$	6,555	$	7,688

Yields on investment securities increased to 3.51% for the six months ended June 30, 2004. This compares to yields on investment securities of 3.48% for the same period in 2003. This resulted in interest income increasing by $43 thousand. Higher average investment securities balances of $248.8 million in 2004 versus $190.6 million in 2003 resulted in interest income increasing by $1.0 million.

INTEREST EXPENSE

Interest expense for the first six months of 2004 and 2003 was $4.1 million and $4.7 million, respectively. The decrease of $601 thousand in interest expense is primarily due to lower rates paid on deposits and other interest bearing liabilities, which decreased interest expense by $789 thousand. Interest expense decreased $39 thousand due to lower average deposit and FHLB advances balances. Higher average balances of repurchase agreements and other borrowed funds increased interest expense by $227 thousand.

Rates on deposits were 1.29% and 1.70% for the first six months of 2004 and 2003 respectively. This decrease resulted in interest expense decreasing by $546 thousand. Average deposit balances were $265.6 million in 2004 down from $265.9 million in 2003, which had a nominal impact on interest expense.

The following table lists the components of deposit interest expense for the six months ended June 30, 2004 and 2003:

	Six months ended
	6/30/04		6/30/03
	(In Thousands)
NOW and Super NOW accounts	$	19	$	20
Savings deposit accounts		82		113
Money market investment accounts		476		467
Certificates of deposit		702		1,154
Retirement accounts		419		492
Total deposit interest expense	$	1,698	$	2,246

Rates on FHLB advances were 4.78% and 5.19% resulting in interest expense decreasing by $185 thousand in 2004 from 2003. The average balances from these interest bearing liabilities decreased to $91.0 million in 2004 from $92.6 million in 2003, which decreased interest expense by $37 thousand.

Rates paid on repurchase agreements and other borrowed funds were 1.06% and 3.27% for the first six months of 2004 and 2003, respectively. This rate decrease resulted in a decrease of $58 thousand in interest expense. The average balances of repurchase agreements and other borrowed funds increased to $48.2 million for the first half in 2004 compared to $5.2 million for the same period in 2003 resulting in an increase of $227 thousand in interest expense.

18

PROVISION FOR LOAN LOSSES

The Company booked a credit provision for loan losses in the amount of $300 thousand for the six months ended June 30, 2004 due to the $253 thousand recovery to the allowance for loan losses and the continued low level of non-performing loans. The Company made no provision for loan losses in 2003. The absence of a provision for loan losses in 2003 was due to the overall asset quality of the Company and low level of delinquent loans.

NON-INTEREST INCOME

Non-interest income amounted to $3.1 million and $663 thousand for the six months ended June 30, 2004 and 2003, respectively. The increase, net of the lawsuit judgment collected, totaled $164 thousand. The change in non-interest income is the result of loan fee income of $143 thousand versus loan fee loss of $180 thousand in the first six months of 2003. Deposit account fees increased to $432 thousand from $343 thousand derived from a new service offered in 2004. Gains on sales of mortgage loans declined to $69 thousand from $314 thousand in 2003 due to a reduction in the amount of loans sold. Other income declined in the first six months of 2004 to $183 thousand from $186 thousand in 2003 due to a reduction in debit card fees.

NON-INTEREST EXPENSE

Non-interest expense increased to $5.3 million for the six months ended June 30, 2004, compared to $5.0 million in 2003. The increase in non-interest expense is attributable to an increase in salaries and employee benefits to $3.2 million in 2004 up by $178 thousand over the same period in 2003 due to normal salary increases and an increase in headcount due to the new Salem, New Hampshire branch. Occupancy and equipment expenses have risen to $439 thousand for the first six months in 2004 from $422 thousand in 2003 due to increased depreciation expenses. Professional expense decreased to $331 thousand for the six months in 2004 from $363 thousand over the same period in 2003 as the Bank’s legal expenses and consulting fees decreased. Data processing expense increased to $432 thousand from $360 thousand resulting from an increase in service bureau charges.

INCOME TAXES

The Bank reported an income tax expense of $1.8 million and $695 thousand for the first six months ended June 30, 2004 and 2003, respectively, representing an effective tax rate of 36.3% and 37.0%, respectively. The increase in the provision for income taxes of $1.1 million was primarily attributable to the previously mentioned lawsuit recovery.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary source of funds is cash dividends from its wholly-owned subsidiary, Lawrence Savings Bank (the “Bank”). The Bank paid dividends to the Company in the amount of $1.1 million and $500 thousand during the first six months of 2004 and 2003, respectively. The Company made cash payments of dividends to shareholders in the amount of $1.1 million and $1.0 million in the first half of 2004 and 2003, respectively.

The Bank’s primary sources of funds include collections of principal payments and repayments on outstanding loans, increases in deposits, advances from the Federal Home Loan Bank of Boston (“FHLB”) and securities sold under agreements to repurchase. The Bank has a line of credit of $6.8 million with the FHLB. The Bank also has a $5 million unsecured Federal funds line of credit.

The FHLB requires member banks to maintain qualified collateral for its advances. Collateral is comprised of the Bank’s investments in FHLB stock, its residential mortgage portfolio and the portion of the investment portfolio which meets FHLB qualifying collateral requirements and have been designated as such. The Bank’s borrowing capacity at the FHLB at June 30, 2004 was $179.7 million of which $122.2 million has been borrowed.

At June 30, 2004, the Company’s stockholder’s equity was $57.0 million as compared to $55.0 million at December 31, 2003. The change during the first six months of 2004 occurred due to net income of $3.1 million and $361 thousand from the exercise of stock options. Stockholders’ equity was reduced by the declaration of cash dividends to shareholders of $1.1 million and a decrease in the market value of investment securities available for sale, net of taxes by $418 thousand. The Company’s leverage ratio at June 30, 2004 and December 31, 2003 was 11.63% and 12.11%, respectively. The Company’s and the Bank’s total risk based capital ratios were 20.99% and 20.63% at June 30, 2004, respectively, compared with 20.50% and 20.25% at December 31, 2003, respectively. The Company exceeds all regulatory minimum capital ratio requirements set forth by the FRB, and the Bank exceeds all minimum capital ratio requirements as defined by the FDIC.

19

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The response is incorporated herein by reference to the discussion under the sub-caption “Interest Rate Sensitivity” of the caption “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” on pages 19 and 20 of the LSB Corporation’s Annual Report for the fiscal year ended December 31, 2003.

ITEM 4: CONTROLS AND PROCEDURES

The Company’s chief executive officer and chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report (the “Evaluation Date”), have concluded that as of the Evaluation Date the Company’s disclosure controls and procedures were effective and designed to ensure that material information relating to the Company and its subsidiaries would be made known to them by others within those entities.

During the period covered by this quarterly report, there were no significant changes in the Company’s internal controls that have materially affected, or are reasonable likely to materially affect the internal controls over financial reporting.

20

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is involved in various legal proceedings incidental to its business. Other than the following matter, management does not believe resolution of such litigation will have a material effect on the financial condition and operating results of the Company.

The Bank was awarded a $4.2 million judgment against a debtor in 1997. The judgment was appealed and the Bank prevailed in this matter in Appeals Court. On February 13, 2002, the defendant filed bankruptcy under Chapter 7 (liquidation). Post-judgment interest accrues from the date of the judgment to February 13, 2002 and approximates $1.9 million. However, collectibility of post-judgment interest in addition to the $4.2 million award has not yet been determined.

Bids of approximately $3.3 million for the major assets of the debtor were approved by the Bankruptcy Court on October 14, 2002. The net amount to be received by the Bank after taxes and bankruptcy expenses is not known at this time. However, it is not likely that the full $4.2 million judgment and post-judgment interest of $1.9 million will be collected.

On June 15, 2004 the Company reported in a press release the receipt of $2.5 million on a U.S. Bankruptcy Judge’s Order on the Trustee’s Motion for authorization to make an interim distribution to the Bank. The $2.5 million distribution has been received and recorded as income by the Bank on June 15, 2004. The Bank has agreed to return any of the interim distribution as would be necessary to pay additional taxes imposed on the bankruptcy estate in the event reserves set aside for expenses and taxes are insufficient. The Company first reported the Bankruptcy Trustee’s Motion seeking authorization from the U.S. Bankruptcy Judge for an interim distribution to creditors in a press release dated February 26, 2004. The diluted earnings per share impact of the interim distribution is approximately $0.35 per share based on average dilutive shares outstanding during the quarter ended June 30, 2004.

It is management’s opinion the timing and final amount to be collected can not be determined at this time. Accordingly, no recognition beyond the interim distribution has been recorded in the Company’s Consolidated Financial Statements at June 30, 2004.

For further information, please refer to the discussion under the caption “CONTINGENCIES” on page 41 of the Corporation’s Annual Report for the fiscal year ended December 31, 2003, which is hereby incorporated herein by reference.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 4, 2004, the Company held its Annual Meeting.

The stockholders elected each of the following three individuals as Class B directors of the Company to serve until the 2007 Annual Meeting, with the following votes cast:

					Broker non-votes
Nominees	For		Withheld		and Abstentions
Malcolm W. Brawn		3,779,744		23,821		0
Neil H. Cullen		3,780,744		22,821		0
Richard Hart Harrington		3,768,840		34,725		0

The following directors of the Company continued as directors after the 2004 Annual Meeting: Eugene A. Beliveau, Kathleen Boshar Reynolds, Thomas J. Burke, Byron R. Cleveland, Jr., Robert F. Hatem, Marsha A. McDonough and Paul A. Miller

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ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits.

Please see the Exhibit Index attached hereto.

b. Reports on Form 8-K.

The following is a list of Form 8-K filed by LSB Corporation with the Securities and Exchange Commission during the quarter ended June 30, 2004:

Date Filed	Items reported
April 19, 2004	LSB Corporation’s press release announcing the Company’s earnings for the three months ended March 31, 2004.
April 26, 2004	LSB Corporation’s press release announcing the Company’s dividend to shareholders for the second quarter 2004.
May 5, 2004	LSB Corporation’s press release regarding the Company’s Annual Meeting of stockholders held May 4, 2004.
June 16, 2004	LSB Corporation’s press release announcing the Company’s Interim Distribution received by a Bank Subsidiary of $2.5 million.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	LSB CORPORATION AND SUBSIDIARY
August 12, 2004	/s/ Paul A. Miller
	Paul A. Miller
	President and
	Chief Executive Officer
August 12, 2004	/s/ John E. Sharland
	John E. Sharland
	Senior Vice President
	Chief Financial Officer

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LSB CORPORATION AND SUBSIDIARY

Quarterly Report on Form 10-Q For Quarter Ended June 30, 2004

EXHIBIT INDEX

		Page
31.1	Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002		25
31.2	Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002		26
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		27
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		28

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