##### 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 June 30, 2010
 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
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



Part I  Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets June 30, 2010 (unaudited) and December 31, 2009
    
    
    3Consolidated Statements of Income (unaudited) for the three and six months
ended June 30, 2010 and June 30, 2009
    
    
    4Consolidated Statements of Shareholders Equity (unaudited) for the six
months ended June 30, 2010 and June 30, 2009
    
    
    5Consolidated Statements of Cash Flows (unaudited) for the six months ended
June 30, 2010 and June 30, 2009
    
    
    6Notes to the Consolidated Financial Statements (unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    36Item 4. Controls and Procedures
    
    
    38Part II  Other Information
    
    
    38Item 1. Legal Proceedings
    
    
    38Item 1A. Risk Factors
    
    
    39Item 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
 June 30, 2010
    
    
    December 31, 2009(unaudited)(Dollars in thousands except share amounts)ASSETSCash and due from banks (Note 3)
    
    $
    17,876
    
    
    $
    16,318Federal funds sold and short-term investments
    
    
    37,100
    
    
    
    10,615Cash and cash equivalents
    
    
    54,976
    
    
    
    26,933Interest-bearing deposits in other banks
    
    
    346
    
    
    
    359Securities: (Note 5)Trading securities, at fair value
    
    
    
    
    
    
    8,445Available for sale, at fair value
    
    
    244,111
    
    
    
    247,037Total securities
    
    
    244,111
    
    
    
    255,482Restricted stock
    
    
    5,741
    
    
    
    4,985Loans held for sale
    
    
    1,528
    
    
    
    3,783Loans: (Note 6)Portfolio loans
    
    
    795,451
    
    
    
    803,197Allowance for loan losses (Note 6)
    
    
    (19,435
    )
    
    
    (18,792
    )Net loans
    
    
    776,016
    
    
    
    784,405Bank premises and equipment, net
    
    
    9,654
    
    
    
    10,105Other real estate owned
    
    
    2,355
    
    
    
    1,264Bank owned life insurance
    
    
    16,780
    
    
    
    16,435Goodwill, net (Note 4)
    
    
    21,582
    
    
    
    21,582Intangible assets, net (Note 4)
    
    
    938
    
    
    
    1,005Accrued interest receivable
    
    
    3,994
    
    
    
    4,072Other assets
    
    
    15,934
    
    
    
    19,099Total Assets
    
    $
    1,153,955
    
    
    $
    1,149,509LIABILITIES AND SHAREHOLDERS EQUITYDeposits (Note 8)Demand and other noninterest-bearing
    
    $
    115,689
    
    
    $
    118,505Savings, money market and interest-bearing demand
    
    
    307,560
    
    
    
    305,045Certificates of deposit
    
    
    550,641
    
    
    
    547,883Total deposits
    
    
    973,890
    
    
    
    971,433Short-term borrowings (Note 9)
    
    
    1,725
    
    
    
    1,457Federal Home Loan Bank advances (Note 10)
    
    
    42,503
    
    
    
    42,505Junior subordinated debentures (Note 11)
    
    
    20,620
    
    
    
    20,620Accrued interest payable
    
    
    1,935
    
    
    
    2,074Accrued taxes, expenses and other liabilities
    
    
    6,143
    
    
    
    7,279Total Liabilities
    
    
    1,046,816
    
    
    
    1,045,368Shareholders EquityPreferred stock, Series A Voting, no par value, authorized 750,000
shares, none issued at June 30, 2010 and December 31, 2009.
    
    
    
    
    
    
    Fixed rate cumulative perpetual preferred stock, Series B, no par value,
$1,000 liquidation value, 25,223 shares authorized and issued at June 30,
2010 and December 31, 2009.
    
    
    25,223
    
    
    
    25,223Discount on Series B preferred stock
    
    
    (124
    )
    
    
    (131
    )Warrant to purchase common stock
    
    
    146
    
    
    
    146Common stock, par value $1 per share, authorized 15,000,000 shares, issued
7,691,355 shares at June 30, 2010 and 7,623,857 at December 31, 2009.
    
    
    7,691
    
    
    
    7,624Additional paid-in capital
    
    
    37,837
    
    
    
    37,862Retained earnings
    
    
    38,672
    
    
    
    36,883Accumulated other comprehensive income
    
    
    3,786
    
    
    
    2,626Treasury shares at cost, 328,194 shares at June 30, 2010 and at December
31, 2009
    
    
    (6,092
    )
    
    
    (6,092
    )Total Shareholders Equity
    
    
    107,139
    
    
    
    104,141Total Liabilities and Shareholders Equity
    
    $
    1,153,955
    
    
    $
    1,149,509
 See accompanying notes to consolidated financial statements.
 3




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##### Table of Contents



Consolidated Statements of Income (unaudited)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands except share and per share amounts)Interest and Dividend IncomeLoans
    
    $
    10,580
    
    
    $
    11,360
    
    
    $
    21,372
    
    
    $
    22,971Securities:U.S. Government agencies and corporations
    
    
    2,070
    
    
    
    2,537
    
    
    
    4,206
    
    
    
    5,012State and political subdivisions
    
    
    245
    
    
    
    266
    
    
    
    491
    
    
    
    499Trading securities
    
    
    
    
    
    
    119
    
    
    
    49
    
    
    
    246Other debt and equity securities
    
    
    69
    
    
    
    55
    
    
    
    130
    
    
    
    118Federal funds sold and short-term investments
    
    
    11
    
    
    
    19
    
    
    
    20
    
    
    
    33Total interest and dividend income
    
    
    12,975
    
    
    
    14,356
    
    
    
    26,268
    
    
    
    28,879Interest ExpenseDeposits
    
    
    2,745
    
    
    
    4,601
    
    
    
    5,725
    
    
    
    9,503Federal Home Loan Bank advances
    
    
    316
    
    
    
    348
    
    
    
    634
    
    
    
    780Short-term borrowings
    
    
    1
    
    
    
    32
    
    
    
    2
    
    
    
    68Junior subordinated debentures
    
    
    216
    
    
    
    241
    
    
    
    431
    
    
    
    496Total interest expense
    
    
    3,278
    
    
    
    5,222
    
    
    
    6,792
    
    
    
    10,847Net Interest Income
    
    
    9,697
    
    
    
    9,134
    
    
    
    19,476
    
    
    
    18,032Provision for Loan Losses (Note 6)
    
    
    2,109
    
    
    
    2,484
    
    
    
    4,218
    
    
    
    4,293Net interest income after provision for
loan losses
    
    
    7,588
    
    
    
    6,650
    
    
    
    15,258
    
    
    
    13,739Noninterest IncomeInvestment and trust services
    
    
    563
    
    
    
    559
    
    
    
    1,008
    
    
    
    909Deposit service charges
    
    
    1,094
    
    
    
    1,095
    
    
    
    2,033
    
    
    
    2,121Other service charges and fees
    
    
    826
    
    
    
    705
    
    
    
    1,620
    
    
    
    1,342Income from bank owned life insurance
    
    
    173
    
    
    
    165
    
    
    
    344
    
    
    
    327Other income
    
    
    69
    
    
    
    81
    
    
    
    162
    
    
    
    164Total fees and other income
    
    
    2,725
    
    
    
    2,605
    
    
    
    5,167
    
    
    
    4,863Securities gains, net
    
    
    
    
    
    
    249
    
    
    
    38
    
    
    
    586Gains on sale of loans
    
    
    195
    
    
    
    368
    
    
    
    387
    
    
    
    622Gains (losses) on sale of other assets, net
    
    
    (24
    )
    
    
    22
    
    
    
    (45
    )
    
    
    30Total noninterest income
    
    
    2,896
    
    
    
    3,244
    
    
    
    5,547
    
    
    
    6,101Noninterest ExpenseSalaries and employee benefits
    
    
    3,911
    
    
    
    3,802
    
    
    
    7,829
    
    
    
    7,520Furniture and equipment
    
    
    917
    
    
    
    1,189
    
    
    
    1,850
    
    
    
    2,331Net occupancy
    
    
    581
    
    
    
    570
    
    
    
    1,196
    
    
    
    1,214Outside services
    
    
    595
    
    
    
    789
    
    
    
    1,148
    
    
    
    1,344Marketing and public relations
    
    
    326
    
    
    
    295
    
    
    
    572
    
    
    
    539Supplies, postage and freight
    
    
    302
    
    
    
    306
    
    
    
    644
    
    
    
    640Telecommunications
    
    
    211
    
    
    
    185
    
    
    
    423
    
    
    
    388Ohio franchise tax
    
    
    281
    
    
    
    225
    
    
    
    562
    
    
    
    457FDIC assessments
    
    
    557
    
    
    
    976
    
    
    
    1,085
    
    
    
    1,289Other real estate owned
    
    
    71
    
    
    
    103
    
    
    
    152
    
    
    
    174Electronic banking expenses
    
    
    238
    
    
    
    200
    
    
    
    422
    
    
    
    389Loan and collection expense
    
    
    450
    
    
    
    368
    
    
    
    773
    
    
    
    578Other expense
    
    
    518
    
    
    
    472
    
    
    
    995
    
    
    
    977Total noninterest expense
    
    
    8,958
    
    
    
    9,480
    
    
    
    17,651
    
    
    
    17,840Income before income tax expense
    
    
    1,526
    
    
    
    414
    
    
    
    3,154
    
    
    
    2,000Income tax expense (benefit)
    
    
    283
    
    
    
    (102
    )
    
    
    580
    
    
    
    167Net Income
    
    $
    1,243
    
    
    $
    516
    
    
    $
    2,574
    
    
    $
    1,833Dividends and accretion on preferred stock
    
    
    318
    
    
    
    319
    
    
    
    637
    
    
    
    618Net Income Available to Common Shareholders
    
    $
    925
    
    
    $
    197
    
    
    $
    1,937
    
    
    $
    1,215Net Income Per Common Share (Note 2)Basic
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.26
    
    
    $
    0.17Diluted
    
    
    0.12
    
    
    
    0.03
    
    
    
    0.26
    
    
    
    0.17Dividends declared
    
    
    0.01
    
    
    
    0.09
    
    
    
    0.02
    
    
    
    0.18Average Common Shares OutstandingBasic
    
    
    7,363,161
    
    
    
    7,295,663
    
    
    
    7,343,023
    
    
    
    7,295,663Diluted
    
    
    7,363,161
    
    
    
    7,295,663
    
    
    
    7,343,023
    
    
    
    7,295,663
 See accompanying notes to consolidated financial statements
 4




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##### Table of Contents



Consolidated Statements of Shareholders Equity (unaudited)
 Preferred Stock
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    Accumulated Other(net of
    
    
    Warrant to Purchase
    
    
    Common
    
    
    Paid-In
    
    
    
    
    
    
    Comprehensive Income
    
    
    Treasurydiscount)
    
    
    Common Stock
    
    
    Stock
    
    
    Capital
    
    
    Retained Earnings
    
    
    (Loss)
    
    
    Stock
    
    
    Total(Dollars in thousands except share and per share amounts)Balance, January 1, 2009
    
    $
    25,077
    
    
    $
    146
    
    
    $
    7,624
    
    
    $
    37,783
    
    
    $
    41,682
    
    
    $
    839
    
    
    $
    (6,092
    )
    
    $
    107,059Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,833
    
    
    
    
    
    
    
    
    
    
    
    1,833Other comprehensive income, net of tax:Change in unrealized gains and losses
on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    736Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    736
    
    
    
    
    
    
    
    2,569Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57Preferred dividends and accretion of discount
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (701
    )
    
    
    
    
    
    
    
    
    
    
    (693
    )Common dividends declared, $.18 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,313
    )
    
    
    
    
    
    
    
    
    
    
    (1,313
    )Balance, June 30, 2009
    
    $
    25,085
    
    
    $
    146
    
    
    $
    7,624
    
    
    $
    37,840
    
    
    $
    41,501
    
    
    $
    1,575
    
    
    $
    (6,092
    )
    
    $
    107,679Balance, January 1, 2010
    
    $
    25,092
    
    
    $
    146
    
    
    $
    7,624
    
    
    $
    37,862
    
    
    $
    36,883
    
    
    $
    2,626
    
    
    $
    (6,092
    )
    
    $
    104,141Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,574
    
    
    
    
    
    
    
    
    
    
    
    2,574Other comprehensive income, net of tax:Change in unrealized gains and losses
on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,160
    
    
    
    
    
    
    
    1,160Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,734Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42Restricted shares granted (67,498 shares)
    
    
    
    
    
    
    
    
    
    
    67
    
    
    
    (67
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred dividends and accretion of discount
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (637
    )
    
    
    
    
    
    
    
    
    
    
    (630
    )Common dividends declared, $.02 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (148
    )
    
    
    
    
    
    
    
    
    
    
    (148
    )Balance, June 30, 2010
    
    $
    25,099
    
    
    $
    146
    
    
    $
    7,691
    
    
    $
    37,837
    
    
    $
    38,672
    
    
    $
    3,786
    
    
    $
    (6,092
    )
    
    $
    107,139
 See accompanying notes to consolidated financial statements
 5




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##### Table of Contents



Consolidated Statements of Cash Flows (unaudited)
 Six Months Ended June 30,2010
    
    
    2009(Dollars in thousands)Operating ActivitiesNet income
    
    $
    2,574
    
    
    $
    1,833Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses
    
    
    4,218
    
    
    
    4,293Depreciation and amortization
    
    
    727
    
    
    
    804Amortization (accretion) of premiums and discounts
    
    
    829
    
    
    
    631Amortization of intangibles
    
    
    67
    
    
    
    68Amortization of loan servicing rights
    
    
    98
    
    
    
    173Amortization of deferred loan fees
    
    
    37
    
    
    
    164Federal deferred income tax benefit
    
    
    (844
    )
    
    
    (171
    )Securities gains, net
    
    
    (38
    )
    
    
    (586
    )Share-based compensation expense
    
    
    42
    
    
    
    57Loans originated for sale
    
    
    (38,075
    )
    
    
    (61,417
    )Proceeds from sales of loan originations
    
    
    40,330
    
    
    
    58,559Net gain from loan sales
    
    
    (387
    )
    
    
    (622
    )Net (gain) loss on sale of other assets
    
    
    43
    
    
    
    (30
    )Net decrease (increase) in accrued interest receivable and other assets
    
    
    3,278
    
    
    
    (4,833
    )Net increase (decrease) in accrued interest payable, taxes and other liabilities
    
    
    (1,275
    )
    
    
    5,632Net cash provided by operating activities
    
    
    11,624
    
    
    
    4,555Investing ActivitiesProceeds from sales of available-for-sale securities
    
    
    4,170
    
    
    
    23,049Proceeds from maturities of available-for-sale securities
    
    
    41,368
    
    
    
    24,536Purchase of available-for-sale securities
    
    
    (41,091
    )
    
    
    (105,463
    )Proceeds from maturities of trading securities
    
    
    436
    
    
    
    890Proceeds from sale of trading securities
    
    
    7,338
    
    
    
    Change in interest-bearing deposits in other banks
    
    
    13
    
    
    
    (4
    )Purchase of Federal Home Loan Bank Stock
    
    
    
    
    
    
    (101
    )Purchase of Federal Reserve Bank Stock
    
    
    (756
    )
    
    
    Net (increase) decrease in loans made to customers
    
    
    3,155
    
    
    
    (3,153
    )Proceeds from the sale of other real estate owned
    
    
    117
    
    
    
    536Purchase of bank premises and equipment
    
    
    (276
    )
    
    
    (220
    )Net cash provided by (used in) investing activities
    
    
    14,474
    
    
    
    (59,930
    )Financing ActivitiesNet increase (decrease) in demand and other noninterest-bearing
    
    
    (2,816
    )
    
    
    1,333Net increase in savings, money market and interest-bearing demand
    
    
    2,515
    
    
    
    32,166Net increase in certificates of deposit
    
    
    2,758
    
    
    
    60,050Net increase in short-term borrowings
    
    
    268
    
    
    
    6,361Proceeds from Federal Home Loan Bank advances
    
    
    30,000
    
    
    
    15,000Payment of Federal Home Loan Bank advances
    
    
    (30,002
    )
    
    
    (25,351
    )Dividends paid
    
    
    (778
    )
    
    
    (1,849
    )Net cash provided by financing activities
    
    
    1,945
    
    
    
    87,710Net increase in cash and cash equivalents
    
    
    28,043
    
    
    
    32,335Cash and cash equivalents, January 1
    
    
    26,933
    
    
    
    36,923Cash and cash equivalents, June 30
    
    $
    54,976
    
    
    $
    69,258Supplemental cash flow informationInterest paid
    
    $
    6,930
    
    
    $
    11,291Income taxes paid
    
    
    
    
    
    
    300Transfer of loans to other real estate owned
    
    
    1,366
    
    
    
    646
  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
  New Accounting Pronouncements
 ASC Subtopic 310-30
 ASC Topic 860, Transfers and Servicing
 ASC Topic 810, Consolidation
 Use of Estimates
  Segment Information
  Statement of Cash Flows
  7




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##### Table of Contents



Securities
  Restricted 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
  Split-Dollar Life Insurance
  Investment and Trust Services Assets and Income
  Income Taxes
  9




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##### Table of Contents



Stock-Based Compensation
  Comprehensive Income
   Preferred Stock
  (2) Earnings Per Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands except per share amounts)Weighted average shares outstanding used in Basic
Earnings per Common Share
    
    
    7,363,161
    
    
    
    7,295,663
    
    
    
    7,343,023
    
    
    
    7,295,663Dilutive effect of incentive stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares outstanding used in
Diluted Earnings Per Common Share
    
    
    7,363,161
    
    
    
    7,295,663
    
    
    
    7,343,023
    
    
    
    7,295,663Net Income
    
    $
    1,243
    
    
    $
    516
    
    
    $
    2,574
    
    
    $
    1,833Preferred stock dividend and accretion
    
    
    318
    
    
    
    319
    
    
    
    637
    
    
    
    618Income Available to Common Shareholders
    
    $
    925
    
    
    $
    197
    
    
    $
    1,937
    
    
    $
    1,215Basic Earnings Per Common Share
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.26
    
    
    $
    0.17Diluted Earnings Per Common Share
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.26
    
    
    $
    0.17
  (3) Cash and Due from Banks
  10




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##### Table of Contents



(4) Goodwill and Intangible Assets
    June 30, 2010
    
    
    December 31, 2009(Dollars in thousands)Core deposit intangibles
    
    $
    1,367
    
    
    $
    1,367Less: accumulated amortization
    
    
    429
    
    
    
    362Carrying value of core deposit intangibles
    
    $
    938
    
    
    $
    1,005
 (5) Securities
  At June 30, 2010Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueSecurities available for sale:U.S. Government agencies and corporations
    
    $
    62,791
    
    
    $
    678
    
    
    $
    (279
    )
    
    $
    63,190Mortgage backed securities
    
    
    150,372
    
    
    
    7,177
    
    
    
    (25
    )
    
    
    157,524State and political subdivisions
    
    
    22,592
    
    
    
    845
    
    
    
    (40
    )
    
    
    23,397Total securities available for sale
    
    $
    235,755
    
    
    $
    8,700
    
    
    $
    (344
    )
    
    $
    244,111
 11




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##### Table of Contents



At December 31, 2009Amortized Cost
    
    
    Unrealized Gains
    
    
    Unrealized Losses
    
    
    Fair Value(Dollars in thousands)Securities available for sale:U.S. Government agencies and corporations
    
    $
    45,142
    
    
    $
    354
    
    
    $
    (281
    )
    
    $
    45,215Mortgage backed securities
    
    
    172,708
    
    
    
    6,092
    
    
    
    (21
    )
    
    
    178,779State and political subdivisions
    
    
    22,588
    
    
    
    571
    
    
    
    (116
    )
    
    
    23,043Total securities available for sale
    
    $
    240,438
    
    
    $
    7,017
    
    
    $
    (418
    )
    
    $
    247,037
  Trading Securities held at December 31, 2009Aggregate
    
    
    AggregateUnrealized Gains
    
    
    Unrealized Losses
    
    
    FairCost
    
    
    recorded to income
    
    
    recorded to income
    
    
    Value(Dollars in thousands)Trading Securities
    
    $
    8,327
    
    
    $
    118
    
    
    $
    
    
    
    $
    8,445
 (6) Loans and Allowance for Loan Losses
  June 30, 2010
    
    
    December 31, 2009(Dollars in thousands)Real estate loans (includes loans secured primarily by real estate only):Construction and land development
    
    $
    56,930
    
    
    $
    65,052One to four family residential
    
    
    213,125
    
    
    
    219,508Multi-family residential
    
    
    28,708
    
    
    
    28,988Non-farm non-residential properties
    
    
    284,940
    
    
    
    286,778Commercial and industrial loans
    
    
    61,297
    
    
    
    61,929Personal loans to individuals:Auto, single payment and installment
    
    
    144,577
    
    
    
    135,097All other loans
    
    
    5,874
    
    
    
    5,845Total loans
    
    
    795,451
    
    
    
    803,197Allowance for loan losses
    
    
    (19,435
    )
    
    
    (18,792
    )Net loans
    
    $
    776,016
    
    
    $
    784,405
  June 30, 2010
    
    
    June 30, 2009(Dollars in thousands)Balance at the beginning of period
    
    $
    18,792
    
    
    $
    11,652Provision for loan losses
    
    
    4,218
    
    
    
    4,293Loans charged-off
    
    
    (4,039
    )
    
    
    (3,342
    )Recoveries on loans previously charged-off
    
    
    464
    
    
    
    375Balance at the end of the year
    
    $
    19,435
    
    
    $
    12,978
  12




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##### Table of Contents



(7) Deposits
  June 30, 2010
    
    
    December 31, 2009(Dollars in thousands)Demand and other noninterest-bearing
    
    $
    115,689
    
    
    $
    118,505Interest checking
    
    
    129,807
    
    
    
    137,807Savings
    
    
    87,322
    
    
    
    82,771Money market accounts
    
    
    90,431
    
    
    
    84,467Consumer time deposits
    
    
    460,611
    
    
    
    476,798Public time deposits
    
    
    90,030
    
    
    
    71,085Total deposits
    
    $
    973,890
    
    
    $
    971,433
   Within
    
    
    After 12 months but
    
    
    After 36 months but12 months
    
    
    within 36 months
    
    
    within 60 months
    
    
    After 5 years
    
    
    Total(Dollars in thousands)Consumer time deposits
    
    $
    276,201
    
    
    $
    150,757
    
    
    $
    33,633
    
    
    $
    20
    
    
    $
    460,611Public time deposits
    
    
    86,807
    
    
    
    3,223
    
    
    
    
    
    
    
    
    
    
    
    90,030Total time deposits
    
    $
    363,008
    
    
    $
    153,980
    
    
    $
    33,633
    
    
    $
    20
    
    
    $
    550,641
 (8) Short-Term Borrowings
   (9) Federal Home Loan Bank Advances
  13




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##### Table of Contents



June 30, 2010
    
    
    December 31, 2009(Dollars in thousands)Maturity January 2010, fixed rate 3.58%
    
    $
    
    
    
    $
    10,000Maturities January 2011 through February
2011, with fixed rates ranging from 3.17%
to 3.67%, averaging 3.50% for 2010 and
2009.
    
    
    15,000
    
    
    
    15,000Maturity January 2012, fixed rate 2.37%
    
    
    15,000
    
    
    
    15,000Maturities January 2014, fixed rates
ranging from 2.57% to 3.55%, averaging
2.57% for 2010 and 3.55% for 2009.
    
    
    10,046
    
    
    
    55Maturity July 2015, fixed rate 4.76%
    
    
    2,457
    
    
    
    2,450Total FHLB advances
    
    $
    42,503
    
    
    $
    42,505
 (10) Trust Preferred Securities
    (11) Commitments, Credit Risk, and Contingencies
    14




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##### Table of Contents



Amount(Dollars in thousands)Commitments to extend credit
    
    $
    70,140Home equity lines of credit
    
    
    75,964Standby letters of credit
    
    
    8,623Total
    
    $
    154,727
 (12) Estimated Fair Value of Financial Instruments
   
    
    The carrying value of cash and due from banks, Federal funds sold,
short-term investments, interest-bearing deposits in other banks 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 which similar
loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.
    
    The carrying value approximates the fair value for bank owned life insurance.
    
    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
the balance sheet date, 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 Federal Home Loan Bank 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 June 30, 2010 and December 31, 2009.
 Limitations
   15




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##### Table of Contents



June 30, 2010
    
    
    December 31, 2009Carrying
    
    
    
    
    
    
    CarryingValue
    
    
    Estimated Fair Value
    
    
    Value
    
    
    Estimated Fair Value(Dollars in thousands)Financial assetsCash and due from banks, Federal
funds sold, short-term investments
and interest-bearing deposits in
other banks
    
    $
    55,322
    
    
    $
    55,322
    
    
    $
    27,292
    
    
    $
    27,292Securities
    
    
    244,111
    
    
    
    244,111
    
    
    
    255,482
    
    
    
    255,482Portfolio loans, net
    
    
    776,016
    
    
    
    773,083
    
    
    
    784,405
    
    
    
    786,154Loans held for sale
    
    
    1,528
    
    
    
    1,528
    
    
    
    3,783
    
    
    
    3,783Accrued interest receivable
    
    
    3,994
    
    
    
    3,994
    
    
    
    4,072
    
    
    
    4,072Financial liabilitiesDeposits:Demand, savings and money market
    
    
    423,249
    
    
    
    423,249
    
    
    
    423,550
    
    
    
    423,550Certificates of deposit
    
    
    550,641
    
    
    
    556,072
    
    
    
    547,883
    
    
    
    555,302Total deposits
    
    
    973,890
    
    
    
    979,321
    
    
    
    971,433
    
    
    
    978,852Short-term borrowings
    
    
    1,725
    
    
    
    1,725
    
    
    
    1,457
    
    
    
    1,457Federal Home Loan Bank advances
    
    
    42,503
    
    
    
    44,171
    
    
    
    42,505
    
    
    
    43,708Junior subordinated debentures
    
    
    20,620
    
    
    
    19,996
    
    
    
    20,620
    
    
    
    18,489Accrued interest payable
    
    
    1,935
    
    
    
    1,935
    
    
    
    2,074
    
    
    
    2,074
  
 
 
  16




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##### Table of Contents



Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantFair Value as of
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsDescription
    
    June 30, 2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Available for Sale Securities
    
    
    244,111
    
    
    
    
    
    
    
    244,111
    
    
    
    Total
    
    $
    244,111
    
    
    $
    
    
    
    $
    244,111
    
    
    $
    
 Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantFair Value as of
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsDescription
    
    December 31, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Trading Securities
    
    $
    8,445
    
    
    
    
    
    
    $
    8,445
    
    
    $
    Available for Sale Securities
    
    
    247,037
    
    
    
    
    
    
    
    247,037
    
    
    
    Total
    
    $
    255,482
    
    
    $
    
    
    
    $
    255,482
    
    
    $
    
   (13) Stock-Based Compensation
    17




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##### Table of Contents



Outstanding
    
    
    ExercisableWeighted AverageRemainingContractual Life
    
    
    
    
    
    
    Weighted AverageNumber
    
    
    (Years)
    
    
    Number
    
    
    Exercise PriceRange of Exercise Prices$5.46-$14.46
    
    
    2,500
    
    
    
    8.88
    
    
    
    833
    
    
    $
    5.46$14.47-$15.34
    
    
    83,000
    
    
    
    7.60
    
    
    
    55,329
    
    
    
    14.47$15.35-$16.50
    
    
    52,500
    
    
    
    6.71
    
    
    
    45,834
    
    
    
    15.84$16.51-$19.09
    
    
    30,000
    
    
    
    5.59
    
    
    
    30,000
    
    
    
    19.10$19.10-$19.17
    
    
    30,000
    
    
    
    4.59
    
    
    
    30,000
    
    
    
    19.17Outstanding at end of period
    
    
    198,000
    
    
    
    6.62
    
    
    
    161,996
    
    
    $
    16.54
  2010
    
    
    2009Weighted Average
    
    
    
    
    
    
    Weighted AverageExercise
    
    
    
    
    
    
    ExerciseOptions
    
    
    Price per Share
    
    
    Options
    
    
    Price per ShareOutstanding at beginning of period
    
    
    198,000
    
    
    $
    16.12
    
    
    
    203,500
    
    
    $
    16.18Granted
    
    
    
    
    
    
    
    
    
    
    2,500
    
    
    
    5.46Forfeited or expired
    
    
    
    
    
    
    
    
    
    
    (2,500
    )
    
    
    14.47Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock dividend or split
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of period
    
    
    198,000
    
    
    $
    16.12
    
    
    
    203,500
    
    
    $
    16.20Exercisable at end of period
    
    
    161,996
    
    
    $
    16.54
    
    
    
    118,831
    
    
    $
    17.22
 18




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Summary
         19




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20




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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 June 30,2010
    
    
    2009Average
    
    
    
    
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Assets:U.S. Govt agencies and corporations
    
    $
    229,497
    
    
    $
    2,070
    
    
    
    3.62
    %
    
    $
    253,365
    
    
    $
    2,652
    
    
    
    4.29
    %State and political subdivisions
    
    
    23,266
    
    
    
    355
    
    
    
    6.11
    
    
    
    24,975
    
    
    
    383
    
    
    
    6.16Federal funds sold and short-term
investments
    
    
    36,849
    
    
    
    12
    
    
    
    0.13
    
    
    
    46,690
    
    
    
    19
    
    
    
    0.16Restricted stock
    
    
    5,650
    
    
    
    69
    
    
    
    4.90
    
    
    
    4,985
    
    
    
    59
    
    
    
    4.75Commercial loans
    
    
    441,755
    
    
    
    5,845
    
    
    
    5.31
    
    
    
    445,346
    
    
    
    6,253
    
    
    
    5.63Real estate mortgage loans
    
    
    73,262
    
    
    
    982
    
    
    
    5.38
    
    
    
    89,092
    
    
    
    1,308
    
    
    
    5.89Home equity lines of credit
    
    
    109,065
    
    
    
    1,072
    
    
    
    3.94
    
    
    
    105,403
    
    
    
    1,053
    
    
    
    4.01Installment loans
    
    
    170,974
    
    
    
    2,699
    
    
    
    6.33
    
    
    
    168,595
    
    
    
    2,769
    
    
    
    6.59Total Earning Assets
    
    $
    1,090,318
    
    
    $
    13,104
    
    
    
    4.82
    %
    
    $
    1,133,466
    
    
    $
    14,496
    
    
    
    5.13
    %Allowance for loan loss
    
    
    (19,346
    )
    
    
    
    
    
    
    
    
    
    
    (11,719
    )Cash and due from banks
    
    
    16,883
    
    
    
    
    
    
    
    
    
    
    
    17,464Bank owned life insurance
    
    
    16,668
    
    
    
    
    
    
    
    
    
    
    
    15,965Other assets
    
    
    54,455
    
    
    
    
    
    
    
    
    
    
    
    47,021Total Assets
    
    $
    1,158,978
    
    
    
    
    
    
    
    
    
    
    $
    1,202,197Liabilities and Shareholders EquityConsumer time deposits
    
    $
    465,642
    
    
    $
    2,397
    
    
    
    2.06
    %
    
    $
    481,111
    
    
    $
    3,702
    
    
    
    3.09
    %Public time deposits
    
    
    91,515
    
    
    
    149
    
    
    
    0.65
    
    
    
    86,383
    
    
    
    462
    
    
    
    2.96Brokered time deposits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,491
    
    
    
    133
    
    
    
    4.28Money market accounts
    
    
    90,988
    
    
    
    97
    
    
    
    0.43
    
    
    
    116,471
    
    
    
    175
    
    
    
    0.60Savings deposits
    
    
    87,157
    
    
    
    42
    
    
    
    0.19
    
    
    
    80,858
    
    
    
    44
    
    
    
    0.22Interest-bearing demand
    
    
    133,392
    
    
    
    61
    
    
    
    0.18
    
    
    
    125,704
    
    
    
    86
    
    
    
    0.27Short-term borrowings
    
    
    1,778
    
    
    
    1
    
    
    
    0.25
    
    
    
    23,698
    
    
    
    32
    
    
    
    0.53FHLB advances
    
    
    42,503
    
    
    
    316
    
    
    
    2.98
    
    
    
    43,040
    
    
    
    348
    
    
    
    3.24Trust preferred securities
    
    
    20,728
    
    
    
    215
    
    
    
    4.17
    
    
    
    20,740
    
    
    
    240
    
    
    
    4.64Total Interest-Bearing Liabilities
    
    $
    933,703
    
    
    $
    3,278
    
    
    
    1.41
    %
    
    $
    990,496
    
    
    $
    5,222
    
    
    
    2.11
    %Noninterest-bearing deposits
    
    
    112,223
    
    
    
    
    
    
    
    
    
    
    
    92,757Other liabilities
    
    
    6,484
    
    
    
    
    
    
    
    
    
    
    
    10,689Shareholders Equity
    
    
    106,568
    
    
    
    
    
    
    
    
    
    
    
    108,255Total Liabilities and
Shareholders Equity
    
    $
    1,158,978
    
    
    
    
    
    
    
    
    
    
    $
    1,202,197Net interest Income (FTE)
    
    
    
    
    
    $
    9,826
    
    
    
    3.61
    %
    
    
    
    
    
    $
    9,274
    
    
    
    3.28
    %Taxable Equivalent Adjustment
    
    
    
    
    
    
    (129
    )
    
    
    (0.04
    )
    
    
    
    
    
    
    (140
    )
    
    
    (0.05
    )Net Interest Income Per
Financial Statements
    
    
    
    
    
    $
    9,697
    
    
    
    
    
    
    
    
    
    
    $
    9,134Net Yield on Earning Assets
    
    
    
    
    
    
    
    
    
    
    3.57
    %
    
    
    
    
    
    
    
    
    
    
    3.23
    %
 21




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##### Table of Contents



Results of Operations
 Three Months Ended June 30, 2010 versus Three Months Ended June 30, 2009 Net Interest Income
Comparison
      22




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##### Table of Contents



Table 2: Rate/Volume Analysis of Net Interest Income (FTE)
 Three Months Ended June 30,Increase (Decrease) in Interest Income/Expensein 2010 over 2009Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)U.S. Govt agencies and corporations
    
    $
    (170
    )
    
    $
    (412
    )
    
    $
    (582
    )State and political subdivisions
    
    
    (25
    )
    
    
    (3
    )
    
    
    (28
    )Federal funds sold and short-term investments
    
    
    (3
    )
    
    
    (4
    )
    
    
    (7
    )Restricted stock
    
    
    8
    
    
    
    2
    
    
    
    10Commercial loans
    
    
    (48
    )
    
    
    (360
    )
    
    
    (408
    )Real estate mortgage loans
    
    
    (212
    )
    
    
    (114
    )
    
    
    (326
    )Home equity lines of credit
    
    
    36
    
    
    
    (17
    )
    
    
    19Installment loans
    
    
    38
    
    
    
    (108
    )
    
    
    (70
    )Total Interest Income
    
    
    (376
    )
    
    
    (1,016
    )
    
    
    (1,392
    )Consumer time deposits
    
    
    (80
    )
    
    
    (1,225
    )
    
    
    (1,305
    )Public time deposits
    
    
    (3
    )
    
    
    (310
    )
    
    
    (313
    )Brokered time deposits
    
    
    (133
    )
    
    
    
    
    
    
    (133
    )Money market accounts
    
    
    (27
    )
    
    
    (51
    )
    
    
    (78
    )Savings deposits
    
    
    3
    
    
    
    (5
    )
    
    
    (2
    )Interest bearing demand
    
    
    4
    
    
    
    (29
    )
    
    
    (25
    )Short-term borrowings
    
    
    (14
    )
    
    
    (17
    )
    
    
    (31
    )FHLB advances
    
    
    (4
    )
    
    
    (28
    )
    
    
    (32
    )Trust preferred securities
    
    
    
    
    
    
    (25
    )
    
    
    (25
    )Total Interest Expense
    
    
    (254
    )
    
    
    (1,690
    )
    
    
    (1,944
    )Net Interest Income (FTE)
    
    $
    (122
    )
    
    $
    674
    
    
    $
    552
  23




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##### Table of Contents



Table 3: Condensed Consolidated Average Balance Sheets
 Interest, Rate, and Rate/ Volume differentials are stated on a Fully-Tax Equivalent (FTE) Basis.
  Six Months Ended June 30,2010
    
    
    2009Average
    
    
    
    
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Assets:U.S. Govt agencies and corporations
    
    $
    228,826
    
    
    $
    4,255
    
    
    
    3.75
    %
    
    $
    236,051
    
    
    $
    5,255
    
    
    
    4.49
    %State and political subdivisions
    
    
    23,222
    
    
    
    709
    
    
    
    6.16
    
    
    
    23,792
    
    
    
    720
    
    
    
    6.10Federal funds sold and short-term
investments
    
    
    34,779
    
    
    
    20
    
    
    
    0.12
    
    
    
    43,686
    
    
    
    33
    
    
    
    0.15Restricted stock
    
    
    5,319
    
    
    
    130
    
    
    
    4.93
    
    
    
    4,889
    
    
    
    121
    
    
    
    4.99Commercial loans
    
    
    444,597
    
    
    
    11,887
    
    
    
    5.39
    
    
    
    446,193
    
    
    
    12,677
    
    
    
    5.73Real estate mortgage loans
    
    
    75,004
    
    
    
    2,014
    
    
    
    5.41
    
    
    
    92,052
    
    
    
    2,745
    
    
    
    6.01Home equity lines of credit
    
    
    108,882
    
    
    
    2,141
    
    
    
    3.96
    
    
    
    103,774
    
    
    
    2,063
    
    
    
    4.01Installment loans
    
    
    168,583
    
    
    
    5,364
    
    
    
    6.42
    
    
    
    166,046
    
    
    
    5,526
    
    
    
    6.71Total Earning Assets
    
    $
    1,089,212
    
    
    $
    26,520
    
    
    
    4.91
    %
    
    $
    1,116,483
    
    
    $
    29,140
    
    
    
    5.26
    %Allowance for loan loss
    
    
    (19,249
    )
    
    
    
    
    
    
    
    
    
    
    (11,642
    )Cash and due from banks
    
    
    17,559
    
    
    
    
    
    
    
    
    
    
    
    18,253Bank owned life insurance
    
    
    16,582
    
    
    
    
    
    
    
    
    
    
    
    15,883Other assets
    
    
    54,355
    
    
    
    
    
    
    
    
    
    
    
    47,158Total Assets
    
    $
    1,158,459
    
    
    
    
    
    
    
    
    
    
    $
    1,186,135Liabilities and Shareholders EquityConsumer time deposits
    
    $
    471,958
    
    
    $
    5,021
    
    
    
    2.15
    %
    
    $
    475,600
    
    
    $
    7,542
    
    
    
    3.20
    %Public time deposits
    
    
    88,202
    
    
    
    320
    
    
    
    0.73
    
    
    
    85,154
    
    
    
    1,076
    
    
    
    2.55Brokered time deposits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,488
    
    
    
    264
    
    
    
    4.27Money market accounts
    
    
    88,978
    
    
    
    175
    
    
    
    0.40
    
    
    
    105,722
    
    
    
    332
    
    
    
    0.63Savings deposits
    
    
    85,161
    
    
    
    81
    
    
    
    0.19
    
    
    
    79,598
    
    
    
    96
    
    
    
    0.24Interest-bearing demand
    
    
    134,246
    
    
    
    128
    
    
    
    0.19
    
    
    
    122,753
    
    
    
    194
    
    
    
    0.32Short-term borrowings
    
    
    1,688
    
    
    
    2
    
    
    
    0.24
    
    
    
    25,884
    
    
    
    67
    
    
    
    0.53FHLB advances
    
    
    43,343
    
    
    
    634
    
    
    
    2.95
    
    
    
    47,893
    
    
    
    780
    
    
    
    3.28Trust preferred securities
    
    
    20,727
    
    
    
    431
    
    
    
    4.19
    
    
    
    20,746
    
    
    
    496
    
    
    
    4.82Total Interest-Bearing Liabilities
    
    $
    934,303
    
    
    $
    6,792
    
    
    
    1.47
    %
    
    $
    975,838
    
    
    $
    10,847
    
    
    
    2.24
    %Noninterest-bearing deposits
    
    
    111,740
    
    
    
    
    
    
    
    
    
    
    
    91,612Other liabilities
    
    
    6,614
    
    
    
    
    
    
    
    
    
    
    
    10,704Shareholders Equity
    
    
    105,802
    
    
    
    
    
    
    
    
    
    
    
    107,981Total Liabilities and
Shareholders Equity
    
    $
    1,158,459
    
    
    
    
    
    
    
    
    
    
    $
    1,186,135Net interest Income (FTE)
    
    
    
    
    
    $
    19,728
    
    
    
    3.65
    %
    
    
    
    
    
    $
    18,293
    
    
    
    3.30
    %Taxable Equivalent Adjustment
    
    
    
    
    
    
    (252
    )
    
    
    (0.04
    )
    
    
    
    
    
    
    (261
    )
    
    
    (0.05
    )Net Interest Income Per
Financial Statements
    
    
    
    
    
    $
    19,476
    
    
    
    
    
    
    
    
    
    
    $
    18,032Net Yield on Earning Assets
    
    
    
    
    
    
    
    
    
    
    3.61
    %
    
    
    
    
    
    
    
    
    
    
    3.25
    %
 24




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##### Table of Contents



Six Months Ended June 30, 2010 versus Six Months Ended June 30, 2009 Net Interest Income Comparison
      25




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##### Table of Contents



Table 4: Rate/Volume Analysis of Net Interest Income (FTE)
 Six Months Ended June 30,Increase (Decrease) in Interest Income/Expensein 2010 over 2009Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)U.S. Govt agencies and corporations
    
    $
    (134
    )
    
    $
    (866
    )
    
    $
    (1,000
    )State and political subdivisions
    
    
    (18
    )
    
    
    7
    
    
    
    (11
    )Federal funds sold and short-term investments
    
    
    (5
    )
    
    
    (8
    )
    
    
    (13
    )Restricted stock
    
    
    11
    
    
    
    (2
    )
    
    
    9Commercial loans
    
    
    (43
    )
    
    
    (747
    )
    
    
    (790
    )Real estate mortgage loans
    
    
    (458
    )
    
    
    (273
    )
    
    
    (731
    )Home equity lines of credit
    
    
    101
    
    
    
    (23
    )
    
    
    78Installment loans
    
    
    81
    
    
    
    (243
    )
    
    
    (162
    )Total Interest Income
    
    
    (465
    )
    
    
    (2,155
    )
    
    
    (2,620
    )Consumer time deposits
    
    
    (39
    )
    
    
    (2,482
    )
    
    
    (2,521
    )Public time deposits
    
    
    11
    
    
    
    (767
    )
    
    
    (756
    )Brokered time deposits
    
    
    (264
    )
    
    
    
    
    
    
    (264
    )Money market accounts
    
    
    (33
    )
    
    
    (124
    )
    
    
    (157
    )Savings deposits
    
    
    5
    
    
    
    (20
    )
    
    
    (15
    )Interest bearing demand
    
    
    11
    
    
    
    (76
    )
    
    
    (65
    )Short-term borrowings
    
    
    (29
    )
    
    
    (37
    )
    
    
    (66
    )FHLB advances
    
    
    (67
    )
    
    
    (79
    )
    
    
    (146
    )Trust preferred securities
    
    
    
    
    
    
    (65
    )
    
    
    (65
    )Total Interest Expense
    
    
    (405
    )
    
    
    (3,650
    )
    
    
    (4,055
    )Net Interest Income (FTE)
    
    $
    (60
    )
    
    $
    1,495
    
    
    $
    1,435
  26




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##### Table of Contents



Noninterest Income
 Table 5: Details on Noninterest Income
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Investment and trust services
    
    $
    563
    
    
    $
    559
    
    
    $
    1,008
    
    
    $
    909Deposit service charges
    
    
    1,094
    
    
    
    1,095
    
    
    
    2,033
    
    
    
    2,121Electronic banking fees
    
    
    826
    
    
    
    705
    
    
    
    1,620
    
    
    
    1,342Income from bank owned life insurance
    
    
    173
    
    
    
    165
    
    
    
    344
    
    
    
    327Other income
    
    
    69
    
    
    
    81
    
    
    
    162
    
    
    
    164Total fees and other income
    
    
    2,725
    
    
    
    2,605
    
    
    
    5,167
    
    
    
    4,863Gain on sale of securities
    
    
    
    
    
    
    249
    
    
    
    38
    
    
    
    586Gain on sale of loans
    
    
    195
    
    
    
    368
    
    
    
    387
    
    
    
    622Gains (losses) on sale of other assets
    
    
    (24
    )
    
    
    22
    
    
    
    (45
    )
    
    
    30Total noninterest income
    
    $
    2,896
    
    
    $
    3,244
    
    
    $
    5,547
    
    
    $
    6,101
 Three Months Ended June 30, 2010 versus Three Months Ended June 30, 2009 Noninterest Income
Comparison
   Six Months Ended June 30, 2010 versus Six Months Ended June 30, 2009 Noninterest Income Comparison
   27




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##### Table of Contents



Noninterest Expense
 Table 6: Details on Noninterest Expense
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Salaries and employee benefits
    
    $
    3,911
    
    
    $
    3,802
    
    
    $
    7,829
    
    
    $
    7,520Furniture and equipment
    
    
    917
    
    
    
    1,189
    
    
    
    1,850
    
    
    
    2,331Net occupancy
    
    
    581
    
    
    
    570
    
    
    
    1,196
    
    
    
    1,214Outside services
    
    
    595
    
    
    
    789
    
    
    
    1,148
    
    
    
    1,344Marketing and public relations
    
    
    326
    
    
    
    295
    
    
    
    572
    
    
    
    539Supplies, postage and freight
    
    
    302
    
    
    
    306
    
    
    
    644
    
    
    
    640Telecommunications
    
    
    211
    
    
    
    185
    
    
    
    423
    
    
    
    388Ohio Franchise tax
    
    
    281
    
    
    
    225
    
    
    
    562
    
    
    
    457FDIC Assessments
    
    
    557
    
    
    
    976
    
    
    
    1,085
    
    
    
    1,289Other real estate owned
    
    
    71
    
    
    
    103
    
    
    
    152
    
    
    
    174Electronic banking expenses
    
    
    238
    
    
    
    200
    
    
    
    422
    
    
    
    389Loan and Collection Expense
    
    
    450
    
    
    
    368
    
    
    
    773
    
    
    
    578Other expense
    
    
    518
    
    
    
    472
    
    
    
    995
    
    
    
    977Total noninterest expense
    
    $
    8,958
    
    
    $
    9,480
    
    
    $
    17,651
    
    
    $
    17,840
 Three Months Ended June 30, 2010 versus Three Months Ended June 30, 2009 Noninterest Expense
Comparison
  Six Months Ended June 30, 2010 versus Six Months Ended June 30, 2009 Noninterest Expense Comparison
  Income taxes
 Three Months Ended June 30, 2010 versus Three Months Ended June 30, 2009 Income Taxes Comparison
  28




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##### Table of Contents



Six Months Ended June 30, 2010 versus Six Months Ended June 30, 2009 Income Taxes Comparison
  Financial Condition
 Overview
  Securities
  Loans
  Table 7: Details on Loan Balances
 June 30, 2010
    
    
    December 31, 2009(Dollars in thousands)Commercial
    
    $
    442,987
    
    
    $
    452,341Real estate mortgage
    
    
    70,449
    
    
    
    77,204Home equity lines of credit
    
    
    109,304
    
    
    
    108,921Installment
    
    
    172,711
    
    
    
    164,731Total Loans
    
    
    795,451
    
    
    
    803,197Allowance for loan losses
    
    
    (19,435
    )
    
    
    (18,792
    )Net Loans
    
    $
    776,016
    
    
    $
    784,405
   29




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##### Table of Contents



Provision and Allowance for Loan Losses
  Table 8: Analysis of Allowance for Loan Losses
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Balance at beginning of period
    
    $
    19,183
    
    
    $
    11,575
    
    
    $
    18,792
    
    
    $
    11,652Charge-offs:Commercial
    
    
    (1,597
    )
    
    
    (470
    )
    
    
    (2,593
    )
    
    
    (1,444
    )Real estate mortgage
    
    
    (77
    )
    
    
    (86
    )
    
    
    (139
    )
    
    
    (143
    )Home equity lines of credit
    
    
    (329
    )
    
    
    (334
    )
    
    
    (758
    )
    
    
    (705
    )Installment
    
    
    (143
    )
    
    
    (429
    )
    
    
    (457
    )
    
    
    (951
    )DDA Overdrafts
    
    
    (42
    )
    
    
    (50
    )
    
    
    (92
    )
    
    
    (99
    )Total charge-offs
    
    
    (2,188
    )
    
    
    (1,369
    )
    
    
    (4,039
    )
    
    
    (3,342
    )Recoveries:Commercial
    
    
    202
    
    
    
    135
    
    
    
    205
    
    
    
    168Real estate mortgage
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    12Home equity lines of credit
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    24Installment
    
    
    119
    
    
    
    109
    
    
    
    228
    
    
    
    143DDA Overdrafts
    
    
    10
    
    
    
    10
    
    
    
    31
    
    
    
    28Total Recoveries
    
    
    331
    
    
    
    288
    
    
    
    464
    
    
    
    375Net Charge-offs
    
    
    (1,857
    )
    
    
    (1,081
    )
    
    
    (3,575
    )
    
    
    (2,967
    )Provision for loan losses
    
    
    2,109
    
    
    
    2,484
    
    
    
    4,218
    
    
    
    4,293Balance at end of period
    
    $
    19,435
    
    
    $
    12,978
    
    
    $
    19,435
    
    
    $
    12,978
  30




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##### Table of Contents



Deposits
 Table 9: Deposits and Borrowings
 Average Balances Outstanding
    
    
    Average Rates PaidFor the Three Months EndedJune 30, 2010
    
    
    December 31, 2009
    
    
    June 30, 2010
    
    
    December 31, 2009(Dollars in thousands)Demand deposits
    
    $
    112,223
    
    
    $
    105,074
    
    
    
    0.00
    %
    
    
    0.00
    %Interest checking
    
    
    133,392
    
    
    
    137,682
    
    
    
    0.18
    
    
    
    0.22Money market
    
    
    90,988
    
    
    
    90,158
    
    
    
    0.43
    
    
    
    0.35Savings deposits
    
    
    87,157
    
    
    
    80,984
    
    
    
    0.19
    
    
    
    0.19Consumer time deposits
    
    
    465,642
    
    
    
    483,577
    
    
    
    2.06
    
    
    
    2.55Public time deposits
    
    
    91,515
    
    
    
    80,528
    
    
    
    0.65
    
    
    
    1.17Total Deposits
    
    
    980,917
    
    
    
    978,003
    
    
    
    1.27
    
    
    
    1.44Short-term borrowings
    
    
    1,778
    
    
    
    10,961
    
    
    
    0.25
    
    
    
    0.46FHLB borrowings
    
    
    42,503
    
    
    
    42,988
    
    
    
    2.98
    
    
    
    3.23Junior subordinated
debentures
    
    
    20,728
    
    
    
    20,727
    
    
    
    4.17
    
    
    
    4.21Total borrowings
    
    
    65,009
    
    
    
    74,676
    
    
    
    3.29
    
    
    
    3.10Total funding
    
    $
    1,045,926
    
    
    $
    1,052,679
    
    
    
    1.41
    %
    
    
    1.56
    %
   31




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##### Table of Contents



Borrowings
  Regulatory Capital
    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, including new or
heightened legal
 32




---



##### Table of Contents



standards and regulatory requirements, practices or expectations, which may
impede profitability or affect the Corporations financial condition (such as, for example, the
Dodd-Frank Wall Street reform and Consumer Protection Act and rules and regulations that may be
promulgated under the Act);
    
    persisting volatility and limited credit availability in the financial markets, particularly if
limitations on the Corporations ability to raise funding to the extent required by banking
regulators or otherwise; initiatives undertaken by the U.S. government do not have the intended
effect on the financial markets;
    
    limitations on the Corporations ability to return capital to shareholders and dilution of the
Corporations common shares that may result from the terms of the Capital Purchase Program
(CPP), pursuant to which the Corporation issued securities to the United States Department of
the Treasury (the U.S. Treasury);
    
    limitations on the Corporations ability to pay dividends;
    
    increases in interest rates or further weakening economic conditions that could constrain
borrowers ability to repay outstanding loans or diminish the value of the collateral securing
those loans;
    
    adverse effects on the Corporations ability to engage in routine funding transactions as a
result of the actions and commercial soundness of other financial institutions;
    
    asset price deterioration, which has had and may continue to have a negative effect on the
valuation of certain asset categories represented on the Corporations balance sheet;
    
    general economic conditions, either nationally or regionally (especially in northeastern Ohio),
becoming less favorable than expected resulting in, among other things, further deterioration
in credit quality of assets;
    
    increases in deposit insurance premiums or assessments imposed on the Corporation by the FDIC;
    
    difficulty attracting and/or retaining key executives and/or relationship managers at
compensation levels necessary to maintain a competitive market position;
    
    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; and
    
    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.
 Critical Accounting Policies and Estimates
    Allowance for Loan Losses
  33




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##### Table of Contents



Income Taxes
  Goodwill
  34




---



##### Table of Contents



New Accounting Pronouncements
  35




---



##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
 RISK ELEMENTS
  Credit Risk Management
  Nonperforming Assets
    36




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##### Table of Contents



Table 10: Nonperforming Assets
 June 30, 2010
    
    
    December 31, 2009(Dollars in thousands)Commercial loans
    
    $
    33,099
    
    
    $
    26,846Real estate mortgage
    
    
    9,224
    
    
    
    9,139Home equity lines of credit
    
    
    2,040
    
    
    
    1,417Installment loans
    
    
    2,051
    
    
    
    1,435Total nonperforming loans
    
    
    46,414
    
    
    
    38,837Other foreclosed assets
    
    
    2,355
    
    
    
    1,264Total nonperforming assets
    
    $
    48,769
    
    
    $
    40,101Loans 90 days past due accruing interest
    
    $
    
    
    
    $
    Total nonperforming loans to total loans
    
    
    5.83
    %
    
    
    4.84
    %Allowance for loan losses to nonperforming assets
    
    
    26.61
    %
    
    
    46.86
    %
 Market Risk Management
     Liquidity Risk Management
  37




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##### Table of Contents



ITEM 4. Controls and Procedures
   
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  38




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##### Table of Contents



Item 1A. Risk Factors
  The impact of financial reform legislation on the Corporation is uncertain
  
 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: August 5, 2010
    /s/ Gary J. ElekGary J. ElekChief Financial Officer
(Duly Authorized Officer, and Principal
Financial and Accounting Officer) 40




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##### Table of Contents



Exhibit31.1
    
    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