LSBX Lsb Corp (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2010

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.

Yes þ       No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o       No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).

Large Accelerated Filer o		Accelerated Filer o		Non-Accelerated Filer o		Smaller Reporting Company þ
				(Do not check if a smaller reporting company)

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

Yes o       No þ

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 August 6, 2010
Common Stock, par value $.10 per share		4,506,686 shares

 

 

LSB CORPORATION AND SUBSIDIARY

INDEX

		Page:
PART I — FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (Unaudited)
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 (Unaudited) Consolidated Financial Statements			7-12
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			12-24
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK			24
ITEM 4 CONTROLS AND PROCEDURES			25
PART II — OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS			25
ITEM 1A RISK FACTORS			25
ITEM 6 EXHIBITS			26-27
SIGNATURES			28
EXHIBIT INDEX			29
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART 1 — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LSB CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

		June 30,				December 31,
		2010				2009
		(In thousands, except share data)
ASSETS
Assets:
Cash and due from banks		$	7,536			$	8,615
Federal funds sold			10,222				6,597
Total cash and cash equivalents			17,758				15,212
Investment securities available for sale, at fair value, amortized cost of $193,945 in 2010 and $224,130 in 2009			202,270				230,533
Federal Home Loan Bank stock, at cost			11,825				11,825
Loans, net of allowance for loan losses of $7,467 in 2010 and $7,168 in 2009			535,046				529,451
Premises and equipment			8,501				7,209
Accrued interest receivable			2,593				2,727
Deferred income tax asset, net			3,087				4,315
Bank-owned life insurance			11,350				11,120
Prepaid FDIC insurance			2,674				3,069
Other assets			1,813				1,137
Total assets		$	796,917			$	816,598
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Core deposits		$	273,805			$	252,389
Term deposits			218,742				240,405
Total deposits			492,547				492,794
Long-term borrowed funds			221,889				245,971
Short-term borrowed funds			8,209				7,111
Subordinated debt			6,000				6,000
Mortgagors’ escrow accounts			741				776
Other liabilities			3,444				3,426
Total liabilities			732,830				756,078
Stockholders’ equity:
Preferred stock, Series A, $.10 par value per share: 5,000,000 shares authorized, none issued			—				—
Common stock, $.10 par value per share; 20,000,000 shares authorized; 4,506,686 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively			451				451
Additional paid-in capital			60,004				60,004
Accumulated deficit			(1,378	)			(3,802	)
Accumulated other comprehensive income, net of tax			5,010				3,867
Total stockholders’ equity			64,087				60,520
Total liabilities and stockholders’ equity		$	796,917			$	816,598

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

LSB CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

		Three months ended								Six months ended
		June 30,								June 30,
		2010				2009				2010				2009
		(In thousands, except share data)
Interest and dividend income:
Loans		$	7,862			$	7,077			$	15,568			$	13,754
Investment securities available for sale			2,112				3,003				4,490				6,367
Short term investments			5				7				14				11
Total interest and dividend income			9,979				10,087				20,072				20,132
Interest expense:
Deposits			1,959				2,585				4,191				5,245
Long-term borrowed funds			2,280				2,770				4,773				5,544
Short-term borrowed funds			3				4				7				43
Subordinated debt			132				—				261				—
Total interest expense			4,374				5,359				9,232				10,832
Net interest income			5,605				4,728				10,840				9,300
Provision for loan losses			700				460				1,400				700
Net interest income after provision for loan losses			4,905				4,268				9,440				8,600
Non-interest income:
Deposit account fees			236				234				460				457
Loan servicing fees, net			69				65				151				116
Gains on sales of investments			679				232				1,376				458
Income on bank-owned life insurance			115				124				230				249
Prepayment penalty on FHLB advances			—				—				(149	)			—
Other income			139				119				261				225
Total non-interest income			1,238				774				2,329				1,505
Non-interest expense:
Salaries and employee benefits			1,929				1,627				3,745				3,370
Occupancy and equipment			467				346				942				720
Data processing			295				233				535				473
Professional			129				152				241				337
Marketing			96				117				241				259
Other real estate owned			10				—				15				2
FDIC deposit insurance			200				369				411				760
Other			472				613				948				1,158
Total non-interest expense			3,598				3,457				7,078				7,079
Income before income tax expense			2,545				1,585				4,691				3,026
Income tax expense			946				524				1,546				1,001
Net income before preferred stock dividends and accretion			1,599				1,061				3,145				2,025
Preferred stock dividends and accretion			—				(215	)			—				(374	)
Net income available to common shareholders		$	1,599			$	846			$	3,145			$	1,651
Average basic common shares outstanding			4,506,686				4,471,382				4,506,686				4,471,163
Common stock equivalents			3,538				1,683				2,935				882
Average diluted common shares outstanding			4,510,224				4,473,065				4,509,621				4,472,045
Basic earnings per share		$	0.35			$	0.19			$	0.70			$	0.36
Diluted earnings per share		$	0.35			$	0.19			$	0.70			$	0.36

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

LSB CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2009 AND THE
SIX MONTHS ENDED JUNE 30, 2010
(UNAUDITED)

																		Accumulated
										Additional								Other				Total
		Preferred				Common				Paid-In				Accumulated				Comprehensive				Stockholders’
		Stock				Stock				Capital				Deficit				Income				Equity
		(In thousands, except share data)
Balance at December 31, 2008		$	14,455			$	447			$	60,179			$	(6,250	)		$	3,311			$	72,142
Net income			—				—				—				5,037				—				5,037
Other comprehensive income - Unrealized gain on securities available for sale (tax effect $343)			—				—				—				—				556				556
Total comprehensive income																							5,593
Stock-based compensation			—				—				121				—				—				121
Exercise of stock options and tax benefits (28,995 shares)			—				4				264				—				—				268
Common dividends declared and paid ($0.30 per share)			—				—				—				(1,344	)			—				(1,344	)
Preferred dividends declared and paid			—				—				—				(700	)			—				(700	)
Accretion of discount on preferred stock			545				—				—				(545	)			—				—
Redemption of preferred stock			(15,000	)			—				—				—				—				(15,000	)
Repurchase of warrants issued with preferred stock			—				—				(560	)			—				—				(560	)
Balance at December 31, 2009			—				451				60,004				(3,802	)			3,867				60,520
Net income			—				—				—				3,145				—				3,145
Other comprehensive income - Unrealized gain on securities available for sale (tax effect $780)			—				—				—				—				1,143				1,143
Total comprehensive income																							4,288
Dividends declared and paid ($0.16 per common share)			—				—				—				(721	)			—				(721	)
Balance at June 30, 2010		$	—			$	451			$	60,004			$	(1,378	)		$	5,010			$	64,087

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

LSB CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

		Six months ended June 30,
		2010				2009
		(In thousands)
Cash flows from operating activities:
Net income		$	3,145			$	1,651
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			1,400				700
Gains on sales of securities			(1,376	)			(458	)
Net accretion of investment securities			(110	)			(393	)
Depreciation and amortization of premises and equipment			388				290
Decrease in accrued interest receivable			134				34
Deferred income tax benefit			(137	)			(115	)
Stock-based compensation			—				14
Income on bank-owned life insurance			(230	)			(249	)
Decrease (increase) in other assets and prepaid FDIC Insurance			304				(52	)
Increase in other liabilities			18				717
Net cash provided by operating activities			3,536				2,139
Cash flows from investing activities:
Proceeds from maturities of investment securities available for sale			16,779				7,987
Proceeds from sales of investment securities available for sale			25,598				8,291
Purchases of investment securities available for sale			(39,929	)			(24,288	)
Principal payments of investment securities available for sale			29,224				45,816
Loan originations, net of principal payments			(7,248	)			(42,474	)
Loans purchased			—				(6,837	)
Proceeds from sales of other real estate owned			253				—
Purchases of premises and equipment			(1,680	)			(1,093	)
Net cash provided by (used in) investing activities			22,997				(12,598	)
Cash flows from financing activities:
Net (decrease) increase in deposits			(247	)			40,068
Additions to long-term borrowed funds			9,000				—
Payments on long-term borrowed funds			(33,082	)			(5,078	)
Net increase (decrease) in short-term borrowed funds			1,098				(10,218	)
(Decrease) increase in mortgagors’ escrow accounts			(35	)			13
Dividends paid to preferred shareholders			—				(319	)
Dividends paid to common shareholders			(721	)			(894	)
Proceeds from exercise of stock options			—				30
Net cash (used in) provided by financing activities			(23,987	)			23,602
Net increase in cash and cash equivalents			2,546				13,143
Cash and cash equivalents, beginning of period			15,212				13,328
Cash and cash equivalents, end of period		$	17,758			$	26,471
Cash paid during the period for:
Interest on deposits		$	4,201			$	5,257
Interest on borrowed funds			5,158				5,654
Income taxes paid			1,592				1,235
Supplemental non cash investing and financing activities:
Transfers to other real estate owned			253				—

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

LSB CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(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 River Bank (the “Bank”), a state-chartered Massachusetts savings bank organized in 1868. 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 currently insured by the Deposit Insurance Fund of the FDIC up to $250,000 per depositor, as defined by the FDIC. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law which made permanent the current standard maximum deposit insurance amount of $250,000. The FDIC coverage limit applies per depositor, per insured depository institution, for each account ownership category. The Depositors Insurance Fund (“DIF”) of Massachusetts, a private industry-sponsored insurer, insures the Bank’s customer deposit amounts in excess of FDIC insurance limits. The Consolidated Financial Statements include the accounts of LSB Corporation and its wholly-owned consolidated subsidiary, River Bank, and the Bank’s wholly-owned subsidiaries, Shawsheen Security Corporation, Shawsheen Security Corporation II, and Spruce Wood Realty Trust. All inter-company balances and transactions have been eliminated in consolidation. The Company has one reportable operating segment. In the opinion of management, the accompanying Consolidated Financial Statements reflect all necessary adjustments consisting of normal recurring adjustments for fair presentation. Certain amounts in prior periods may be 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 impairment of investment securities.

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, 2009 filed with the Securities and Exchange Commission.

2. INVESTMENTS

The following table reflects the components and carrying values of the investment securities portfolio at June 30, 2010 and December 31, 2009:

		6/30/10																12/31/09
		Amortized				Unrealized								Fair				Amortized				Unrealized								Fair
		Cost				Gains				Losses				Value				Cost				Gains				Losses				Value
		(In thousands)
Debt securities:
U.S. Treasury obligations		$	5,548			$	342			$	—			$	5,890			$	5,557			$	237			$	—			$	5,794
Government-sponsored enterprise obligations (1)			39,844				360				—				40,204				33,379				188				(49	)			33,518
Residential mortgage-backed:
U.S. government guaranteed			13,102				718				—				13,820				16,037				483				—				16,520
Government-sponsored enterprises			92,021				5,993				(7	)			98,007				118,537				5,543				(71	)			124,009
Residential collateralized mortgage obligations:
U.S. government guaranteed			25,435				727				—				26,162				21,965				94				(80	)			21,979
Government-sponsored enterprises			14,537				302				—				14,839				21,283				389				—				21,672
Private-label			—				—				—				—				1,415				93				—				1,508
Corporate obligations			—				—				—				—				2,489				—				(111	)			2,378
Total debt securities			190,487				8,442				(7	)			198,922				220,662				7,027				(311	)			227,378
Equity securities:
Mutual funds			1,000				—				(8	)			992				1,000				—				(34	)			966
Equity securities			2,458				—				(102	)			2,356				2,468				—				(279	)			2,189
Total equity securities			3,458				—				(110	)			3,348				3,468				—				(313	)			3,155
Total investment securities		$	193,945			$	8,442			$	(117	)		$	202,270			$	224,130			$	7,027			$	(624	)		$	230,533

The net unrealized gains on securities available for sale at June 30, 2010 totaled $8.3 million, or $5.0 million net of taxes. One preferred equity security is on the Bank’s securities watch list due to its current credit rating by external, independent rating agencies. Management believes that the Company will collect all amounts due on this investment in accordance with its contractual terms. The cost of this investment totaled $2.0 million at June 30, 2010, with an unrealized loss of $102,000, or 5.0% of cost. This watch list security recovered a significant portion of the unrealized losses during the fourth quarter of 2009 and the first quarter of 2010 due to the improved outlook of the issuer. If a decline in value is determined to be other-than-temporary, a charge to earnings would be recognized at that time. Management is monitoring this security on a regular basis, does not intend to sell the security, and it is not more likely than not that the Company will be required to sell the security before recovery of its cost. Therefore, management does not consider this investment to be other-than-temporarily impaired at June 30, 2010. The remainder of the gross unrealized losses resulted from changes in interest rates and is not material as of June 30, 2010.

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2010.

		Less Than 12 Months								12 Months or Longer								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
		(In thousands)
Debt securities:
Residential mortgage- backed securities		$	1,500			$	(7	)		$	—			$	—			$	1,500			$	(7	)
Total debt securities			1,500				(7	)			—				—				1,500				(7	)
Equity securities:
Mutual funds			—				—				992				(8	)			992				(8	)
Equity securities			—				—				1,938				(102	)			1,938				(102	)
Total equity securities			—				—				2,930				(110	)			2,930				(110	)
Total temporarily impaired securities		$	1,500			$	(7	)		$	2,930			$	(110	)		$	4,430			$	(117	)

The Company realized gross gains of $1.4 million and gross losses of $5,000 on the sale of $25.6 million of investments available for sale in the first six months of 2010.

The following table is a summary of the contractual maturities of debt securities available for sale at June 30, 2010. Mortgage-backed securities and collateralized mortgage obligations are shown at their final contractual maturity date but are expected to have shorter average lives.

		Amortized Cost				Fair Value
		(In thousands)
Debt securities:
Within 1 year		$	505			$	506
After 1 year through 5 years			51,303				52,127
After 5 years through 10 years			19,409				19,992
After 10 years			119,270				126,297
Total debt securities		$	190,487			$	198,922

Investment securities pledged as collateral for customer repurchase and wholesale repurchase agreements at June 30, 2010 totaled $6.6 million and $47.5 million, respectively.

3. CONTINGENCIES

The Company is involved in various legal proceedings incidental to its business. During the six months ended June 30, 2010, no new legal proceeding was filed and no material development in any pending legal proceeding occurred that the Company expects will have a material adverse effect on its financial condition or operating results.

4. FAIR VALUES OF ASSETS AND LIABILITIES

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The estimated fair values of the Company’s financial instruments at June 30, 2010 and December 31, 2009, follow:

		June 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
		(In thousands)
Financial assets:
Cash and due from banks		$	7,536			$	7,536			$	8,615			$	8,615
Federal Funds sold			10,222				10,222				6,597				6,597
Investment securities available for sale			202,270				202,270				230,533				230,533
Federal Home Loan Bank stock			11,825				11,825				11,825				11,825
Accrued interest receivable			2,593				2,593				2,727				2,727
Loans, net			535,046				538,818				529,451				526,087
Financial liabilities:
Core deposits			273,805				273,805				252,389				252,389
Certificates of deposit			218,742				223,250				240,405				244,002
Borrowed funds			236,098				257,510				259,082				272,320
Mortgagors’ escrow accounts			741				741				776				776
Accrued interest payable			858				858				987				987

The fair values for cash and short-term investments approximate their carrying amounts because of the short-term nature of the assets. The securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. These securities include marketable equity securities and U.S. Treasury obligations. Securities measured at fair value in Level 2 are based on pricing models from an independent pricing service that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. The Company did not make any changes to the input factors used by the external pricing service. These securities include government-sponsored enterprise obligations, mortgage-backed securities, collateralized mortgage obligations and corporate obligations. Securities measured at fair value in Level 3 include non-marketable equity securities that are carried at par value based on the redemptive provisions of the issuers. The fair value of stock in the Federal Home Loan Bank of Boston is based upon the redemption value of the stock which equates to its carrying value. Loans are estimated by discounting contractual cash flows adjusted for prepayment estimates and using discount rates approximately equal to current market rates on loans with similar characteristics and maturities. The incremental credit risk for non-performing loans has been considered in the determination of the fair value of the loans. The fair values of demand deposit accounts, NOW accounts, savings accounts and money market accounts are equal to their respective carrying amounts because they are equal to the amounts payable on demand at the reporting date. Certificates of deposit, Federal Home Loan Bank advances, and wholesale repurchase agreements are estimated using discounted value of contractual cash flows. The discount rates used are representative of approximate market rates currently offered on instruments with similar remaining maturities. The fair values of short-term borrowed funds, accrued interest receivable, mortgagors’ escrow accounts and accrued interest payable approximate their carrying amounts because of the short-term nature of the liabilities. The majority of the Company’s commitments for unused lines and outstanding standby letters of credit and unadvanced portions of loans are at floating rates and, therefore, there is no fair value adjustment.

Assets measured at fair value on a recurring basis at June 30, 2010 and December 31, 2009, are summarized below. There are no liabilities measured at fair value on a recurring basis. The Company had no transfers into or out of Levels 1, 2 or 3 during the six months ended June 30, 2010.

2010		Level 1				Level 2				Level 3				Fair Value
		(In thousands)
Investment securities available for sale:
U.S. Treasury obligations		$	5,890			$	—			$	—			$	5,890
All other debt securities			—				193,032				—				193,032
Equity securities			1,937				995				416				3,348
Total recurring assets		$	7,827			$	194,027			$	416			$	202,270

2009		Level 1				Level 2				Level 3				Fair Value
		(In thousands)
Investment securities available for sale:
U.S. Treasury obligations		$	5,794			$	—			$	—			$	5,794
All other debt securities			—				221,584				—				221,584
Equity securities			1,760				970				425				3,155
Total recurring assets		$	7,554			$	222,554			$	425			$	230,533

There was a minimal change in Level 3 assets measured at fair value on a recurring basis for the six months ended June 30, 2010 and the year ended December 31, 2009. The investments carried under Level 3 assumptions are carried at par value since all redemptions have been made at par value and represent non-marketable securities.

The Company may also be required, from time to time, to measure certain other assets or liabilities on a non-recurring basis in accordance with generally accepted accounting principles. Asset adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. There are no liabilities measured at fair value on a non-recurring basis at June 30, 2010 or December 31, 2009. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the assets measured at fair value on a non-recurring basis as of June 30, 2010 and December 31, 2009. The losses represent the amount of losses recorded during 2010 on the assets held at June 30, 2010 and during 2009 on the assets held at December 31, 2009.

														Three months ended				Six months ended
														June 30, 2010				June 30, 2010
2010		Level 1				Level 2				Level 3				Total Losses				Total Losses
		(In thousands)
Impaired loans		$	—			$	—			$	2,616			$	773			$	1,053
																		Year ended
																		December 31, 2009
2009		Level 1				Level 2				Level 3								Total Losses
		(In thousands)
Impaired loans		$	—			$	—			$	2,781							$	415

Losses applicable to impaired loans that are collateral dependent are based on the appraised value of the underlying collateral, discounted as necessary due to management’s estimates of changes in market conditions. The factors used to determine the fair value of such collateral include selling prices of similar properties, expected future cash flows of the subject property and other economic factors. These losses are recorded as a component in determining the overall adequacy of the allowance for loan losses. Adjustments to the estimated fair value of impaired loans may result in increases or decreases to the provision for loan losses.

5. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the Financial Accounting Standards Board (FASB) amended its guidance surrounding the accounting for transfers and servicing of financial assets and extinguishments of liabilities and will now require more information about transfers of financial assets, including securitization transactions, where entities have continuing exposure to the risks related to transferred financial assets. This guidance eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. The Company adopted this new guidance on January 1, 2010, as required, and it did not have a material impact on the Company’s Consolidated Financial Statements.

In June 2009, the FASB amended its guidance on the consolidation of variable interest entities and changed how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or

similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. The Company adopted this new guidance on January 1, 2010, as required, and it did not have a material impact on the Company’s Consolidated Financial Statements.

In September 2009, the FASB amended its guidance on fair value measurements and disclosures relating to investments in certain entities that calculate net asset value per share (or its equivalent). This guidance permits a reporting entity to measure the fair value of certain investments on the basis of the net asset value per share of the investment (or its equivalent). This guidance also requires new disclosures, by major category of investments, about the attributes of investments within the scope of this guidance. The Company adopted this new guidance on January 1, 2010, as required, and it did not have a material impact on the Company’s Consolidated Financial Statements.

In January 2010, the FASB amended its guidance on fair value measurements and disclosures. These changes increase the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.

In July 2010, the FASB issued an Accounting Standards Update, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The objective of this Update is for an entity to provide disclosures that facilitate financial statement users’ evaluation of (1) the nature of credit risk inherent in the entity’s portfolio of financing receivables (2) how that risk is analyzed and assessed in arriving at the allowance for credit losses (3) the changes and reasons for those changes in the allowance for credit losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010 and the disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. This update will significantly expand the Company’s relevant disclosures in the Company’s Consolidated Financial Statements.

6. SUBSEQUENT EVENT

On July 15, 2010, the Company entered into an Agreement and Plan of Merger with People’s United Financial, Inc. to acquire the Company in an all-cash transaction valued at $21.00 per share or approximately $96 million.

The completion of the merger is subject to customary conditions, including the approval of the shareholders of LSB Corporation and the receipt of regulatory approvals. Assuming satisfaction of all of the conditions to closing, completion of the merger is expected to occur in the fourth quarter of 2010.

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

FORWARD-LOOKING STATEMENTS

In this report, 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) that are subject to risks and uncertainties. Such forward-looking statements are expressions of management’s expectations as of the date of this report regarding future events or trends and which do not relate to historical matters. Such expectations may or may not be realized, depending on a number of variable factors, including, but not limited to, changes in interest rates, general economic conditions, including real estate conditions in the Bank’s lending areas, regulatory considerations, competition and consummation of the merger with People’s United Financial, Inc. For more information about these factors, please see our 2009 Annual Report on Form 10-K on file with the SEC, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. As a result of such risk factors and uncertainties, among others, 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 updates or revisions to any such forward-looking statements as a result of new information, future events or otherwise.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company has not changed its significant accounting and reporting policies from those disclosed in its 2009 Annual Report on Form 10-K. In applying these accounting policies, management is required to exercise judgment

in determining many of the methodologies, assumptions and estimates to be utilized. As discussed in the Company’s 2009 Annual Report on Form 10-K, the three most significant areas in which management applies critical assumptions and estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses, income taxes and impairment of the investment portfolio. Management’s estimates and assumptions affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from the amount derived from management’s estimates and assumptions under different conditions.

EXECUTIVE LEVEL OVERVIEW

The Company recorded second quarter 2010 net income available to common shareholders of $1.6 million, or $0.35 per diluted common share, compared to $846,000, or $0.19 per diluted common share, for the second quarter of 2009. The largest factors affecting the quarterly results were gains on sales of investments totaling $679,000 and $232,000 in the second quarter of 2010 and 2009, respectively, offset in part by FDIC deposit insurance premiums amounting to $200,000 and $369,000 in the same periods, respectively, as well as the preferred stock dividend and accretion of $215,000 in the second quarter of 2009. Another positive factor in the second quarter of 2010 was the $877,000 improvement in net interest income offset by the $240,000 increased loan loss provision from the second quarter of 2009.

On July 15, 2010, the Company entered into an Agreement and Plan of Merger with People’s United Financial, Inc. to acquire the Company in an all-cash transaction valued at $21.00 per share or approximately $96 million.

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 Company’s most significant source of revenue and is 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. Management’s efforts in this area are to increase the corporate loan portfolio, which includes construction, commercial real estate and commercial loans, and the residential loan portfolio. Management’s efforts for funding are to increase core deposit accounts, which are lower interest-bearing accounts and include savings and money market accounts, and demand deposit accounts. Deposits and borrowings typically have short durations and the costs of these funds do not necessarily rise and fall concurrent with earnings from 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 and reviews at meetings of the Asset and Liability Management Committee (“ALCO”) 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 gains and losses on sales of investment securities, various fees and increases in the cash surrender value of the Company’s investment in Bank-Owned Life Insurance (“BOLI”). Customers’ loan and deposit accounts generate various amounts of fee income depending on the product selected. The Company receives fee income from servicing loans that were sold in previous periods. 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 as well as securities gains or losses.

Non-interest expenses include salaries and employee benefits, occupancy and equipment, professional, data processing and other expenses of the Company, which generally are directly related to business volume and are controlled by a budget process.

Income tax expense is directly related to earnings of the Company. Changes in the statutory tax rates and the earnings of the Company, the Bank and its subsidiaries, as well as the mix of earnings among the different entities, would also affect the amount of income tax expense reported and the overall effective income tax rate recorded.

The Company believes that the most significant challenge in the current interest rate environment is to increase net interest income while also maintaining competitive deposit rates. The Company’s net interest income for the six

months ended June 30, 2010 was $10.8 million, a 16.6% increase from $9.3 million for the comparable period in 2009, primarily due to sustained loan growth. The results from the Company’s continued emphasis on increasing loan originations instead of purchasing lower-yielding investment securities, which favorably affected net interest income during the six months ended June 30, 2010.

FINANCIAL CONDITION

SUMMARY

The Company maintains its commitment to servicing the banking needs of the local community in the Merrimack Valley area of northeastern Massachusetts and southern New Hampshire. The Company had total assets of $796.9 million at June 30, 2010, compared to $816.6 million at December 31, 2009. The decrease in asset size at June 30, 2010 from December 31, 2009 reflected a measured effort to reduce wholesale funding. The Company experienced local loan growth of $5.9 million or 1.1% from December 31, 2009.

Investments:

The investment securities portfolio totaled $202.3 million, or 25.4% of total assets, at June 30, 2010, a decrease of $28.3 million, compared to $230.5 million, or 28.2% of total assets at December 31, 2009.

During the first six months of 2010, the Bank experienced cash inflows of $29.2 million of investments from principal payments and prepayments, $16.8 million in calls and maturities, as well as $25.6 million in proceeds from sales of investments. The funds were reinvested in investment securities purchases totaling $39.9 million, funded new loan originations and paid down maturing FHLBB advances. These purchases were primarily for use as collateral for wholesale repurchase agreements, FHLBB short-term and long-term advances and customer repurchase agreements. The Company intends to utilize future principal paydowns and maturities from the investment portfolio to fund future loan growth.

Loans:

Total loans increased $5.9 million to $542.5 million and represented 68.1% of total assets at June 30, 2010, versus $536.6 million and 65.7% of total assets, respectively, at December 31, 2009. Retail loans, comprised primarily of residential mortgage loans, increased $4.8 million while corporate loans, comprised mainly of construction and commercial real estate loans, increased $1.1 million during the same period. The increase is due to loan growth experienced in the commercial real estate and residential loan categories and reflects the continued strategic preference toward loan originations rather than investment security purchases. There has been continued demand from the Bank’s existing borrowers which is reflected in the commercial business loans. During the first six months of 2010, construction loans decreased $9.4 million due to improved sales of the underlying collateral in the portfolio.

The following table reflects the loan portfolio at June 30, 2010 and December 31, 2009:

		6/30/10				12/31/09
		(In thousands)
Residential real estate		$	134,573			$	131,441
Home equity lines and second mortgages			28,593				27,003
Consumer			699				657
Retail loans			163,865				159,101
Construction and land development			53,407				62,772
Commercial real estate			284,242				282,716
Commercial business			40,999				32030
Corporate loans			378,648				377,518
Total loans			542,513				536,619
Allowance for loan losses			(7,467	)			(7,168	)
Net loans		$	535,046			$	529,451

Allowance For Loan Losses:

The following table summarizes changes in the allowance for loan losses for the three and six months ended June 30, 2010 and 2009:

		Three months ended								Six months ended
		6/30/10				6/30/09				6/30/10				6/30/09
		(Dollars in thousands)
Beginning balance		$	7,277			$	6,089			$	7,168			$	5,885
Provision for loan losses			700				460				1,400				700
Recoveries on loans previously charged-off			4				1				5				2
Loans charged-off			(514	)			(151	)			(1,106	)			(188	)
Ending balance		$	7,467			$	6,399			$	7,467			$	6,399
Ratios:
Annualized net charge-offs to average loans outstanding			0.37	%			0.12	%			0.41	%			0.08	%
Allowance for loan losses to total loans at end of period			1.38	%			1.28	%			1.38	%			1.28	%

The allowance for loan losses increased to $7.5 million at June 30, 2010 compared to $7.2 million and $6.4 million, respectively, at December 31, 2009 and June 30, 2009. The coverage of the allowance for loan losses increased slightly to 1.38% at June 30, 2010 from 1.34% at December 31, 2009 and 1.28% at June 30, 2009. The Company recorded charge-offs of $750,000 in the first six months of 2010 on one commercial construction loan that was foreclosed in July 2010 and the remaining balance of $1.2 million was transferred into other real estate owned at that time. The Company believes that asset quality remains high, as evidenced by the relatively low levels of non-performing and delinquent loans as a percentage of total loans and OREO or total assets as defined below. See “Risk Assets” below. The level of loan charge-offs combined with the low levels of delinquent loans and sustained asset quality of the loan portfolio contributed to the assessment of the allowance for loan losses and resulted in the increase in the allowance for loan loss coverage as a percentage of total loans from December 31, 2009 to June 30, 2010. The Company has not engaged in any subprime lending, which it views as one-to-four-family residential loans to a borrower with a credit score below 620 on a scale that ranges from 300 to 850.

The Company considers the current level of the allowance for loan losses to be appropriate and adequate. The amount of the allowance for loan losses reflects management’s assessment of estimated credit quality 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 values 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 the estimated credit losses inherent in the loan portfolio.

Risk Assets:

Risk assets consist of non-performing loans and other real estate owned (“OREO”). Non-performing loans consist of both loans that are 90 days or more past due and loans that are placed on non-accrual because full collection of the principal balance and interest is in doubt. OREO is comprised of foreclosed properties where the Company has formally received title or has possession of the collateral and is carried at the lower of the carrying amount of the loan plus capital improvements or the estimated fair value of the property, less selling costs.

Total risk assets were $6.1 million at June 30, 2010, compared to $6.0 million at December 31, 2009 and $4.3 million as of June 30, 2009. As evidenced by the table below, the economy has had an impact on the level of non-performing loans and on residential and commercial real estate non-performing loans in particular. The Bank expects the commercial business non-performing loans totaling $646,000 will be partially protected by a guaranty by the SBA in the amount of $415,000.

Impaired loans are commercial and commercial real estate loans and individually significant residential mortgage loans for which management believes it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans totaled $10.6 million and $7.3 million at June 30, 2010 and December 31, 2009, respectively, with specific reserves of $449,000 and $415,000, respectively. Of the $10.6 million in impaired loans, $1.7 million represent modifications on residential, owner-occupied properties at June 30, 2010. Additionally, one construction loan for residential condominiums with a balance of $2.3 million and five commercial rentals from the same project with a balance of $1.7 million were modified at a lower interest rate as the project experienced a slow down in sales activity during the winter months. This construction loan and related rental units totaled $4.1 million at June 30, 2010, down from a combined balance of $4.9 million in January in the fourth quarter of 2010 and are included in the accruing loan portfolio. In July 2010, another $640,000 was received to reduce the construction loan balance from a unit sale. The Company does not have collateral concerns and the loans remained current on their respective payment status. The remaining impaired loans are reported as nonaccrual loans in the table below in their respective loan category. All of the impaired loans at June 30, 2010, have been measured using either the fair value of the collateral method or the estimated cash flow method. The Company had impaired loans totaling $1.5 million at June 30, 2009.

The following table summarizes the Company’s risk assets at June 30, 2010, December 31, 2009 and June 30, 2009:

		6/30/10				12/31/09				6/30/09
		(Dollars in thousands)
Non-performing loans:
Residential real estate		$	1,311			$	1,211			$	442
Construction and land development			1,713				2,527				349
Commercial real estate			2,344				1,528				3,282
Commercial business			646				683				—
Equity			39				54				66
Total non-performing loans			6,053				6,003				4,139
Other real estate owned			—				—				120
Total risk assets		$	6,053			$	6,003			$	4,259
Restructured loans — accruing		$	5,779			$	2,634			$	1,540
Risk assets as a percent of total loans and OREO			1.12	%			1.12	%			0.85	%
Risk assets as a percent of total assets			0.76	%			0.74	%			0.54	%

Deposits:

Deposits decreased slightly by $247,000 during the first six months of 2010 to $492.5 million at June 30, 2010, from $492.8 million at December 31, 2009. Core deposits, consisting of NOW accounts, demand deposit accounts, savings accounts and money market accounts, increased $21.4 million, or 8.5%, amounting to $273.8 million at June 30, 2010, compared to $252.4 million at December 31, 2009. Savings accounts experienced an increase of $10.6 million from December 31, 2009, to $101.3 million at June 30, 2010, primarily due to higher-rate promotional accounts. NOW and money market accounts increased $3.0 million and $4.4 million, respectively, from December 31, 2009, to $23.7 million and $111.1 million, respectively, at June 30, 2010. Demand deposit accounts increased $3.3 million to $37.7 million at June 30, 2010. Term deposits, comprised of brokered certificates of deposit and certificates of deposit, decreased $21.7 million, or 9.0%, totaling $218.7 million at June 30, 2010, versus $240.4 million at December 31, 2009. Certificates of deposit decreased $12.7 million to $198.3 million at June 30, 2010, while brokered certificates of deposit decreased $8.9 million to $20.4 million at June 30, 2010. The decrease in brokered deposits reflects a maturity of $8.9 million.

Due to the recent turmoil in the financial markets, the Bank has seen an inflow of core deposits as evidenced by the 8.5% growth in core deposits during the first six months of 2010. However, the Company continues to face strong competition for deposits which will impact the rate of growth of deposits for the foreseeable future.

The following table reflects the components of the deposit portfolio at June 30, 2010 and December 31, 2009:

		6/30/10				12/31/09
		(In thousands)
NOW accounts		$	23,749			$	20,739
Demand deposit accounts			37,717				34,368
Savings accounts			101,284				90,642
Money market accounts			111,055				106,640
Core deposits			273,805				252,389
Brokered certificates of deposit			20,411				29,344
Certificates of deposit			198,331				211,061
Term deposits			218,742				240,405
Total deposits		$	492,547			$	492,794

Borrowed Funds:

Borrowed funds consist of long-term and short-term Federal Home Loan Bank of Boston (FHLBB) advances, securities sold under agreements to repurchase and subordinated debt. Total borrowed funds amounted to $236.1 million at June 30, 2010, compared to $259.1 million at December 31, 2009, a decrease of $23.0 million or 8.9%. Short-term FHLBB borrowings increased $3.0 million from December 31, 2009, while long-term FHLBB borrowed funds decreased $24.1 million due to maturing advances totaling $28.0 million and $5.0 million in prepayments. Wholesale repurchase agreements remained stable at $40.0 million at both June 30, 2010 and December 31, 2009. In October 2009, the Bank entered into a subordinated debt agreement for $6.0 million on an unsecured basis with a final maturity in October 2016. The subordinated agreement calls for a fixed interest rate of 8.5% and equal annual principal payments of $1.2 million commencing on the third anniversary of the agreement. The entire amount of the subordinated debt was included as part of the Bank’s Tier 2 capital for regulatory purposes at both June 30, 2010 and December 31, 2009. The Company reduced its borrowing position with a view toward lessening the Company’s exposure to rate fluctuations that may occur in the coming year.

The following table reflects the components of borrowings at June 30, 2010 and December 31, 2009:

		6/30/10				12/31/09
		(In thousands)
Long-term borrowed funds:
FHLBB long-term advances		$	181,889			$	205,971
Subordinated debt			6,000				6,000
Wholesale repurchase agreements			40,000				40,000
			227,889				251,971
Short-term borrowed funds:
FHLBB short-term borrowings			3,000				—
Customer repurchase agreements			5,209				7,111
			8,209				7,111
Total borrowed funds		$	236,098			$	259,082

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2010 and 2009

SUMMARY

The Company reported net income available to common shareholders of $1.6 million, or $0.35 per diluted common share, as compared to $846,000, or $0.19 per diluted common share, for the three months ended June 30, 2010 and 2009, respectively. The largest factors affecting net income were an improvement of $877,000 in the net interest income and an increase in the gains on sales of investments amounting to $447,000 in the second quarter of 2010 as

compared to the second quarter of 2009. Offsetting the impact of these gains were an increased loan loss provision from the second quarter of 2009 of $240,000, FDIC deposit insurance premiums totaling $200,000 and $369,000 for the second quarter of 2010 and 2009, respectively, as well as the preferred stock dividend and accretion of $215,000 in the second quarter of 2009.

Net Interest Income:

Net interest income for the three months ended June 30, 2010 increased by $877,000, or 18.5%, to $5.6 million from $4.7 million for the same period of 2009. The net interest rate spread increased to 2.67% for the three months ended June 30, 2010 versus 2.17% for the same period of 2009. Interest and dividend income for the three months ended June 30, 2010 decreased $108,000, or 1.1%, primarily due to a decline in investment security rates and average balances compared to the same period of 2009. Interest expense decreased $985,000 or 18.4% to $4.4 million from $5.4 million during the three months ended June 30, 2010, versus 2009, respectively, primarily due to a decrease in average deposit rates. Net interest margin increased to 2.90% versus 2.52% for the quarters ended June 30, 2010 and 2009, respectively.

Interest and Dividend Income:

Interest and dividend income decreased $108,000, or 1.1%, during the second quarter of 2010 versus the same quarter in 2009, primarily due to a decline in investment security rates and average balances coupled with a decline in loan rates partially offset by a rise in average loan balances.

Interest income on loans for the three months ended June 30, 2010, increased $785,000, or 11.1%, from the same period of 2009. Average loan interest rates decreased 2 basis points from 5.82% to 5.80% during the second quarter of 2010 as compared to the same quarter of 2009, resulting in a decrease of $57,000 to interest income. Average loan balances rose $56.5 million, or 11.6%, from $487.5 million in 2009 to $544.0 million in 2010, contributing $842,000 to interest income.

Interest income on investment securities for the three months ended June 30, 2010, decreased $893,000 or 29.7%, from the same period in 2009. Average investment security interest rates decreased 87 basis points during the second quarter of 2010, from 4.54% in 2009 to 3.67% in 2010, resulting in a decrease of $456,000 to interest income. Average investment security balances declined $34.3 million or 12.9%, from $265.9 million in 2009 to $231.6 million in 2010, resulting in a decrease of $437,000 to interest income.

Interest Expense:

Interest expense decreased $985,000 during the second quarter of 2010, from $5.4 million in the second quarter of 2009 to $4.4 million in the second quarter of 2010, primarily due to the decline in average deposit rates coupled with a decrease in average borrowed funds balances.

Interest expense on deposits for the three months ended June 30, 2010, decreased $626,000, or 24.2%, from the same period in 2009. Average deposit interest rates decreased 86 basis points, from 2.54% to 1.68% in the second quarter of 2010 as compared to the same quarter of 2009, decreasing interest expense by $659,000. Average interest-bearing deposit balances increased by $58.0 million or 14.2%, from $408.8 million in 2009 to $466.9 million in 2010, accompanied by a change in the mix resulting in a preference for higher rate promotional savings accounts which increased interest expense by $33,000.

Interest expense on borrowed funds for the three months ended June 30, 2010, decreased $359,000, or 12.9%, from the same period in 2009. Average interest rates on borrowed funds declined 16 basis points from 4.24% in the second quarter of 2009 to 4.08% in the same quarter of 2010 reducing interest expense by $98,000. Average borrowed funds balances decreased $25.3 million, or 9.6%, from $262.6 million in 2009 to $237.3 million in 2010. This decrease resulted in a decline in interest expense of $261,000 due primarily to maturities and prepayments of longer term borrowed funds.

Provision for Loan Losses:

The provision for loan losses totaled $700,000 and $460,000 for the three months ended June 30, 2010 and 2009, respectively. The provisions in 2010 and 2009 reflect management’s analysis of loan growth and changes in risk during the second quarters of 2010 and 2009 with the highest levels of growth coming from the commercial business and residential loan portfolios in 2010 and from the commercial real estate and residential loan portfolios in 2009. The increase in the provision for loan losses was due to the increase in loan charge-offs in the second quarter of 2010. See “Risk Assets” for additional information. The balance of the allowance for loan losses grew to $7.5 million at June 30, 2010, from $7.2 million at December 31, 2009, and $6.4 million at June 30, 2009.

Non-Interest Income:

Non-interest income increased $464,000 or 59.9% for the three months ended June 30, 2010, compared to the same period in 2009, to $1.2 million in 2010 compared to income of $774,000 in 2009. The largest factor in the increase in 2010 was the increase in gains on sales of securities which increased $447,000 to $679,000 from $232,000 in the second quarter of 2010 versus 2009, respectively. Deposit account fees remained stable at $236,000 and $234,000 for the three months ended June 30, 2010 and 2009, respectively. Loan servicing fees increased by $4,000 to $69,000 from $65,000 for the three months ended June 30, 2010 and 2009, respectively, due to the increase in late and prepayment fees on loans and the absence of amortization of service loan fees. Income on bank-owned life insurance decreased $9,000 to $115,000 for the three months ended June 30, 2010 from $124,000 for the same period in 2009 based on lower investment income earned by the underlying insurance company. Other income increased $20,000 or 16.8% to $139,000 from $119,000 for the three months ended June 30, 2010 and 2009, respectively, due to an increase in ATM and debit card fees.

Non-Interest Expense:

Non-interest expenses increased $141,000, or 4.1%, during the second quarter of 2010 to $3.6 million versus $3.5 million for the same period of 2009 primarily resulting from an increase in salaries and benefits of $302,000 or 18.6% to $1.9 million and $1.6 million in the second quarter of 2010 and 2009, respectively, due primarily to increases in bonuses, medical and dental insurance coupled with a reduction in deferred salaries resulting from fewer loan closings in 2010, partially offset by a decrease of $169,000 in FDIC deposit insurance premiums due to the absence of a special assessment in 2010. Occupancy and equipment expense increased $121,000, or 35.0%, to $467,000 in the second quarter of 2010 from $346,000 in the same period of 2009 due mainly to an increase in depreciation due to the opening of the newly relocated Lawrence, Massachusetts branch coupled with depreciation of obsolete equipment amounting to $60,000, equipment purchases of $35,000 and an increase in rent expense of $26,000. Data processing expense increased $62,000 or 26.6% to $295,000 from $233,000 in the second quarters of 2010 and 2009, respectively, due primarily to an increase of $43,000 in computer software and license fees. Professional fees decreased $23,000, or 15.1%, to $129,000 in the second quarter of 2010 from $152,000 in the second quarter of 2009 due primarily to a decrease in legal fees. Marketing expense decreased $21,000 or 17.9% to $96,000 and $117,000 in 2010 and 2009, respectively, due primarily to a reduction in public relations expenses. OREO expense totaled $10,000 in the three months ended June 30, 2010 compared to zero in the same period of 2009. Other expenses decreased $141,000, or 23.0%, to $472,000 in the second quarter of 2010 from $613,000 in the same period of 2009 due primarily to a decrease in loan workout expenses associated with one nonaccrual loan coupled with a decrease in expenses associated with a third party debit card fraud incurred in 2009.

Income Taxes:

The Company reported an income tax expense of $946,000 for the three months ended June 30, 2010 for an effective income tax rate of 37.2%. This compares to an income tax expense of $524,000 for the three months ended June 30, 2009 for an effective income tax rate of 33.1%. The increase in the effective tax rate in the second quarter of 2010 was due primarily to the reversal of a previously recorded state tax valuation reserve on the Fannie Mae and Freddie Mac preferred stock holdings. Subsidiaries within the consolidated group pay various state income tax rates, the mix of taxable earnings within the group can change and, beginning in 2010, the taxable losses of one subsidiary can be used to offset taxable income in another subsidiary in the consolidated group.

The following table presents the Company’s average balance sheet, net interest income and average interest rates for the three months ended June 30, 2010 and 2009. Average loans include non-performing loans.

		Three months ended												Three months ended
		6/30/10												6/30/09
										Average												Average
		Average								Interest				Average								Interest
		Balance				Interest				Rate				Balance				Interest				Rate
		(Dollars in thousands)
Assets
Investment securities:
Short-term investments		$	9,267			$	5				0.22	%		$	17,269			$	7				0.16	%
U. S. Treasury and government- sponsored enterprise obligations			45,859				238				2.08				21,138				179				3.40
Other bonds and equity securities			15,203				49				1.29				19,357				125				2.59
Collateralized mortgage obligations and mortgage- backed securities			161,269				1,825				4.54				208,114				2,699				5.20
Total investment securities			231,598				2,117				3.67				265,878				3,010				4.54
Loans:
Residential real estate			133,633				1,769				5.31				122,415				1,680				5.50
Home equity			28,049				268				3.83				24,558				248				4.05
Consumer			662				7				4.24				634				11				6.96
Total retail loans			162,344				2,044				5.05				147,607				1,939				5.27
Construction and land			57,966				828				5.73				75,308				1,014				5.40
Commercial real estate			283,763				4,456				6.30				234,589				3,752				6.42
Commercial			39,934				534				5.36				30,044				372				4.97
Total corporate loans			381,663				5,818				6.11				339,941				5,138				6.06
Total loans			544,007				7,862				5.80				487,548				7,077				5.82
Total interest-earning assets			775,605				9,979				5.16	%			753,426				10,087				5.37	%
Allowance for loan losses			(7,432	)											(6,232	)
Other assets			36,397												30,861
Total assets		$	804,570											$	778,055
Liabilities and Stockholders’ Equity
Deposits:
NOW accounts		$	23,967			$	23				0.38	%		$	18,590			$	9				0.19	%
Regular savings accounts			102,802				227				0.89				67,559				221				1.31
Money market accounts			118,029				323				1.10				76,803				281				1.47
Certificates of deposit and escrow			222,068				1,386				2.50				245,892				2,074				3.38
Total interest-bearing deposits			466,866				1,959				1.68				408,844				2,585				2.54
Borrowed funds:
Long-term borrowed funds			231,584				2,412				4.18				256,405				2,770				4.33
Short-term borrowed funds			5,700				3				0.21				6,161				4				0.26
Total borrowed funds			237,284				2,415				4.08				262,566				2,774				4.24
Total interest-bearing liabilities			704,150				4,374				2.49	%			671,410				5,359				3.20	%
Non-interest-bearing deposits			35,206												30,515
Other liabilities			2,701												3,013
Total liabilities			742,057												704,938
Stockholders’ equity			62,513												73,117
Total liabilities and stockholders’ equity		$	804,570											$	778,055
Net interest rate spread											2.67	%											2.17	%
Net interest income						$	5,605											$	4,728
Net interest margin on average earning assets											2.90	%											2.52	%