##### 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 March 31, 2006
 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 or other jurisdiction
of Incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 457 Broadway, Lorain, Ohio
    
    44052 - 1769(Address of principal executive offices)
    
    (Zip Code)
 
 
 þ o
  o þ o
 o þ




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##### 



Part I Financial InformationItem 1. Financial Statements.Consolidated Balance Sheets March 31, 2006 (unaudited) and December 31, 2005Consolidated Statements of Income (unaudited)
For the three months ended March 31, 2006 and March 31, 2005Consolidated Statements of Changes in Shareholders Equity (unaudited)
For the three months ended March 31, 2006 and March 31, 2005Consolidated Statements of Cash Flows (unaudited)
For the three months ended March 31, 2006 and March 31, 2005Notes to the Consolidated Financial Statements (unaudited)Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.Item 3. Quantitative and Qualitative Disclosures about Market Risk.Item 4. Controls and Procedures.Part II Other InformationItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of Proceeds.Item 6. Exhibits.EX-31(I)(A) 302 CERTIFICATION FOR CEOEX-31(I)(B) 302 CERTIFICATION FOR CFOEX-32(A) 906 CERTIFICATION FOR CEOEX-32(B) 906 CERTIFICATION FOR CFO
  2




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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 Consolidated Balance Sheets
 March 31, 2006
    
    
    December 31, 2005(unaudited)(Dollars in thousands except share amounts)ASSETSCash and due from Banks
    
    $
    25,081
    
    
    $
    23,923Federal funds sold and short-term investments
    
    
    
    
    
    
    Securities:Available for sale, at fair value
    
    
    158,004
    
    
    
    151,629Federal Home Loan Bank and Federal Reserve Stock
    
    
    3,121
    
    
    
    3,645Total securities
    
    
    161,125
    
    
    
    155,274Loans:Loans held for sale
    
    
    2,599
    
    
    
    2,586Portfolio loans
    
    
    588,226
    
    
    
    588,425Allowance for loan losses
    
    
    (6,568
    )
    
    
    (6,622
    )Net loans
    
    
    584,257
    
    
    
    584,389Bank premises and equipment, net
    
    
    11,413
    
    
    
    10,833Other real estate owned
    
    
    608
    
    
    
    432Bank owned life insurance
    
    
    14,161
    
    
    
    13,935Goodwill and intangible assets, net
    
    
    3,279
    
    
    
    3,321Accrued interest receivable
    
    
    3,275
    
    
    
    3,053Other assets
    
    
    6,894
    
    
    
    5,961Total Assets
    
    $
    810,093
    
    
    $
    801,121LIABILITIES AND SHAREHOLDERS EQUITYDepositsDemand and other noninterest-bearing
    
    $
    87,997
    
    
    $
    87,597Savings, money market and interest-bearing demand
    
    
    275,304
    
    
    
    265,831Certificates of deposit
    
    
    310,755
    
    
    
    286,788Total deposits
    
    
    674,056
    
    
    
    640,216Short-term borrowings
    
    
    21,901
    
    
    
    32,616Federal Home Loan Bank advances
    
    
    41,093
    
    
    
    53,896Accrued interest payable
    
    
    2,153
    
    
    
    2,126Accrued taxes, expenses and other liabilities
    
    
    3,501
    
    
    
    3,861Total Liabilities
    
    
    742,704
    
    
    
    732,715Shareholders EquityCommon stock, par value $1 per share, authorized 15,000,000 shares, issued 6,771,867 shares at
March 31, 2006 and December 31, 2005
    
    
    6,772
    
    
    
    6,772Additional paid-in capital
    
    
    26,346
    
    
    
    26,334Retained earnings
    
    
    43,235
    
    
    
    42,945Accumulated other comprehensive loss
    
    
    (3,491
    )
    
    
    (2,996
    )Treasury shares at cost, 293,194 shares at March 31, 2006 and 250,694 shares at December 31, 2005
    
    
    (5,473
    )
    
    
    (4,649
    )Total Shareholders Equity
    
    
    67,389
    
    
    
    68,406Total Liabilities and Shareholders Equity
    
    $
    810,093
    
    
    $
    801,121
 See accompanying notes to consolidated financial statements.
 3




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##### Table of Contents



Consolidated Statements of Income (unaudited)
 Three Months Ended March 31,2006
    
    
    2005(Dollars in thousands except share and per share amounts)Interest IncomeLoans
    
    $
    10,078
    
    
    $
    8,833Securities:U.S. Government agencies and corporations
    
    
    1,339
    
    
    
    1,019State and political subdivisions
    
    
    103
    
    
    
    114Other debt and equity securities
    
    
    52
    
    
    
    50Federal funds sold and short-term investments
    
    
    36
    
    
    
    36Total interest income
    
    
    11,608
    
    
    
    10,052Interest ExpenseDeposits:Certificates of deposit, $100 and over
    
    
    1,370
    
    
    
    683Other deposits
    
    
    2,434
    
    
    
    1,447Federal Home Loan Bank advances
    
    
    400
    
    
    
    501Short-term borrowings
    
    
    201
    
    
    
    89Total interest expense
    
    
    4,405
    
    
    
    2,720Net Interest Income
    
    
    7,203
    
    
    
    7,332Provision for Loan Losses
    
    
    150
    
    
    
    399Net interest income after provision for loan losses
    
    
    7,053
    
    
    
    6,933Noninterest IncomeInvestment and trust services
    
    
    509
    
    
    
    517Deposit service charges
    
    
    968
    
    
    
    908Other service charges and fees
    
    
    451
    
    
    
    461Mortgage banking revenue
    
    
    
    
    
    
    370Income from bank owned life insurance
    
    
    145
    
    
    
    193Other income
    
    
    46
    
    
    
    161Total fees and other income
    
    
    2,119
    
    
    
    2,610Securities gains, net
    
    
    
    
    
    
    180Gains on sale of loans
    
    
    
    
    
    
    132Gains on sale of other assets, net
    
    
    2
    
    
    
    5Total noninterest income
    
    
    2,121
    
    
    
    2,927Noninterest ExpenseSalaries and employee benefits
    
    
    3,578
    
    
    
    3,978Furniture and equipment
    
    
    737
    
    
    
    733Net occupancy
    
    
    478
    
    
    
    517Outside services
    
    
    419
    
    
    
    309Marketing and public relations
    
    
    391
    
    
    
    307Supplies, postage and freight
    
    
    298
    
    
    
    371Telecommunications
    
    
    199
    
    
    
    312Ohio Franchise tax
    
    
    232
    
    
    
    182Electronic banking expenses
    
    
    145
    
    
    
    123Other expense
    
    
    732
    
    
    
    839Total noninterest expense
    
    
    7,209
    
    
    
    7,671Income before income tax expense
    
    
    1,965
    
    
    
    2,189Income tax expense
    
    
    517
    
    
    
    618Net Income
    
    $
    1,448
    
    
    $
    1,571Net Income Per Common ShareBasic
    
    $
    0.22
    
    
    $
    0.24Diluted
    
    
    0.22
    
    
    
    0.24Dividends declared
    
    
    0.18
    
    
    
    0.18Average Common Shares OutstandingBasic
    
    
    6,504,981
    
    
    
    6,641,173Diluted
    
    
    6,504,981
    
    
    
    6,641,173
 See accompanying notes to consolidated financial statements
 4




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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, 2005
    
    $
    6,767
    
    
    $
    26,243
    
    
    $
    41,292
    
    
    $
    (1,297
    )
    
    $
    (2,430
    )
    
    $
    70,575Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    1,571
    
    
    
    
    
    
    
    
    
    
    
    1,571Other comprehensive income, net of tax:Change in unrealized gains and losses on
securities, net of reclassification
adjustment of $119 for gains on sale of
securities, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,595
    )
    
    
    
    
    
    
    (2,595
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,024
    )Common dividends declared, $.18 per share
    
    
    
    
    
    
    
    
    
    
    (1,195
    )
    
    
    
    
    
    
    
    
    
    
    (1,195
    )Balance, March 31, 2005
    
    $
    6,767
    
    
    $
    26,243
    
    
    $
    41,668
    
    
    $
    (3,892
    )
    
    $
    (2,430
    )
    
    $
    68,356Balance, January 1, 2006
    
    $
    6,772
    
    
    $
    26,334
    
    
    $
    42,945
    
    
    $
    (2,996
    )
    
    $
    (4,649
    )
    
    $
    68,406Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    1,448
    
    
    
    
    
    
    
    
    
    
    
    1,448Other comprehensive income, net of tax:Change in unrealized gains and losses
on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (495
    )
    
    
    
    
    
    
    (495
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    953Share-based
compensation expense, net of tax
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12Purchase of 42,500 shares of Treasury Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (824
    )
    
    
    (824
    )Common dividends declared, $.18 per share
    
    
    
    
    
    
    
    
    
    
    (1,158
    )
    
    
    
    
    
    
    
    
    
    
    (1,158
    )Balance, March 31, 2006
    
    $
    6,772
    
    
    $
    26,346
    
    
    $
    43,235
    
    
    $
    (3,491
    )
    
    $
    (5,473
    )
    
    $
    67,389
 See accompanying notes to consolidated financial statements
 5




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##### Table of Contents



Consolidated Statements of Cash Flows (unaudited)
 Three Months Ended March 31,2006
    
    
    2005(Dollars in thousands)Operating ActivitiesNet income
    
    $
    1,448
    
    
    $
    1,571Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses
    
    
    150
    
    
    
    399Depreciation and amortization
    
    
    413
    
    
    
    470Amortization of premiums and discounts
    
    
    68
    
    
    
    167Amortization of intangibles
    
    
    39
    
    
    
    44Amortization of deferred loan fees
    
    
    101
    
    
    
    81Federal deferred income tax benefit
    
    
    (230
    )
    
    
    (98
    )Net gain from loan sales
    
    
    
    
    
    
    (132
    )Securities gains, net
    
    
    
    
    
    
    (180
    )Net gains on sale of other assets
    
    
    
    
    
    
    (5
    )Net decrease in accrued interest receivable and other assets
    
    
    (1,254
    )
    
    
    (565
    )Net decrease (increase) in accrued interest payable, taxes and other liabilities
    
    
    (332
    )
    
    
    1,214Net cash provided by operating activities
    
    
    403
    
    
    
    2,966Investing ActivitiesProceeds from sales of available-for-sale securities
    
    
    
    
    
    
    4,448Purchase of available-for-sale securities
    
    
    (9,989
    )
    
    
    (5,582
    )Proceeds from maturities of available-for-sale securities
    
    
    2,797
    
    
    
    5,897Purchase of Federal Home Loan Bank Stock
    
    
    (46
    )
    
    
    (42
    )Redemption of Federal Home Loan Bank Stock
    
    
    570
    
    
    
    Net increase in loans made to customers
    
    
    (415
    )
    
    
    (8,886
    )Proceeds from the sale of other real estate owned
    
    
    118
    
    
    
    50Purchase of bank premises and equipment
    
    
    (633
    )
    
    
    (271
    )Proceeds from sale of bank premises and equipment
    
    
    
    
    
    
    10Net cash used in investing activities
    
    
    (7,598
    )
    
    
    (4,376
    )Financing ActivitiesNet increase (decrease) in demand and other noninterest-bearing
    
    
    400
    
    
    
    (2,521
    )Net increase (decrease) in savings, money market and interest-bearing demand
    
    
    9,474
    
    
    
    (6,643
    )Net increase in certificates of deposit
    
    
    23,967
    
    
    
    12,719Net decrease in short-term borrowings
    
    
    (10,715
    )
    
    
    (9,275
    )Proceeds from loan sales
    
    
    
    
    
    
    4,549Proceeds from Federal Home Loan Bank advances
    
    
    16,000
    
    
    
    12,000Prepayment of Federal Home Loan Bank advances
    
    
    (28,803
    )
    
    
    (5,832
    )Share-based compensation expense, net of tax
    
    
    12
    
    
    
    Purchase of treasury stock
    
    
    (824
    )
    
    
    Dividends paid
    
    
    (1,158
    )
    
    
    (1,195
    )Net cash provided by financing activities
    
    
    8,353
    
    
    
    3,802Net increase in cash and cash equivalents
    
    
    1,158
    
    
    
    2,392Cash and cash equivalents, January 1
    
    
    23,923
    
    
    
    26,818Cash and cash equivalents, March 31
    
    $
    25,081
    
    
    $
    29,210Supplemental cash flow informationInterest paid
    
    $
    4,424
    
    
    $
    2,041Income taxes paid
    
    
    
    
    
    
    Transfer of loans to other real estate owned
    
    
    318
    
    
    
    270
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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (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
     Allowance for Loan Losses
   8




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##### Table of Contents



Mortgage Servicing Rights
   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
   (2) Earnings Per Share
  Three Months Ended March 31,2006
    
    
    2005(Dollars in thousands except per share amounts)Weighted average shares outstanding used in Basic
Earnings per Share
    
    
    6,504,981
    
    
    
    6,641,173Dilutive effect of incentive stock options
    
    
    
    
    
    
    Weighted average shares outstanding used in
Diluted Earnings Per Share
    
    
    6,504,981
    
    
    
    6,641,173Net Income
    
    $
    1,448
    
    
    $
    1,571Basic Earnings Per Share
    
    $
    0.22
    
    
    $
    0.24Diluted Earnings Per Share
    
    $
    0.22
    
    
    $
    0.24
  (3) Cash and Due from Banks
  (4) Goodwill and Intangible Assets
  10




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March 31, 2006
    
    
    December 31, 2005(Dollars in thousands)Core deposit intangibles
    
    $
    1,288
    
    
    $
    1,288Less: accumulated amortization
    
    
    1,124
    
    
    
    1,095Carrying value of core deposit intangibles
    
    $
    164
    
    
    $
    193
  March 31, 2006
    
    
    December 31, 2005(Dollars in thousands)Goodwill
    
    $
    2,827
    
    
    $
    2,827Mortgage servicing rights
    
    
    288
    
    
    
    301Core deposit intangibles
    
    
    164
    
    
    
    193Total goodwill and intangible assets
    
    $
    3,279
    
    
    $
    3,321
 (5) Securities
  At March 31, 2006Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities available for sale:U.S. Government agencies and corporations
    
    $
    153,083
    
    
    $
    
    
    
    $
    (4,632
    )
    
    
    148,451State and political subdivisions
    
    
    9,284
    
    
    
    186
    
    
    
    (37
    )
    
    
    9,433Equity securities
    
    
    52
    
    
    
    68
    
    
    
    
    
    
    
    120Federal Home Loan Bank and Federal Reserve
Bank stock
    
    
    3,121
    
    
    
    
    
    
    
    
    
    
    
    3,121Total Securities
    
    $
    165,540
    
    
    $
    254
    
    
    $
    (4,669
    )
    
    $
    161,125
 At December 31, 2005Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities available for sale:U.S. Government agencies and corporations
    
    $
    146,010
    
    
    $
    8
    
    
    $
    (3,965
    )
    
    $
    142,053State and political subdivisions
    
    
    9,231
    
    
    
    249
    
    
    
    (24
    )
    
    
    9,456Equity securities
    
    
    52
    
    
    
    68
    
    
    
    
    
    
    
    120Federal Home Loan Bank and Federal Reserve
Bank stock
    
    
    3,645
    
    
    
    
    
    
    
    
    
    
    
    3,645Total Securities
    
    $
    158,938
    
    
    $
    325
    
    
    $
    (3,989
    )
    
    $
    155,274
 11




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##### Table of Contents



(6) Loans and Allowance for Loan Losses
  March 31, 2006
    
    
    December 31, 2005(Dollars in thousands)Commercial
    
    $
    366,525
    
    
    $
    363,144Real estate mortgage
    
    
    79,586
    
    
    
    81,367Home equity lines of credit
    
    
    66,172
    
    
    
    66,134Purchased installment
    
    
    38,056
    
    
    
    42,023Installment
    
    
    40,486
    
    
    
    38,343Total Loans
    
    
    590,825
    
    
    
    591,011Allowance for loan losses
    
    
    (6,568
    )
    
    
    (6,622
    )Net Loans
    
    $
    584,257
    
    
    $
    584,389
  March 31, 2006
    
    
    March 31, 2005(Dollars in thousands)Balance at the beginning of period
    
    $
    6,622
    
    
    $
    7,386Provision for loan losses
    
    
    150
    
    
    
    399Loans charged-off
    
    
    (295
    )
    
    
    (298
    )Recoveries on loans previously charged-off
    
    
    91
    
    
    
    58Balance at end of period
    
    $
    6,568
    
    
    $
    7,545
  (7) Stock Options and Stock Appreciation Rights
  12




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##### Table of Contents



Year Issued2005
    
    2005
    
    2006
    
    2006Type
    
    Option
    
    Option
    
    Option
    
    SARSNumber of Options
    
    
    2,500
    
    
    
    30,000
    
    
    
    30,000
    
    
    
    30,000Strike Price
    
    $
    16.50
    
    
    $
    19.17
    
    
    $
    19.10
    
    
    $
    19.00Number of Options Vested
    
    
    
    
    
    
    10,000
    
    
    
    
    
    
    
    Assumptions:Risk free interest rate
    
    
    4.50
    %
    
    
    3.92
    %
    
    
    3.66
    %
    
    
    4.90
    %Dividend yield
    
    
    4.36
    %
    
    
    3.76
    %
    
    
    3.77
    %
    
    
    3.73
    %Volatility
    
    
    18.48
    %
    
    
    17.30
    %
    
    
    17.66
    %
    
    
    17.70
    %Expected Life  years
    
    
    6
    
    
    
    7
    
    
    
    7
    
    
    
    7
  Weighted AverageWeighted Average
    
    
    RemainingExercise
    
    
    Contractual TermShares
    
    
    Price per Share
    
    
    (Years)Options outstanding, December 31, 2005
    
    
    32,500
    
    
    $
    18.96Granted
    
    
    30,000
    
    
    
    19.10Exercised
    
    
    
    
    
    
    Forfeited, expired or cancelled
    
    
    
    
    
    
    Options outstanding, March 31, 2006
    
    
    62,500
    
    
    $
    19.03
    
    
    
    6.96Options vested and exercisable, March 31, 2006
    
    
    10,000
    
    
    $
    19.17
    
    
    
    7.00
  Three Months EndedMarch 31, 2005(Dollars in thousands except per share amounts)Net Income as reported
    
    $
    1,571Add: Stock-based compensation, net of tax, as reported
    
    
    Deduct: Stock-based compensation, net of tax, that
would have been reported if the fair value based method
had been applied to all awards
    
    
    Pro forma net income
    
    $
    1,571Pro forma net income per share:Basic  as reported
    
    $
    0.24Basic  pro forma
    
    
    0.24Diluted  as reported
    
    
    0.24Diluted  pro forma
    
    
    0.24
 13




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##### Table of Contents



(8) Deposits
  March 31, 2006
    
    
    December 31, 2005(Dollars in thousands)Demand and other noninterest-bearing
    
    $
    87,997
    
    
    $
    87,597Interest checking
    
    
    80,294
    
    
    
    77,297Savings
    
    
    90,737
    
    
    
    93,906Money market accounts
    
    
    104,273
    
    
    
    94,628Consumer time deposits
    
    
    209,451
    
    
    
    199,190Public time deposits
    
    
    55,372
    
    
    
    32,332Brokered time deposits
    
    
    45,932
    
    
    
    55,266Total deposits
    
    $
    674,056
    
    
    $
    640,216
   After
    
    
    After12 months but
    
    
    36 months butWithin 12
    
    
    within 36
    
    
    within 60
    
    
    Aftermonths
    
    
    months
    
    
    months
    
    
    5 years
    
    
    Total(Dollars in thousands)Consumer time deposits
    
    $
    135,507
    
    
    $
    61,026
    
    
    $
    12,915
    
    
    $
    3
    
    
    
    209,451Public time deposits
    
    
    51,972
    
    
    
    3,400
    
    
    
    
    
    
    
    
    
    
    
    55,372Brokered time deposits
    
    
    30,439
    
    
    
    15,493
    
    
    
    
    
    
    
    
    
    
    
    45,932Total time deposits
    
    $
    217,918
    
    
    $
    79,919
    
    
    $
    12,915
    
    
    $
    3
    
    
    $
    310,755
 (9) Short-Term Borrowings
   14




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##### Table of Contents



March 31, 2006
    
    
    December 31, 2005(Dollars in thousands)Securities sold under agreements to repurchase
    
    $
    16,901
    
    
    $
    16,116Federal funds purchased
    
    
    5,000
    
    
    
    16,500Total short-term borrowings
    
    $
    21,901
    
    
    $
    32,616
 (10) Federal Home Loan Bank Advances
  March 31, 2006
    
    
    December 31, 2005(Dollars in thousands)FHLB advance - 4.27%, repaid in 2006
    
    $
    
    
    
    $
    12,801FHLB advance - 4.92%, due April 28, 2006
    
    
    1,000
    
    
    
    1,000FHLB advance - 2.70%, due June 19, 2006
    
    
    10,000
    
    
    
    10,000FHLB advance - 2.95%, due January 30, 2007
    
    
    10,000
    
    
    
    10,000FHLB advance - 3.55%, due November 21, 2007
    
    
    5,000
    
    
    
    5,000FHLB advance - 3.33%, due February 8, 2008
    
    
    5,000
    
    
    
    5,000FHLB advance - 3.36%, due March 27, 2009
    
    
    10,000
    
    
    
    10,000FHLB advance - 3.55%, due January 1, 2014
    
    
    93
    
    
    
    95Total FHLB advances
    
    $
    41,093
    
    
    $
    53,896
 (11) Commitments, Credit Risk, and Contingencies
    15




---



##### Table of Contents



Amount(Dollars in thousands)Commitments to extend credit
    
    $
    79,491Home equity lines of credit
    
    
    57,116Standby letters of credit
    
    
    4,738Total
    
    $
    141,345
 
 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 monetary and tax policies;
    
    changes in the securities markets;
 16




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##### Table of Contents




    
    changes in economic conditions and competition in the geographic and business areas
in which the Corporation conducts its operations; 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
     17




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##### Table of Contents




    
    Income Taxes
  New Accounting Pronouncements
  SFAS No. 123 (revised) Share Based Payments
  18




---



##### Table of Contents



EITF No. 03-01 The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments
   SFAS No. 154 Accounting Changes and Error Corrections
  19




---



##### Table of Contents



Summary of Earnings (Dollars in thousands except per share data)
  Results of Operations
 Net Interest Income
  Three Months Ended March 31, 2006 versus Three Months Ended March 31, 2005
   20




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##### Table of Contents



21




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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 March 31,2006
    
    
    2005Average
    
    
    
    
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Assets:U.S. Govt agencies and corporations
    
    $
    148,530
    
    
    $
    1,391
    
    
    
    3.80
    %
    
    $
    136,924
    
    
    $
    1,069
    
    
    
    3.17
    %State and political subdivisions
    
    
    9,497
    
    
    
    151
    
    
    
    6.45
    %
    
    
    11,632
    
    
    
    168
    
    
    
    5.86
    %Federal funds sold and short-term
investments
    
    
    3,622
    
    
    
    36
    
    
    
    4.03
    %
    
    
    5,411
    
    
    
    36
    
    
    
    2.70
    %Commercial loans
    
    
    360,409
    
    
    
    6,578
    
    
    
    7.40
    %
    
    
    348,379
    
    
    
    5,486
    
    
    
    6.39
    %Real estate mortgage loans
    
    
    79,839
    
    
    
    1,226
    
    
    
    6.23
    %
    
    
    94,421
    
    
    
    1,457
    
    
    
    6.26
    %Home equity lines of credit
    
    
    65,851
    
    
    
    1,159
    
    
    
    7.14
    %
    
    
    62,354
    
    
    
    832
    
    
    
    5.41
    %Purchased installment loans
    
    
    40,743
    
    
    
    427
    
    
    
    4.25
    %
    
    
    27,409
    
    
    
    255
    
    
    
    3.77
    %Installment loans
    
    
    43,046
    
    
    
    688
    
    
    
    6.48
    %
    
    
    39,901
    
    
    
    803
    
    
    
    8.16
    %Total Earning Assets
    
    $
    751,537
    
    
    $
    11,656
    
    
    
    6.29
    %
    
    $
    726,431
    
    
    $
    10,106
    
    
    
    5.64
    %Allowance for loan loss
    
    
    (6,596
    )
    
    
    
    
    
    
    
    
    
    
    (7,517
    )Cash and due from banks
    
    
    22,252
    
    
    
    
    
    
    
    
    
    
    
    25,258Bank owned life insurance
    
    
    14,060
    
    
    
    
    
    
    
    
    
    
    
    13,451Other assets
    
    
    23,300
    
    
    
    
    
    
    
    
    
    
    
    23,340Total Assets
    
    $
    804,553
    
    
    
    
    
    
    
    
    
    
    $
    780,963Liabilities and Shareholders EquityInterest-bearing demand
    
    $
    78,371
    
    
    $
    103
    
    
    
    0.53
    %
    
    $
    84,029
    
    
    $
    42
    
    
    
    0.20
    %Savings deposits
    
    
    90,676
    
    
    
    76
    
    
    
    0.34
    %
    
    
    104,218
    
    
    
    78
    
    
    
    0.30
    %Money market accounts
    
    
    98,271
    
    
    
    675
    
    
    
    2.79
    %
    
    
    93,005
    
    
    
    328
    
    
    
    1.43
    %Consumer time deposits
    
    
    207,411
    
    
    
    1,905
    
    
    
    3.72
    %
    
    
    168,418
    
    
    
    1,194
    
    
    
    2.88
    %Brokered time deposits
    
    
    50,077
    
    
    
    487
    
    
    
    3.94
    %
    
    
    30,144
    
    
    
    236
    
    
    
    3.18
    %Public time deposits
    
    
    48,736
    
    
    
    557
    
    
    
    4.64
    %
    
    
    41,700
    
    
    
    252
    
    
    
    2.45
    %Short-term borrowings
    
    
    20,375
    
    
    
    199
    
    
    
    3.96
    %
    
    
    15,039
    
    
    
    89
    
    
    
    2.40
    %FHLB advances
    
    
    48,141
    
    
    
    403
    
    
    
    3.40
    %
    
    
    70,001
    
    
    
    501
    
    
    
    2.90
    %Total Interest-Bearing Liabilities
    
    $
    642,058
    
    
    $
    4,405
    
    
    
    2.78
    %
    
    $
    606,554
    
    
    $
    2,720
    
    
    
    1.82
    %Noninterest-bearing deposits
    
    
    87,662
    
    
    
    
    
    
    
    
    
    
    
    98,062Other liabilities
    
    
    5,494
    
    
    
    
    
    
    
    
    
    
    
    5,640Shareholders Equity
    
    
    69,339
    
    
    
    
    
    
    
    
    
    
    
    70,707Total Liabilities and
Shareholders Equity
    
    $
    804,553
    
    
    
    
    
    
    
    
    
    
    $
    780,963Net interest Income (FTE)
    
    
    
    
    
    $
    7,251
    
    
    
    3.91
    %
    
    
    
    
    
    $
    7,386
    
    
    
    4.12
    %Taxable Equivalent Adjustment
    
    
    
    
    
    
    (48
    )
    
    
    -0.02
    %
    
    
    
    
    
    
    (54
    )
    
    
    -0.03
    %Net Interest Income Per Financial
Statements
    
    
    
    
    
    $
    7,203
    
    
    
    
    
    
    
    
    
    
    $
    7,332Net Yield on Earning Assets
    
    
    
    
    
    
    
    
    
    
    3.89
    %
    
    
    
    
    
    
    
    
    
    
    4.09
    %
 22




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##### Table of Contents



Rate/Volume
  Table 2: Rate/Volume Analysis of Net Interest Income (FTE)
 Three Months Ended March 31,Increase (Decrease) in Interest Income/Expense 2006 and 2005Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)U.S. Govt agencies and corporations
    
    $
    103
    
    
    $
    219
    
    
    $
    322State and political subdivisions
    
    
    (29
    )
    
    
    12
    
    
    
    (17
    )Commercial loans
    
    
    214
    
    
    
    878
    
    
    
    1,092Real estate mortgage loans
    
    
    (225
    )
    
    
    (6
    )
    
    
    (231
    )Home equity lines of credit
    
    
    59
    
    
    
    268
    
    
    
    327Purchased installment loans
    
    
    128
    
    
    
    44
    
    
    
    172Installment loans
    
    
    45
    
    
    
    (160
    )
    
    
    (115
    )Total Interest Income
    
    
    295
    
    
    
    1,255
    
    
    
    1,550Interest-bearing demand
    
    
    (8
    )
    
    
    69
    
    
    
    61Savings deposits
    
    
    (7
    )
    
    
    5
    
    
    
    (2
    )Money market accounts
    
    
    34
    
    
    
    313
    
    
    
    347Consumer time deposits
    
    
    321
    
    
    
    390
    
    
    
    711Brokered time deposits
    
    
    168
    
    
    
    83
    
    
    
    251Public time deposits
    
    
    72
    
    
    
    233
    
    
    
    305Short-term borrowings
    
    
    44
    
    
    
    66
    
    
    
    110FHLB advances
    
    
    (144
    )
    
    
    46
    
    
    
    (98
    )Total Interest Expense
    
    
    480
    
    
    
    1,205
    
    
    
    1,685Net Interest Income (FTE)
    
    $
    (185
    )
    
    $
    50
    
    
    $
    (135
    )
   23




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##### Table of Contents



Noninterest Income
 Table 3: Details on Noninterest Income
 Three Months Ended March 31,2006
    
    
    2005(Dollars in thousands)Investment and trust services
    
    $
    509
    
    
    $
    517Deposit service charges
    
    
    968
    
    
    
    908Electronic banking fees
    
    
    364
    
    
    
    366Mortgage banking revenue
    
    
    
    
    
    
    370Income from bank owned life insurance
    
    
    145
    
    
    
    193Other income
    
    
    133
    
    
    
    256Total fees and other income
    
    
    2,119
    
    
    
    2,610Securities gains, net
    
    
    
    
    
    
    180Gains on sale of loans
    
    
    
    
    
    
    132Gains on sale of other assets
    
    
    2
    
    
    
    5Total noninterest income
    
    $
    2,121
    
    
    $
    2,927
 Three Months Ended March 31, 2006 as compared to the Three Months Ended March 31, 2005
  24




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##### Table of Contents



Noninterest Expense
 Table 4: Details on Noninterest Expense
 Three Months Ended March 31,2006
    
    
    2005(Dollars in thousands)Salaries and employee benefits
    
    $
    3,578
    
    
    $
    3,978Furniture and equipment
    
    
    737
    
    
    
    733Net occupancy
    
    
    478
    
    
    
    517Outside services
    
    
    419
    
    
    
    309Marketing and public relations
    
    
    391
    
    
    
    307Supplies and postage
    
    
    298
    
    
    
    371Telecommunications
    
    
    199
    
    
    
    312Ohio Franchise tax
    
    
    232
    
    
    
    182Electronic banking expense
    
    
    145
    
    
    
    123Other expense
    
    
    732
    
    
    
    839Total noninterest expense
    
    $
    7,209
    
    
    $
    7,671
 Three Months Ended March 31, 2006 as compared to the Three Months Ended March 31, 2005
      25




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Income taxes
  26




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##### Table of Contents



Balance Sheet Analysis
 Overview
  Securities
  Loans
  Table 5: Details on Loan Balances
 March 31, 2006
    
    
    December 31, 2005(Dollars in thousands)Real estate loans (includes loans secured primarily by real estate only):Construction and land development
    
    $
    177,401
    
    
    $
    169,007One to four family residential
    
    
    166,150
    
    
    
    164,671Multi-family residential
    
    
    5,408
    
    
    
    4,676Non-farm non-residential properties
    
    
    113,106
    
    
    
    117,090Commercial and industrial loans
    
    
    64,896
    
    
    
    63,834Personal loans to individuals:Auto, single payment and installment
    
    
    63,864
    
    
    
    71,132All other loans
    
    
    
    
    
    
    601Total loans
    
    
    590,825
    
    
    
    591,011Allowance for loan losses
    
    
    (6,568
    )
    
    
    (6,622
    )Net loans
    
    $
    584,257
    
    
    $
    584,389
 27




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##### Table of Contents



Deposits
 Table 6: Deposits
 Average Balances OutstandingFor the Three Months Ended March 31,2006
    
    
    2005Average
    
    
    Percent of
    
    
    
    
    
    
    Average
    
    
    Percent ofBalance
    
    
    Deposits
    
    
    Rate
    
    
    Balance
    
    
    Deposits
    
    
    Rate(Dollars in thousands)Interest-bearing demand
    
    $
    78,371
    
    
    
    13.66
    %
    
    
    0.53
    %
    
    $
    84,029
    
    
    
    16.11
    %
    
    
    0.20
    %Savings deposits
    
    
    90,676
    
    
    
    15.81
    %
    
    
    0.34
    %
    
    
    104,218
    
    
    
    19.98
    %
    
    
    0.30
    %Money market accounts
    
    
    98,271
    
    
    
    17.13
    %
    
    
    2.79
    %
    
    
    93,005
    
    
    
    17.83
    %
    
    
    1.43
    %Consumer time deposits
    
    
    207,411
    
    
    
    36.16
    %
    
    
    3.72
    %
    
    
    168,418
    
    
    
    32.29
    %
    
    
    2.88
    %Brokered time deposits
    
    
    50,077
    
    
    
    8.73
    %
    
    
    3.94
    %
    
    
    30,144
    
    
    
    5.78
    %
    
    
    3.18
    %Public time deposits
    
    
    48,736
    
    
    
    8.51
    %
    
    
    4.64
    %
    
    
    41,700
    
    
    
    8.01
    %
    
    
    2.45
    %Total Deposits
    
    $
    573,542
    
    
    
    100.00
    %
    
    
    2.78
    %
    
    $
    521,514
    
    
    
    100.00
    %
    
    
    1.82
    %
   Borrowings
  28




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##### Table of Contents



Regulatory Capital
    
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
 RISK ELEMENTS
  Credit Risk Management
  29




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##### Table of Contents



Nonperforming Assets
    Table 7: Nonperforming Assets
 March 31, 2006
    
    
    December 31, 2005(Dollars in thousands)Commercial loans
    
    $
    5,415
    
    
    $
    5,129Real estate mortgage
    
    
    938
    
    
    
    1,182Home equity lines of credit
    
    
    15
    
    
    
    25Purchased installment
    
    
    
    
    
    
    Installment loans
    
    
    113
    
    
    
    158Total nonperforming loans
    
    
    6,481
    
    
    
    6,494Other foreclosed assets
    
    
    608
    
    
    
    432Total nonperforming assets
    
    $
    7,089
    
    
    $
    6,926Nonperforming loans to total loans
    
    
    1.20
    %
    
    
    1.17
    %Nonperforming assets to total assets
    
    
    0.88
    %
    
    
    0.86
    %
 30




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##### Table of Contents



Provision and Allowance for Loan Losses
   Table 8: Analysis of Allowance for Loan Losses
 Three Months Ended March 31,2006
    
    
    2005(Dollars in thousands)Balance at beginning of year
    
    $
    6,622
    
    
    $
    7,386Charge-offs:Commercial
    
    
    (87
    )
    
    
    (169
    )Real estate mortgage
    
    
    (41
    )
    
    
    Home equity lines of credit
    
    
    (25
    )
    
    
    Purchased installment
    
    
    (26
    )
    
    
    Installment
    
    
    (65
    )
    
    
    (129
    )Credit cards
    
    
    
    
    
    
    DDA overdrafts
    
    
    (51
    )
    
    
    Total charge-offs
    
    
    (295
    )
    
    
    (298
    )Recoveries:Commercial
    
    
    
    
    
    
    15Real estate mortgage
    
    
    1
    
    
    
    Home equity lines of credit
    
    
    
    
    
    
    1Purchased installment
    
    
    
    
    
    
    Installment
    
    
    31
    
    
    
    41Credit cards
    
    
    1
    
    
    
    1DDA overdrafts
    
    
    58
    
    
    
    Total Recoveries
    
    
    91
    
    
    
    58Net Charge-offs
    
    
    (204
    )
    
    
    (240
    )Provision for loan losses
    
    
    150
    
    
    
    399Balance at end of period
    
    $
    6,568
    
    
    $
    7,545
 31




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##### Table of Contents



Market Risk Management
     32




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##### Table of Contents



ITEM 4. Controls and Procedures
  
 PART II OTHER INFORMATION
 
 Item 1A. Risk Factors
 .
 
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities
  (c)
    
    
    (d)Total number of
    
    
    Maximum numbershares (or units)
    
    
    of shares (or units)(a)
    
    
    
    
    
    
    purchased as
    
    
    that may yet beTotal number of
    
    
    (b)
    
    
    part of publicly
    
    
    purchased undershares (or units)
    
    
    Average price paid
    
    
    announced plans
    
    
    the plansPeriod
    
    purchased
    
    
    per share (or unit)
    
    
    or programs
    
    
    or programsJanuary 1 - 31, 2006
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    207,000February 1 - 28, 2006
    
    
    35,000
    
    
    $
    19.44
    
    
    
    35,000
    
    
    
    172,000March 1 - 31, 2006
    
    
    7,500
    
    
    $
    19.25
    
    
    
    7,500
    
    
    
    164,500Total
    
    
    42,500
    
    
    $
    19.40
    
    
    
    42,500
    
    
    
    164,500
  33




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##### Table of Contents



Item 6. Exhibits.
  
 SIGNATURES
  LNB BANCORP, INC.
(Registrant)Date: May 9, 2006
    /s/ Terry M. WhiteTerry M. WhiteChief Financial Officer
(Duly Authorized Officer, and Principal
Financial Officer)Date:  May 9, 2006
    /s/ Sharon L. ChurchillSharon L. Churchill, CPAController
(Duly Authorized Officer, and Principal Accounting Officer) 34




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##### Table of Contents



Exhibit31(i)(a)
    
    Chief Executive Officer Rule 13a -14(a)/15d -14(a) Certification.31(i)(b)
    
    Chief Financial Officer Rule 13a -14(a)/15d -14(a) Certification.32(a)
    
    Certification pursuant to 18 U.S.C. section 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.32(b)
    
    Certification pursuant to 18 U.S.C. section 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
 35