##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 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 September 30, 2008
 OR
 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: 0-13203
 LNB Bancorp, Inc.
  Ohio
    
    34-1406303(State of Incorporation)
    
    (I.R.S. Employer Identification No.)457 Broadway, Lorain, Ohio
    
    44052 - 1769(Address of principal executive offices)
    
    (Zip Code)
 
 
 þ o
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



Part I  Financial InformationItem 1. Financial Statements
    
    
    3Consolidated Balance Sheets September 30, 2008 (unaudited) and December 31, 2007
    
    
    3Consolidated Statements of Income (unaudited) For the three and nine months ended September 30, 2008 and September 30, 2007
    
    
    4Consolidated Statements of Changes in Shareholders Equity (unaudited) For the nine months ended September 30, 2008 and September 30, 2007
    
    
    5Consolidated Statements of Cash Flows (unaudited) For the nine months ended September 30, 2008 and September 30, 2007
    
    
    6Notes to the Consolidated Financial Statements (unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    37Part II  Other InformationItem 1A. Risk Factors
    
    
    38Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 6. Exhibits
    
    
    39EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 
 Consolidated Balance Sheets
 September 30, 2008
    
    
    December 31, 2007(unaudited)(Dollars in thousands except share amounts)ASSETSCash and due from Banks (Note 3)
    
    $
    45,665
    
    
    $
    23,523Interest-bearing deposits in other banks
    
    
    350
    
    
    
    100Securities: (Note 5)Trading securities, at fair value
    
    
    33,559
    
    
    
    33,402Available for sale, at fair value
    
    
    172,087
    
    
    
    179,324Federal Home Loan Bank and Federal Reserve Stock
    
    
    4,839
    
    
    
    4,579Total securities
    
    
    210,485
    
    
    
    217,305Loans held for sale
    
    
    5,677
    
    
    
    4,724Loans:Portfolio loans
    
    
    793,542
    
    
    
    753,598Allowance for loan losses (Note 6)
    
    
    (11,355
    )
    
    
    (7,820
    )Net loans
    
    
    782,187
    
    
    
    745,778Bank premises and equipment, net
    
    
    12,408
    
    
    
    13,328Other real estate owned
    
    
    1,799
    
    
    
    2,478Bank owned life insurance
    
    
    15,499
    
    
    
    15,487Goodwill, net (Note 4)
    
    
    21,570
    
    
    
    21,570Intangible assets, net (Note 4)
    
    
    1,176
    
    
    
    1,280Accrued interest receivable
    
    
    4,186
    
    
    
    4,074Other assets
    
    
    8,499
    
    
    
    6,998Total Assets
    
    $
    1,109,501
    
    
    $
    1,056,645LIABILITIES AND SHAREHOLDERS EQUITYDeposits (Note 8)Demand and other noninterest-bearing
    
    $
    90,912
    
    
    $
    88,812Savings, money market and interest-bearing demand
    
    
    308,221
    
    
    
    331,306Certificates of deposit
    
    
    496,529
    
    
    
    436,823Total deposits
    
    
    895,662
    
    
    
    856,941Short-term borrowings (Note 9)
    
    
    29,876
    
    
    
    42,105Federal Home Loan Bank advances (Note 10)
    
    
    73,857
    
    
    
    44,207Junior subordinated debentures (Note 11)
    
    
    20,620
    
    
    
    20,620Accrued interest payable
    
    
    3,560
    
    
    
    4,620Accrued taxes, expenses and other liabilities
    
    
    5,586
    
    
    
    5,499Total Liabilities
    
    
    1,029,161
    
    
    
    973,992Shareholders EquityCommon stock, par value $1 per share, authorized
15,000,000 shares,
issued 7,623,857 shares at September 30, 2008
and December 31, 2007
    
    
    7,624
    
    
    
    7,624Preferred Shares, Series A Voting, no par value,
authorized 750,000
shares, none issued at September 30, 2008
and December 31, 2007
    
    
    
    
    
    
    Additional paid-in capital
    
    
    37,745
    
    
    
    37,712Retained earnings
    
    
    41,079
    
    
    
    42,951Accumulated other comprehensive income (loss)
    
    
    (16
    )
    
    
    458Treasury shares at cost, 328,194 shares at September
30, 2008 and December 31, 2007
    
    
    (6,092
    )
    
    
    (6,092
    )Total Shareholders Equity
    
    
    80,340
    
    
    
    82,653Total Liabilities and Shareholders Equity
    
    $
    1,109,501
    
    
    $
    1,056,645
 See accompanying notes to consolidated financial statements.
 3




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##### Table of Contents



Consolidated Statements of Income (unaudited)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands except share and per share amounts)Interest IncomeLoans
    
    $
    11,976
    
    
    $
    13,437
    
    
    $
    36,514
    
    
    $
    36,610Securities:U.S. Government agencies and corporations
    
    
    1,861
    
    
    
    1,730
    
    
    
    5,795
    
    
    
    4,242State and political subdivisions
    
    
    203
    
    
    
    157
    
    
    
    551
    
    
    
    443Trading securities
    
    
    209
    
    
    
    418
    
    
    
    738
    
    
    
    1,068Other debt and equity securities
    
    
    82
    
    
    
    78
    
    
    
    214
    
    
    
    204Federal funds sold and short-term investments
    
    
    54
    
    
    
    51
    
    
    
    130
    
    
    
    338Total interest income
    
    
    14,385
    
    
    
    15,871
    
    
    
    43,942
    
    
    
    42,905Interest ExpenseDeposits
    
    
    5,135
    
    
    
    6,705
    
    
    
    17,041
    
    
    
    18,436Federal Home Loan Bank advances
    
    
    646
    
    
    
    635
    
    
    
    1,769
    
    
    
    1,235Short-term borrowings
    
    
    93
    
    
    
    347
    
    
    
    354
    
    
    
    812Trust preferred securities
    
    
    282
    
    
    
    356
    
    
    
    890
    
    
    
    567Total interest expense
    
    
    6,156
    
    
    
    8,043
    
    
    
    20,054
    
    
    
    21,050Net Interest Income
    
    
    8,229
    
    
    
    7,828
    
    
    
    23,888
    
    
    
    21,855Provision for Loan Losses(Note 6)
    
    
    471
    
    
    
    441
    
    
    
    5,609
    
    
    
    1,677Net interest income after provision for
loan losses
    
    
    7,758
    
    
    
    7,387
    
    
    
    18,279
    
    
    
    20,178Noninterest IncomeInvestment and trust services
    
    
    441
    
    
    
    547
    
    
    
    1,560
    
    
    
    1,593Deposit service charges
    
    
    1,258
    
    
    
    1,239
    
    
    
    3,559
    
    
    
    3,457Other service charges and fees
    
    
    704
    
    
    
    605
    
    
    
    2,030
    
    
    
    1,706Income from bank owned life insurance
    
    
    154
    
    
    
    182
    
    
    
    735
    
    
    
    531Other income
    
    
    67
    
    
    
    128
    
    
    
    736
    
    
    
    273Total fees and other income
    
    
    2,624
    
    
    
    2,701
    
    
    
    8,620
    
    
    
    7,560Securities gains (losses), net
    
    
    223
    
    
    
    2
    
    
    
    506
    
    
    
    261Gains on sale of loans
    
    
    298
    
    
    
    277
    
    
    
    642
    
    
    
    546Gains (losses) on sale of other assets, net
    
    
    13
    
    
    
    24
    
    
    
    (122
    )
    
    
    59Total noninterest income
    
    
    3,158
    
    
    
    3,004
    
    
    
    9,646
    
    
    
    8,426Noninterest ExpenseSalaries and employee benefits (Note 7)
    
    
    3,828
    
    
    
    4,104
    
    
    
    11,467
    
    
    
    11,862Furniture and equipment
    
    
    1,049
    
    
    
    952
    
    
    
    3,080
    
    
    
    2,566Net occupancy
    
    
    556
    
    
    
    593
    
    
    
    1,816
    
    
    
    1,683Outside services
    
    
    522
    
    
    
    488
    
    
    
    1,996
    
    
    
    1,317Marketing and public relations
    
    
    247
    
    
    
    321
    
    
    
    829
    
    
    
    936Supplies, postage and freight
    
    
    408
    
    
    
    353
    
    
    
    1,092
    
    
    
    986Telecommunications
    
    
    189
    
    
    
    232
    
    
    
    635
    
    
    
    623Ohio Franchise tax
    
    
    225
    
    
    
    188
    
    
    
    670
    
    
    
    604Intangible asset amortization
    
    
    36
    
    
    
    57
    
    
    
    104
    
    
    
    133Other real estate owned
    
    
    285
    
    
    
    58
    
    
    
    892
    
    
    
    305Electronic banking expenses
    
    
    237
    
    
    
    150
    
    
    
    747
    
    
    
    593Loan and collection expense
    
    
    256
    
    
    
    236
    
    
    
    716
    
    
    
    644Other expense
    
    
    660
    
    
    
    602
    
    
    
    1,816
    
    
    
    1,449Total noninterest expense
    
    
    8,498
    
    
    
    8,334
    
    
    
    25,860
    
    
    
    23,701Income before income tax expense
    
    
    2,418
    
    
    
    2,057
    
    
    
    2,065
    
    
    
    4,903Income tax expense (benefit)
    
    
    595
    
    
    
    384
    
    
    
    (70
    )
    
    
    1,059Net Income (Loss)
    
    $
    1,823
    
    
    $
    1,673
    
    
    $
    2,135
    
    
    $
    3,844Net Income (Loss) Per Common ShareBasic
    
    $
    0.25
    
    
    $
    0.23
    
    
    $
    0.29
    
    
    $
    0.56Diluted
    
    
    0.25
    
    
    
    0.23
    
    
    
    0.29
    
    
    
    0.56Dividends declared
    
    
    0.09
    
    
    
    0.18
    
    
    
    0.45
    
    
    
    0.54Average Common Shares OutstandingBasic
    
    
    7,295,663
    
    
    
    7,295,663
    
    
    
    7,295,663
    
    
    
    6,889,953Diluted
    
    
    7,295,663
    
    
    
    7,295,663
    
    
    
    7,295,663
    
    
    
    6,889,953
 See accompanying notes to consolidated financial statements
 4




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##### Table of Contents



Consolidated Statements of Shareholders Equity (unaudited)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    TreasuryStock
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Stock
    
    
    Total(Dollars in thousands except share and per share amounts)Balance, January 1, 2007
    
    $
    6,772
    
    
    $
    26,382
    
    
    $
    43,728
    
    
    $
    (2,093
    )
    
    $
    (6,092
    )
    
    $
    68,697Cumulative affect of adoption of SFAS 159
    
    
    
    
    
    
    
    
    
    
    (1,192
    )
    
    
    1,192
    
    
    
    
    
    
    
    Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    3,844
    
    
    
    
    
    
    
    
    
    
    
    3,844Other comprehensive income, net of tax:Change in unrealized gains and losses
on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    421
    
    
    
    
    
    
    
    421Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,265Share-based compensation income
    
    
    
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37Issuance of 851,990 shares of common stock
    
    
    852
    
    
    
    11,272
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,124Common dividends declared, $.54 per share
    
    
    
    
    
    
    
    
    
    
    (3,783
    )
    
    
    
    
    
    
    
    
    
    
    (3,783
    )Balance, September 30, 2007
    
    $
    7,624
    
    
    $
    37,691
    
    
    $
    42,597
    
    
    $
    (480
    )
    
    $
    (6,092
    )
    
    $
    81,340Balance, January 1, 2008
    
    $
    7,624
    
    
    $
    37,712
    
    
    $
    42,951
    
    
    $
    458
    
    
    $
    (6,092
    )
    
    $
    82,653Cumulative effect of change in accounting
principle for
split-dollar life insurance coverage
    
    
    
    
    
    
    
    
    
    
    (725
    )
    
    
    
    
    
    
    
    
    
    
    (725
    )Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    2,135
    
    
    
    
    
    
    
    
    
    
    
    2,135Other comprehensive income, net of tax:Change in unrealized gains and losses
on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (474
    )
    
    
    
    
    
    
    (474
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,661Share-based compensation income
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33Common dividends declared, $.45 per share
    
    
    
    
    
    
    
    
    
    
    (3,282
    )
    
    
    
    
    
    
    
    
    
    
    (3,282
    )Balance, September 30, 2008
    
    $
    7,624
    
    
    $
    37,745
    
    
    $
    41,079
    
    
    $
    (16
    )
    
    $
    (6,092
    )
    
    $
    80,340
 See accompanying notes to consolidated financial statements
 5




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##### Table of Contents



Consolidated Statements of Cash Flows (unaudited)
 Nine Months Ended September 30,2008
    
    
    2007(Dollars in thousands)Operating ActivitiesNet income
    
    $
    2,135
    
    
    $
    3,844Adjustments to reconcile net income to net cash provided by
operating activities:Provision for loan losses
    
    
    5,609
    
    
    
    1,677Depreciation and amortization
    
    
    1,345
    
    
    
    1,292Amortization of premiums and discounts
    
    
    (447
    )
    
    
    (28
    )Amortization of intangibles
    
    
    104
    
    
    
    75Amortization of loan servicing rights
    
    
    164
    
    
    
    133Amortization of deferred loan fees
    
    
    55
    
    
    
    297Federal deferred income tax expense
    
    
    1,459
    
    
    
    582Net gain from loan sales
    
    
    (642
    )
    
    
    (546
    )Securities gains, net
    
    
    (506
    )
    
    
    (261
    )Share-based compensation expense, net of tax
    
    
    33
    
    
    
    37Net loss on sale of other assets
    
    
    122
    
    
    
    (59
    )Net increase in accrued interest receivable and other assets
    
    
    (2,482
    )
    
    
    (5,976
    )Net decrease (increase) in accrued interest payable, taxes and
other liabilities
    
    
    (1,698
    )
    
    
    1,715Net cash provided by operating activities
    
    
    5,251
    
    
    
    2,782Investing ActivitiesPurchase of available-for-sale securities
    
    
    (104,018
    )
    
    
    (94,174
    )Proceeds from sales of available-for-sale securities
    
    
    77,069
    
    
    
    35,428Proceeds from maturities of available-for-sale securities
    
    
    33,974
    
    
    
    Purchase of trading securities
    
    
    (70,562
    )
    
    
    (31,582
    )Proceeds from sale of trading securities
    
    
    70,850
    
    
    
    47,632Increase in interest-bearing deposits in other banks
    
    
    (250
    )
    
    
    Purchase of Federal Home Loan Bank Stock
    
    
    (167
    )
    
    
    (495
    )Purchase of Federal Reserve Bank Stock
    
    
    
    
    
    
    (794
    )Acquisition, net of cash and cash equivalents acquired
    
    
    
    
    
    
    (4,912
    )Net increase in loans made to customers
    
    
    (114,160
    )
    
    
    (79,912
    )Proceeds from the sale of other real estate owned
    
    
    599
    
    
    
    561Proceeds from the sale of bank premises and equipment
    
    
    6
    
    
    
    Purchase of bank premises and equipment
    
    
    (425
    )
    
    
    (1,735
    )Net cash used in investing activities
    
    
    (107,084
    )
    
    
    (129,983
    )Financing ActivitiesNet increase (decrease) in demand and other noninterest-bearing
    
    
    2,100
    
    
    
    (13,345
    )Net increase in savings, money market and interest-bearing demand
    
    
    (23,085
    )
    
    
    26,443Net increase (decrease) in certificates of deposit
    
    
    59,706
    
    
    
    2,095Net increase (decrease) in short-term borrowings
    
    
    (12,229
    )
    
    
    4,156Proceeds from loan sales
    
    
    71,115
    
    
    
    68,160Proceeds from Federal Home Loan Bank advances
    
    
    65,000
    
    
    
    213,450Prepayment of Federal Home Loan Bank advances
    
    
    (35,350
    )
    
    
    (207,454
    )Proceeds from issuance of junior subordinated debentures
    
    
    
    
    
    
    20,620Issuance of stock in acquisition
    
    
    
    
    
    
    12,124Dividends paid
    
    
    (3,282
    )
    
    
    (3,783
    )Net cash provided by financing activities
    
    
    123,975
    
    
    
    122,466Net increase (decrease) in cash and cash equivalents
    
    
    22,142
    
    
    
    (4,735
    )Cash and cash equivalents, January 1
    
    
    23,523
    
    
    
    29,122Cash and cash equivalents, September 30
    
    $
    45,665
    
    
    $
    24,387Supplemental cash flow informationInterest paid
    
    $
    20,574
    
    
    $
    20,558Income taxes paid
    
    
    2,255
    
    
    
    1,968Transfer of other real estate owned to loans
    
    
    335
    
    
    
    Transfer of loans to other real estate owned
    
    
    688
    
    
    
    2,373
 6




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands except per share amounts)
 1) Summary of Significant Accounting Policies
 Basis of Presentation
  Use of Estimates
  Segment Information
  Statement of Cash Flows
  Securities
  7




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##### Table of Contents



Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB) Stock
  Loans held for sale
  Loans
    Allowance for Loan Losses
   8




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##### Table of Contents



Servicing
  Bank Premises and Equipment
  Goodwill and Core Deposit Intangibles
   Other Real Estate Owned
  Investment and Trust Services Assets and Income
  Income Taxes
  9




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##### Table of Contents



Comprehensive Income
  Stock-Based Compensation
  Recent Accounting Pronouncements
 Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements,
 FASB Statement No. 159 The Fair Value Option for Financial Assets and Financial Liabilities
  FASB Statement No. 156, Accounting for Servicing of Financial Assets  an Amendment of FASB
Statement No. 140
  10




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##### Table of Contents



FASB Statement No. 157, Fair Value Measurements
  (2) Earnings (Loss) Per Share
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands except per share amounts)Weighted average shares outstanding used in Basic
Earnings per Share
    
    
    7,295,663
    
    
    
    7,295,663
    
    
    
    7,295,663
    
    
    
    6,889,953Dilutive effect of incentive stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares outstanding used in
Diluted Earnings Per Share
    
    
    7,295,663
    
    
    
    7,295,663
    
    
    
    7,295,663
    
    
    
    6,889,953Net Income (Loss)
    
    $
    1,823
    
    
    $
    1,673
    
    
    $
    2,135
    
    
    $
    3,844Basic Earnings (Loss) Per Share
    
    $
    0.25
    
    
    $
    0.23
    
    
    $
    0.29
    
    
    $
    0.56Diluted Earnings (Loss) Per Share
    
    $
    0.25
    
    
    $
    0.23
    
    
    $
    0.29
    
    
    $
    0.56
  (3) Cash and Due from Banks
  (4) Goodwill and Intangible Assets
  11




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##### Table of Contents



(Dollars in thousands)Cash
    
    $
    20,652Loans, net of reserve for loan losses
    
    
    92,019Bank premises and equipment, net
    
    
    731Acquisition Intangibles
    
    
    20,122Deposits
    
    
    101,870Short Term Borrowings
    
    
    1,720FHLB Borrowings
    
    
    4,124
   September 30, 2008
    
    
    December 31, 2007(Dollars in thousands)Core deposit intangibles
    
    $
    2,643
    
    
    $
    2,655Less: accumulated amortization
    
    
    1,467
    
    
    
    1,375Carrying value of core deposit intangibles
    
    $
    1,176
    
    
    $
    1,280
  (5) Securities
  At September 30, 2008Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities available for sale:U.S. Government agencies and corporations
    
    $
    33,745
    
    
    $
    467
    
    
    $
    (80
    )
    
    $
    34,132Mortgage backed securities
    
    
    117,028
    
    
    $
    1,385
    
    
    $
    (218
    )
    
    
    118,195State and political subdivisions
    
    
    20,250
    
    
    
    109
    
    
    
    (768
    )
    
    
    19,591Equity securities
    
    
    52
    
    
    
    117
    
    
    
    
    
    
    
    169Total Securities
    
    $
    171,075
    
    
    $
    2,078
    
    
    $
    (1,066
    )
    
    $
    172,087
 12




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##### Table of Contents



At December 31, 2007Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities available for sale:U.S. Government agencies and corporations
    
    $
    90,046
    
    
    $
    992
    
    
    $
    (87
    )
    
    $
    90,951Mortgage backed securities
    
    
    72,534
    
    
    $
    585
    
    
    $
    (100
    )
    
    
    73,019State and political subdivisions
    
    
    14,961
    
    
    
    294
    
    
    
    (33
    )
    
    
    15,222Equity securities
    
    
    52
    
    
    
    80
    
    
    
    
    
    
    
    132Total Securities
    
    $
    177,593
    
    
    $
    1,951
    
    
    $
    (220
    )
    
    $
    179,324
   At September 30, 2008Aggregate
    
    
    AggregateUnrealized
    
    
    UnrealizedGains recorded
    
    
    Losses recordedto income
    
    
    to incomefor the
    
    
    for thequarter ended
    
    
    quarter endedSeptember 30,
    
    
    September 30,
    
    
    FairCost
    
    
    2008
    
    
    2008
    
    
    Value(Dollars in thousands)Trading Securities
    
    $
    33,575
    
    
    $
    7
    
    
    $
    (23
    )
    
    $
    33,559
 (6) Loans and Allowance for Loan Losses
  September 30, 2008
    
    
    December 31, 2007(Dollars in thousands)Loans Held for Sale, at lower of cost or
fair value;Real estate mortgage loans held for sale
    
    
    
    
    
    
    1,483Installment loans held for sale
    
    
    5,677
    
    
    
    3,241Total Loans Held for Sale
    
    
    5,677
    
    
    
    4,724Portfolio Loans:Commercial
    
    $
    444,956
    
    
    $
    433,081Real estate mortgage
    
    
    96,709
    
    
    
    100,419Home equity lines of credit
    
    
    95,564
    
    
    
    80,049Installment
    
    
    156,313
    
    
    
    140,049Total Portfolio Loans
    
    
    793,542
    
    
    
    753,598Allowance for loan losses
    
    
    (11,355
    )
    
    
    (7,820
    )Net Loans
    
    $
    782,187
    
    
    $
    745,778
  13




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##### Table of Contents



September 30, 2008
    
    
    September 30, 2007(Dollars in thousands)Balance at the beginning of period
    
    $
    7,820
    
    
    $
    7,300Provision for loan losses
    
    
    5,609
    
    
    
    1,677Allowance from merger
    
    
    
    
    
    
    1,098Loans charged-off
    
    
    (2,655
    )
    
    
    (2,520
    )Recoveries on loans previously charged-off
    
    
    581
    
    
    
    396Balance at end of period
    
    $
    11,355
    
    
    $
    7,951
  (7) Stock Options and Stock Appreciation Rights
  Year Issued2005
    
    2005
    
    2006
    
    2007
    
    2007
    
    2007
    
    2007
    
    2006Type
    
    Option
    
    Option
    
    Option
    
    Option
    
    Option
    
    Option
    
    Option
    
    SARsNumber of Options
    
    
    2,500
    
    
    
    30,000
    
    
    
    30,000
    
    
    
    30,000
    
    
    
    20,000
    
    
    
    50,000
    
    
    
    49,500
    
    
    
    18,000Strike Price
    
    $
    16.50
    
    
    $
    19.17
    
    
    $
    19.10
    
    
    $
    16.00
    
    
    $
    15.35
    
    
    $
    14.47
    
    
    $
    14.47
    
    
    $
    19.00Number of Options
Vested
    
    
    2,500
    
    
    
    30,000
    
    
    
    20,000
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Assumptions:Risk free interest rate
    
    
    4.50
    %
    
    
    3.92
    %
    
    
    3.66
    %
    
    
    4.73
    %
    
    
    4.72
    %
    
    
    2.94
    %
    
    
    2.94
    %
    
    
    2.88
    %Dividend yield
    
    
    4.36
    %
    
    
    3.76
    %
    
    
    3.77
    %
    
    
    4.50
    %
    
    
    4.69
    %
    
    
    4.98
    %
    
    
    4.98
    %
    
    
    5.29
    %Volatility
    
    
    18.48
    %
    
    
    17.30
    %
    
    
    17.66
    %
    
    
    16.52
    %
    
    
    16.52
    %
    
    
    15.68
    %
    
    
    15.68
    %
    
    
    21.87
    %Expected Life  years
    
    
    5
    
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    5
  Weighted AverageExerciseShares
    
    
    Price per ShareOptions outstanding, December 31, 2007
    
    
    112,500
    
    
    $
    17.57Granted
    
    
    99,500
    
    
    
    14.47Exercised
    
    
    
    
    
    
    Forfeited, expired or cancelled
    
    
    
    
    
    
    Options outstanding, September 30, 2008
    
    
    212,000
    
    
    $
    16.11Options vested and exercisable, September
30, 2008
    
    
    62,500
    
    
    $
    18.53
 14




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##### Table of Contents



(8) Deposits
  September 30, 2008
    
    
    December 31, 2007(Dollars in thousands)Demand and other noninterest-bearing
    
    $
    90,912
    
    
    $
    88,812Interest checking
    
    
    119,656
    
    
    
    120,052Savings
    
    
    80,103
    
    
    
    81,293Money market accounts
    
    
    108,462
    
    
    
    129,961Consumer time deposits
    
    
    415,209
    
    
    
    344,279Public time deposits
    
    
    68,844
    
    
    
    64,913Brokered time deposits
    
    
    12,476
    
    
    
    27,631Total deposits
    
    $
    895,662
    
    
    $
    856,941
   After
    
    
    After12 months but
    
    
    36 months butWithin 12
    
    
    within 36
    
    
    within 60
    
    
    Aftermonths
    
    
    months
    
    
    months
    
    
    5 years
    
    
    Total(Dollars in thousands)Consumer time deposits
    
    $
    332,033
    
    
    $
    78,223
    
    
    $
    4,914
    
    
    $
    39
    
    
    $
    415,209Public time deposits
    
    
    66,451
    
    
    
    1,676
    
    
    
    717
    
    
    
    
    
    
    
    68,844Brokered time deposits
    
    
    12,476
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,476Total time deposits
    
    $
    410,960
    
    
    $
    79,899
    
    
    $
    5,631
    
    
    $
    39
    
    
    $
    496,529
 (9) Short-Term Borrowings
   September 30, 2008
    
    
    December 31, 2007(Dollars in thousands)Securities sold under agreements to repurchase
    
    $
    29,876
    
    
    $
    22,105Federal funds purchased
    
    
    
    
    
    
    20,000Total short-term borrowings
    
    $
    29,876
    
    
    $
    42,105
 15




---



##### Table of Contents



(10) FHLB Advances
  September 30, 2008
    
    
    December 31, 2007(Dollars in thousands)FHLB advance - 3.33%, due February 8, 2008
    
    $
    
    
    
    $
    5,000FHLB advance - 4.47%, due April 11, 2008
    
    
    
    
    
    
    349FHLB advance - 2.82%, due October 16, 2008
    
    
    15,000
    
    
    
    FHLB advance - 4.99% due November 28, 2008
    
    
    5,000
    
    
    
    5,000FHLB advance - 5.07%, due December 12, 2008
    
    
    500
    
    
    
    499FHLB advance - 3.36%, due March 27, 2009
    
    
    10,000
    
    
    
    10,000FHLB advance - 4.67%, due April 10, 2009
    
    
    349
    
    
    
    349FHLB advance - 5.00%, due December 14, 2009
    
    
    500
    
    
    
    499FHLB advance - 3.58%, due January 8, 2010
    
    
    10,000
    
    
    
    10,000FHLB advance - 3.67%, due January 8, 2011
    
    
    10,000
    
    
    
    10,000FHLB advance - 3.55%, due January 1, 2014
    
    
    66
    
    
    
    76FHLB advance - 4.76%, due July 6, 2015
    
    
    2,442
    
    
    
    2,435FHLB advance - 3.69%, due January 9, 2009
    
    
    15,000
    
    
    
    FHLB advance - 3.17%, due February 8, 2011
    
    
    5,000
    
    
    
    Total FHLB advances
    
    $
    73,857
    
    
    $
    44,207
 (11) Trust Preferred Securities
   16




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##### Table of Contents



(12) Commitments, Credit Risk, and Contingencies
     Amount(Dollars in thousands)Commitments to extend credit
    
    $
    92,202Home equity lines of credit
    
    
    81,835Standby letters of credit
    
    
    9,313Total
    
    $
    183,350
 (13) Estimated Fair Value of Financial Instruments
   
    
    The carrying value of cash and due from banks, Federal funds sold,
short-term investments and accrued interest receivable and other
financial assets is a reasonable estimate of fair value due to the
short-term nature of the asset.
    
    The fair value of investment securities is based on quoted market
prices, where available. If quoted market prices are not available,
fair value is estimated using the quoted market prices of comparable
instruments.
    
    For variable rate loans with interest rates that may be adjusted on a
quarterly, or more frequent basis, the carrying amount is a reasonable
estimate of fair value. The fair value of other types of loans is
estimated by discounting future cash flows using the current rates at
 17




---



##### Table of Contents



which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
    
    The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings, money market, checking
and interest-bearing checking, is equal to the amount payable on
demand as of September 30, for each year presented. The fair value of
fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities. For
variable rate certificates of deposit, the carrying amount is a
reasonable estimate of fair value.
    
    Securities sold under repurchase agreements, other short-term
borrowings, accrued interest payable and other financial liabilities
approximate fair value due to the short-term nature of the liability.
    
    The fair value of FHLB advances is estimated by discounting future
cash flows using current FHLB rates for the remaining term to
maturity.
    
    The fair value of junior subordinated debentures is based on the
discounted value of contractual cash flows using rates currently
offered for similar maturities.
    
    The fair value of commitments to extend credit approximates the fees
charged to make these commitments; since rates and fees of the
commitment contracts approximates those currently charged to originate
similar commitments. The carrying amount and fair value of
off-balance sheet instruments is not significant as of September 30,
2008 and December 31, 2007.
  Quoted Prices in
    
    
    
    
    
    
    SignificantFair Value as of
    
    
    Active Markets for
    
    
    Significant Other
    
    
    UnobservableSeptember 30,
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    InputsDescription
    
    2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Trading Securities
    
    $
    33,559
    
    
    $
    33,559
    
    
    $
    
    
    
    $
    Available for Sale
Securities
    
    
    172,087
    
    
    
    152,327
    
    
    
    19,760
    
    
    
    Total
    
    $
    205,646
    
    
    $
    185,886
    
    
    $
    19,760
    
    
    $
    
  Limitations
   18




---



##### Table of Contents



At September 30, 2008
    
    
    At December 31, 2007Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedValue
    
    
    Fair Value
    
    
    Value
    
    
    Fair Value(Dollars in thousands)Financial assetsCash and due from banks, Federal
funds sold and short-term
investments
    
    $
    45,665
    
    
    $
    45,665
    
    
    $
    23,523
    
    
    $
    23,523Available for sale securities
    
    
    172,087
    
    
    
    172,087
    
    
    
    179,324
    
    
    
    179,324Trading securities, at fair value
    
    
    33,559
    
    
    
    33,559
    
    
    
    33,402
    
    
    
    33,402Portfolio loans, net
    
    
    782,187
    
    
    
    802,869
    
    
    
    745,778
    
    
    
    751,578Loans held for sale
    
    
    5,677
    
    
    
    5,677
    
    
    
    4,724
    
    
    
    4,724Accrued interest receivable
    
    
    4,186
    
    
    
    4,186
    
    
    
    4,074
    
    
    
    4,074Financial liabilitiesDeposits:Demand, savings and money market
    
    
    399,133
    
    
    
    399,133
    
    
    
    420,118
    
    
    
    420,118Certificates of deposit
    
    
    496,529
    
    
    
    502,288
    
    
    
    436,823
    
    
    
    441,400Total deposits
    
    
    895,662
    
    
    
    901,421
    
    
    
    856,941
    
    
    
    861,518Short-term borrowings
    
    
    29,876
    
    
    
    29,876
    
    
    
    42,105
    
    
    
    42,105Federal Home Loan Bank advances
    
    
    73,857
    
    
    
    74,246
    
    
    
    44,207
    
    
    
    43,500Junior subordinated debentures
    
    
    20,620
    
    
    
    21,568
    
    
    
    20,620
    
    
    
    21,716Accrued interest payable
    
    
    3,560
    
    
    
    3,560
    
    
    
    4,620
    
    
    
    4,620
 19




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Introduction
   Forward-Looking Statements
  
    
    significant increases in competitive pressure in the banking and financial services industries;
    
    changes in the interest rate environment which could reduce anticipated or actual margins;
    
    changes in political conditions or the legislative or regulatory environment;
    
    general economic conditions, either nationally or regionally (especially in northeastern
Ohio), becoming less favorable than expected resulting in, among other things, a deterioration
in credit quality of assets;
    
    changes occurring in business conditions and inflation;
    
    changes in technology;
    
    changes in trade, monetary, fiscal and tax policies;
    
    changes in the securities markets, in particular, continued disruption in the fixed income
markets and adverse capital market conditions;
    
    continued disruption in the housing markets and related conditions in the financial markets;
    
    changes in general economic conditions and competition in the geographic and business areas in
which the Corporation conducts its operations, particularly in light of the recent
consolidation of competing financial institutions; as well as the risks and uncertainties
described from time to time in the Corporations reports as filed with the Securities and
Exchange Commission.
 20




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##### Table of Contents



Critical Accounting Policies and Estimates
    Allowance for loan losses
      21




---



##### Table of Contents



Income Taxes
  New Accounting Pronouncements
  Summary of Earnings (Dollars in thousands except per share data)
   22




---



##### Table of Contents



Results of Operations
 Net Interest Income
  Three Months Ended September 30, 2008 versus Three Months Ended September 30, 2007
    23




---



##### Table of Contents



Nine Months Ended September 30, 2008 versus Nine Months Ended September 30, 2007
     24




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##### Table of Contents



Table 1: Condensed Consolidated Average Balance Sheets
 Interest, Rate, and Rate/ Volume differentials are stated on a Fully-Tax Equivalent (FTE) Basis.
 Three Months Ended September 30,2008
    
    
    2007Average
    
    
    
    
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Assets:U.S. Govt agencies and
corporations
    
    $
    183,073
    
    
    $
    2,070
    
    
    
    4.50
    %
    
    $
    181,369
    
    
    $
    2,226
    
    
    
    4.87
    %State and political subdivisions
    
    
    19,822
    
    
    
    293
    
    
    
    5.88
    %
    
    
    14,757
    
    
    
    227
    
    
    
    6.10
    %Federal funds sold and short-term
investments
    
    
    16,747
    
    
    
    138
    
    
    
    3.28
    %
    
    
    3,958
    
    
    
    51
    
    
    
    5.11
    %Commercial loans
    
    
    437,597
    
    
    
    6,991
    
    
    
    6.36
    %
    
    
    411,647
    
    
    
    7,939
    
    
    
    7.65
    %Real estate mortgage loans
    
    
    98,924
    
    
    
    1,495
    
    
    
    6.01
    %
    
    
    102,556
    
    
    
    1,581
    
    
    
    6.12
    %Home equity lines of credit
    
    
    92,926
    
    
    
    1,045
    
    
    
    4.47
    %
    
    
    77,885
    
    
    
    1,514
    
    
    
    7.71
    %Installment loans
    
    
    161,299
    
    
    
    2,466
    
    
    
    6.08
    %
    
    
    145,765
    
    
    
    2,432
    
    
    
    6.62
    %Total Earning Assets
    
    $
    1,010,388
    
    
    $
    14,498
    
    
    
    5.71
    %
    
    $
    937,937
    
    
    $
    15,970
    
    
    
    6.76
    %Allowance for loan loss
    
    
    (11,888
    )
    
    
    
    
    
    
    
    
    
    
    (8,071
    )Cash and due from banks
    
    
    19,160
    
    
    
    
    
    
    
    
    
    
    
    20,479Bank owned life insurance
    
    
    15,412
    
    
    
    
    
    
    
    
    
    
    
    15,203Other assets
    
    
    49,797
    
    
    
    
    
    
    
    
    
    
    
    54,210Total Assets
    
    $
    1,082,869
    
    
    
    
    
    
    
    
    
    
    $
    1,019,758Liabilities and Shareholders EquityInterest-bearing demand
    
    $
    124,928
    
    
    $
    265
    
    
    
    0.84
    %
    
    $
    113,358
    
    
    $
    356
    
    
    
    1.25
    %Savings deposits
    
    
    83,137
    
    
    
    133
    
    
    
    0.64
    %
    
    
    82,189
    
    
    
    156
    
    
    
    0.75
    %Money market accounts
    
    
    108,528
    
    
    
    459
    
    
    
    1.68
    %
    
    
    135,870
    
    
    
    1,269
    
    
    
    3.71
    %Consumer time deposits
    
    
    398,462
    
    
    
    3,609
    
    
    
    3.60
    %
    
    
    308,371
    
    
    
    3,682
    
    
    
    4.74
    %Brokered time deposits
    
    
    8,477
    
    
    
    98
    
    
    
    4.60
    %
    
    
    23,725
    
    
    
    319
    
    
    
    5.33
    %Public time deposits
    
    
    59,732
    
    
    
    571
    
    
    
    3.80
    %
    
    
    70,672
    
    
    
    924
    
    
    
    5.19
    %Short-term borrowings
    
    
    32,918
    
    
    
    93
    
    
    
    1.12
    %
    
    
    32,142
    
    
    
    347
    
    
    
    4.28
    %FHLB advances
    
    
    70,813
    
    
    
    646
    
    
    
    3.63
    %
    
    
    54,928
    
    
    
    635
    
    
    
    4.59
    %Trust preferred
    
    
    20,758
    
    
    
    282
    
    
    
    5.40
    %
    
    
    20,697
    
    
    
    355
    
    
    
    6.80
    %Total Interest-Bearing Liabilities
    
    $
    907,753
    
    
    $
    6,156
    
    
    
    2.70
    %
    
    $
    841,952
    
    
    $
    8,043
    
    
    
    3.79
    %Noninterest-bearing deposits
    
    
    87,358
    
    
    
    
    
    
    
    
    
    
    
    86,393Other liabilities
    
    
    8,466
    
    
    
    
    
    
    
    
    
    
    
    9,449Shareholders Equity
    
    
    79,292
    
    
    
    
    
    
    
    
    
    
    
    81,964Total Liabilities and
Shareholders Equity
    
    $
    1,082,869
    
    
    
    
    
    
    
    
    
    
    $
    1,019,758Net interest Income (FTE)
    
    
    
    
    
    $
    8,342
    
    
    
    3.28
    %
    
    
    
    
    
    $
    7,927
    
    
    
    3.35
    %Taxable Equivalent Adjustment
    
    
    
    
    
    
    (113
    )
    
    
    -0.04
    %
    
    
    
    
    
    
    (99
    )
    
    
    -0.04
    %Net Interest Income Per
Financial Statements
    
    
    
    
    
    $
    8,229
    
    
    
    
    
    
    
    
    
    
    $
    7,828Net Yield on Earning Assets
    
    
    
    
    
    
    
    
    
    
    3.24
    %
    
    
    
    
    
    
    
    
    
    
    3.31
    %
 25




---



##### Table of Contents



Nine Months Ended September 30,2008
    
    
    2007Average
    
    
    
    
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Assets:U.S. Govt agencies and
corporations
    
    $
    195,431
    
    
    $
    6,533
    
    
    
    4.47
    %
    
    $
    155,646
    
    
    $
    5,514
    
    
    
    4.74
    %State and political subdivisions
    
    
    17,766
    
    
    
    795
    
    
    
    5.98
    %
    
    
    13,905
    
    
    
    640
    
    
    
    6.15
    %Federal funds sold and short-term
investments
    
    
    10,384
    
    
    
    345
    
    
    
    4.44
    %
    
    
    10,235
    
    
    
    338
    
    
    
    4.42
    %Commercial loans
    
    
    435,456
    
    
    
    21,309
    
    
    
    6.54
    %
    
    
    393,892
    
    
    
    22,123
    
    
    
    7.51
    %Real estate mortgage loans
    
    
    99,143
    
    
    
    4,470
    
    
    
    6.02
    %
    
    
    99,577
    
    
    
    4,572
    
    
    
    6.14
    %Home equity lines of credit
    
    
    86,963
    
    
    
    3,222
    
    
    
    4.95
    %
    
    
    74,178
    
    
    
    4,323
    
    
    
    7.79
    %Installment loans
    
    
    151,113
    
    
    
    7,582
    
    
    
    6.70
    %
    
    
    115,050
    
    
    
    5,677
    
    
    
    6.60
    %Total Earning Assets
    
    $
    996,256
    
    
    $
    44,256
    
    
    
    5.93
    %
    
    $
    862,483
    
    
    $
    43,187
    
    
    
    6.69
    %Allowance for loan loss
    
    
    (9,240
    )
    
    
    
    
    
    
    
    
    
    
    (7,748
    )Cash and due from banks
    
    
    20,749
    
    
    
    
    
    
    
    
    
    
    
    21,479Bank owned life insurance
    
    
    15,559
    
    
    
    
    
    
    
    
    
    
    
    15,023Other assets
    
    
    47,300
    
    
    
    
    
    
    
    
    
    
    
    41,306Total Assets
    
    $
    1,070,624
    
    
    
    
    
    
    
    
    
    
    $
    932,543Liabilities and Shareholders EquityInterest-bearing demand
    
    $
    122,840
    
    
    $
    836
    
    
    
    0.91
    %
    
    $
    100,330
    
    
    $
    840
    
    
    
    1.12
    %Savings deposits
    
    
    83,145
    
    
    
    406
    
    
    
    0.65
    %
    
    
    80,370
    
    
    
    325
    
    
    
    0.54
    %Money market accounts
    
    
    116,624
    
    
    
    1,780
    
    
    
    2.04
    %
    
    
    126,166
    
    
    
    3,477
    
    
    
    3.68
    %Consumer time deposits
    
    
    382,202
    
    
    
    11,599
    
    
    
    4.05
    %
    
    
    273,243
    
    
    
    9,573
    
    
    
    4.68
    %Brokered time deposits
    
    
    14,365
    
    
    
    562
    
    
    
    5.23
    %
    
    
    39,487
    
    
    
    1,531
    
    
    
    5.18
    %Public time deposits
    
    
    60,047
    
    
    
    1,858
    
    
    
    4.13
    %
    
    
    68,493
    
    
    
    2,697
    
    
    
    5.26
    %Short-term borrowings
    
    
    29,286
    
    
    
    354
    
    
    
    1.61
    %
    
    
    25,431
    
    
    
    812
    
    
    
    4.27
    %FHLB advances
    
    
    63,347
    
    
    
    1,769
    
    
    
    3.73
    %
    
    
    39,232
    
    
    
    1,235
    
    
    
    4.21
    %Trust preferred securities
    
    
    20,784
    
    
    
    890
    
    
    
    5.72
    %
    
    
    10,993
    
    
    
    560
    
    
    
    6.81
    %Total Interest-Bearing Liabilities
    
    $
    892,640
    
    
    $
    20,054
    
    
    
    3.00
    %
    
    $
    763,745
    
    
    $
    21,050
    
    
    
    3.68
    %Noninterest-bearing deposits
    
    
    86,396
    
    
    
    
    
    
    
    
    
    
    
    83,717Other liabilities
    
    
    9,576
    
    
    
    
    
    
    
    
    
    
    
    8,626Shareholders Equity
    
    
    82,012
    
    
    
    
    
    
    
    
    
    
    
    76,455Total Liabilities and
Shareholders Equity
    
    $
    1,070,624
    
    
    
    
    
    
    
    
    
    
    $
    932,543Net interest Income (FTE)
    
    
    
    
    
    $
    24,202
    
    
    
    3.24
    %
    
    
    
    
    
    $
    22,137
    
    
    
    3.43
    %Taxable Equivalent Adjustment
    
    
    
    
    
    
    (314
    )
    
    
    -0.04
    %
    
    
    
    
    
    
    (282
    )
    
    
    -0.04
    %Net Interest Income Per
Financial Statements
    
    
    
    
    
    $
    23,888
    
    
    
    
    
    
    
    
    
    
    $
    21,855Net Yield on Earning Assets
    
    
    
    
    
    
    
    
    
    
    3.20
    %
    
    
    
    
    
    
    
    
    
    
    3.39
    %
 26




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##### Table of Contents



Rate/Volume
  Table 2: Rate/Volume Analysis of Net Interest Income (FTE)
 Three Months Ended September 30,Increase (Decrease) in Interest Income/Expense 2008 and 2007Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)U.S. Govt agencies and corporations
    
    $
    20
    
    
    $
    (176
    )
    
    $
    (156
    )State and political subdivisions
    
    
    77
    
    
    
    (11
    )
    
    
    66Federal funds sold and short-term
investments
    
    
    327
    
    
    
    (240
    )
    
    
    87Commercial loans
    
    
    389
    
    
    
    (1,337
    )
    
    
    (948
    )Real estate mortgage loans
    
    
    (58
    )
    
    
    (28
    )
    
    
    (86
    )Home equity lines of credit
    
    
    135
    
    
    
    (604
    )
    
    
    (469
    )Installment loans
    
    
    (9
    )
    
    
    43
    
    
    
    34Total Interest Income
    
    
    881
    
    
    
    (2,353
    )
    
    
    (1,472
    )Interest-bearing demand
    
    
    22
    
    
    
    (112
    )
    
    
    (90
    )Savings deposits
    
    
    2
    
    
    
    (25
    )
    
    
    (23
    )Money market accounts
    
    
    (140
    )
    
    
    (670
    )
    
    
    (810
    )Consumer time deposits
    
    
    186
    
    
    
    (259
    )
    
    
    (73
    )Brokered time deposits
    
    
    (203
    )
    
    
    (18
    )
    
    
    (221
    )Public time deposits
    
    
    (118
    )
    
    
    (235
    )
    
    
    (353
    )Short-term borrowings
    
    
    2
    
    
    
    (256
    )
    
    
    (254
    )FHLB advances
    
    
    (58
    )
    
    
    69
    
    
    
    11Trust preferred securities and miscellaneous
    
    
    
    
    
    
    (74
    )
    
    
    (74
    )Total Interest Expense
    
    
    (307
    )
    
    
    (1,580
    )
    
    
    (1,887
    )Net Interest Income (FTE)
    
    $
    1,188
    
    
    $
    (773
    )
    
    $
    415
  27




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##### Table of Contents



Nine Months Ended September 30,Increase (Decrease) in Interest Income/Expense 2008 and 2007Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)U.S. Govt agencies and corporations
    
    $
    1,452
    
    
    $
    (433
    )
    
    $
    1,019State and political subdivisions
    
    
    179
    
    
    
    (24
    )
    
    
    155Federal funds sold and short-term
investments
    
    
    5
    
    
    
    2
    
    
    
    7Commercial loans
    
    
    1,457
    
    
    
    (2,271
    )
    
    
    (814
    )Real estate mortgage loans
    
    
    (19
    )
    
    
    (83
    )
    
    
    (102
    )Home equity lines of credit
    
    
    379
    
    
    
    (1,480
    )
    
    
    (1,101
    )Installment loans
    
    
    1,788
    
    
    
    117
    
    
    
    1,905Total Interest Income
    
    
    5,241
    
    
    
    (4,172
    )
    
    
    1,069Interest-bearing demand
    
    
    16
    
    
    
    (20
    )
    
    
    (4
    )Savings deposits
    
    
    13
    
    
    
    68
    
    
    
    81Money market accounts
    
    
    (156
    )
    
    
    (1,541
    )
    
    
    (1,697
    )Consumer time deposits
    
    
    4,457
    
    
    
    (2,431
    )
    
    
    2,026Brokered time deposits
    
    
    (973
    )
    
    
    4
    
    
    
    (969
    )Public time deposits
    
    
    (285
    )
    
    
    (554
    )
    
    
    (839
    )Short-term borrowings
    
    
    40
    
    
    
    (498
    )
    
    
    (458
    )FHLB advances
    
    
    806
    
    
    
    (272
    )
    
    
    534Trust preferred securities and miscellaneous
    
    
    554
    
    
    
    (224
    )
    
    
    330Total Interest Expense
    
    
    4,472
    
    
    
    (5,468
    )
    
    
    (996
    )Net Interest Income (FTE)
    
    $
    769
    
    
    $
    1,296
    
    
    $
    2,065
  Noninterest Income
 Table 3: Details on Noninterest Income
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)
    
    
    (Dollars in thousands)Investment and trust services
    
    $
    441
    
    
    $
    547
    
    
    $
    1,560
    
    
    $
    1,593Deposit service charges
    
    
    1,258
    
    
    
    1,239
    
    
    
    3,559
    
    
    
    3,457Electronic banking fees
    
    
    704
    
    
    
    605
    
    
    
    2,030
    
    
    
    1,706Income from bank owned life insurance
    
    
    154
    
    
    
    182
    
    
    
    735
    
    
    
    531Other income
    
    
    67
    
    
    
    128
    
    
    
    736
    
    
    
    273Total fees and other income
    
    
    2,624
    
    
    
    2,701
    
    
    
    8,620
    
    
    
    7,560Securities gains, net
    
    
    223
    
    
    
    2
    
    
    
    506
    
    
    
    261Gains on sale of loans
    
    
    298
    
    
    
    277
    
    
    
    642
    
    
    
    546Gains (losses) on sale of other assets
    
    
    13
    
    
    
    24
    
    
    
    (122
    )
    
    
    59Total noninterest income
    
    $
    3,158
    
    
    $
    3,004
    
    
    $
    9,646
    
    
    $
    8,426
 28




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##### Table of Contents



Three Months Ended September 30, 2008 as compared to the Three Months Ended September 30, 2007
   Nine Months Ended September 30, 2008 as compared to the Nine Months Ended September 30, 2007
    29




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##### Table of Contents



Noninterest Expense
 Table 4: Details on Noninterest Expense
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)
    
    
    (Dollars in thousands)Salaries and employee
benefits
    
    $
    3,828
    
    
    $
    4,104
    
    
    $
    11,467
    
    
    $
    11,862Furniture and equipment
    
    
    1,049
    
    
    
    952
    
    
    
    3,080
    
    
    
    2,566Net occupancy
    
    
    556
    
    
    
    593
    
    
    
    1,816
    
    
    
    1,683Outside services
    
    
    522
    
    
    
    488
    
    
    
    1,996
    
    
    
    1,317Marketing and public
relations
    
    
    247
    
    
    
    321
    
    
    
    829
    
    
    
    936Supplies and postage
    
    
    408
    
    
    
    353
    
    
    
    1,092
    
    
    
    986Telecommunications
    
    
    189
    
    
    
    232
    
    
    
    635
    
    
    
    623Ohio Franchise tax
    
    
    225
    
    
    
    188
    
    
    
    670
    
    
    
    604Other real estate owned
    
    
    285
    
    
    
    58
    
    
    
    892
    
    
    
    305Electronic banking expense
    
    
    237
    
    
    
    150
    
    
    
    747
    
    
    
    593Other charge-offs and losses
    
    
    59
    
    
    
    192
    
    
    
    328
    
    
    
    387Other expense
    
    
    893
    
    
    
    703
    
    
    
    2,308
    
    
    
    1,839Total noninterest expense
    
    $
    8,498
    
    
    $
    8,334
    
    
    $
    25,860
    
    
    $
    23,701
 Three Months Ended September 30, 2008 as compared to the Three Months Ended September 30, 2007
  Nine Months Ended September 30, 2008 as compared to the Nine Months Ended September 30, 2007
   30




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##### Table of Contents



Income taxes
   Balance Sheet Analysis
 Overview
  Securities
  Loans
  31




---



##### Table of Contents



Table 5: Details on Loan Balances
 September 30, 2008
    
    
    December 31, 2007(Dollars in thousands)Real estate loans (includes loans
secured primarily by real estate
only):Construction and land development
    
    $
    57,233
    
    
    $
    74,379One to four family residential
    
    
    228,822
    
    
    
    213,238Multi-family residential
    
    
    25,793
    
    
    
    24,473Non-farm non-residential properties
    
    
    299,105
    
    
    
    275,552Commercial and industrial loans
    
    
    54,962
    
    
    
    56,688Personal loans to individuals:Auto, single payment and installment
    
    
    122,703
    
    
    
    104,360All other loans
    
    
    4,924
    
    
    
    4,908Total loans
    
    
    793,542
    
    
    
    753,598Allowance for loan losses
    
    
    (11,355
    )
    
    
    (7,820
    )Net loans
    
    $
    782,187
    
    
    $
    745,778
   Deposits
 Table 6: Deposits
 Average Balances OutstandingFor the Nine Months Ended September 30,2008
    
    
    2007Average
    
    
    Percent of
    
    
    
    
    
    
    Average
    
    
    Percent ofBalance
    
    
    Deposits
    
    
    Rate
    
    
    Balance
    
    
    Deposits
    
    
    Rate(Dollars in thousands)Noninterest bearing
demand
    
    $
    86,396
    
    
    
    9.98
    %
    
    
    0.00
    %
    
    $
    83,717
    
    
    
    10.85
    %
    
    
    0.00
    %Interest-bearing demand
    
    
    122,840
    
    
    
    14.19
    %
    
    
    0.91
    %
    
    
    100,330
    
    
    
    13.00
    %
    
    
    1.11
    %Savings deposits
    
    
    83,145
    
    
    
    9.61
    %
    
    
    0.65
    %
    
    
    80,370
    
    
    
    10.41
    %
    
    
    0.54
    %Money market accounts
    
    
    116,624
    
    
    
    13.47
    %
    
    
    2.04
    %
    
    
    126,166
    
    
    
    16.35
    %
    
    
    3.68
    %Consumer time deposits
    
    
    382,202
    
    
    
    44.15
    %
    
    
    4.05
    %
    
    
    273,242
    
    
    
    35.40
    %
    
    
    4.68
    %Brokered time deposits
    
    
    14,365
    
    
    
    1.66
    %
    
    
    5.23
    %
    
    
    39,487
    
    
    
    5.12
    %
    
    
    5.18
    %Public time deposits
    
    
    60,047
    
    
    
    6.94
    %
    
    
    4.13
    %
    
    
    68,493
    
    
    
    8.87
    %
    
    
    5.26
    %Total Deposits
    
    $
    865,619
    
    
    
    100.00
    %
    
    
    2.92
    %
    
    $
    771,805
    
    
    
    100.00
    %
    
    
    3.19
    %
 32




---



##### Table of Contents



Borrowings
  Capital
   33




---



##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
 RISK ELEMENTS
  Credit Risk Management
  34




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##### Table of Contents



Nonperforming Assets, Delinquency and Potential Problem Loans
      Table 8: Nonperforming Assets
 September 30, 2008
    
    
    December 31, 2007(Dollars in thousands)Commercial loans
    
    $
    12,687
    
    
    $
    7,927Real estate mortgage
    
    
    2,950
    
    
    
    2,097Home equity lines of credit
    
    
    845
    
    
    
    429Installment loans
    
    
    963
    
    
    
    378Total nonperforming loans
    
    
    17,445
    
    
    
    10,831Other foreclosed assets
    
    
    1,799
    
    
    
    2,478Total nonperforming assets
    
    $
    19,244
    
    
    $
    13,309Allowance for loan losses to
nonperforming loans
    
    
    65.09
    %
    
    
    72.20
    %Nonperforming assets to total assets
    
    
    1.73
    %
    
    
    1.26
    %
 Provision and Allowance for Loan Losses
  35




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##### Table of Contents



Table 9: Analysis of Allowance for Loan Losses
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)
    
    
    (Dollars in thousands)Balance at beginning of
period
    
    $
    11,874
    
    
    $
    8,115
    
    
    $
    7,820
    
    
    $
    7,300Charge-offs:Commercial
    
    
    (1,097
    )
    
    
    (496
    )
    
    
    (1,540
    )
    
    
    (1,693
    )Real estate mortgage
    
    
    
    
    
    
    (31
    )
    
    
    (275
    )
    
    
    (206
    )Home equity lines of credit
    
    
    (72
    )
    
    
    
    
    
    
    (161
    )
    
    
    (55
    )Purchased installment
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    (37
    )Installment
    
    
    (161
    )
    
    
    (222
    )
    
    
    (486
    )
    
    
    (348
    )DDA overdrafts
    
    
    (79
    )
    
    
    (73
    )
    
    
    (193
    )
    
    
    (181
    )Total charge-offs
    
    
    (1,409
    )
    
    
    (842
    )
    
    
    (2,655
    )
    
    
    (2,520
    )Recoveries:Commercial
    
    
    344
    
    
    
    107
    
    
    
    385
    
    
    
    140Real estate mortgage
    
    
    28
    
    
    
    6
    
    
    
    28
    
    
    
    7Home equity lines of credit
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    25Installment
    
    
    34
    
    
    
    116
    
    
    
    126
    
    
    
    185DDA overdrafts
    
    
    12
    
    
    
    8
    
    
    
    41
    
    
    
    39Total Recoveries
    
    
    419
    
    
    
    237
    
    
    
    581
    
    
    
    396Net Charge-offs
    
    
    (990
    )
    
    
    (605
    )
    
    
    (2,074
    )
    
    
    (2,124
    )Allowance from merger
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,098Provision for loan losses
    
    
    471
    
    
    
    441
    
    
    
    5,609
    
    
    
    1,677Balance at end of period
    
    $
    11,355
    
    
    $
    7,951
    
    
    $
    11,355
    
    
    $
    7,951
    36




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##### Table of Contents



Market Risk Management
     
 ITEM 4. Controls and Procedures
  37




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1A. Risk Factors
  There can be no assurance that recently enacted legislation will help stabilize the U.S. financial
system.
  Current market developments may adversely affect the Corporations industry, business and results
of operations.
  38




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##### Table of Contents



Current levels of market volatility are unprecedented.
  The soundness of other financial institutions could adversely affect the Corporation.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 Issuer Purchases of Equity Securities
  
 Item 6. Exhibits.
  39




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##### Table of Contents



SIGNATURES
  LNB BANCORP, INC.
(Registrant)Date: November 7, 2008

/s/ Sharon L. ChurchillSharon L. ChurchillChief Financial Officer
(Duly Authorized Officer, and Principal
Financial Officer) 40




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##### Table of Contents



Exhibit
 31.1
    
    Chief Executive Officer Rule 13a -14(a)/15d -14(a) Certification.31.2
    
    Chief Financial Officer Rule 13a -14(a)/15d -14(a) Certification.32.1
    
    Certification pursuant to 18 U.S.C. section 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification pursuant to 18 U.S.C. section 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
 41