##### 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, 2007
 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 þ o
 o þ




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##### 



Part I  Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets
June 30, 2007 (unaudited) and December 31, 2006Consolidated Statements of Income (unaudited)
For the three and six months ended June 30, 2007 and June 30, 2006Consolidated Statements of Changes in Shareholders Equity (unaudited)
For the six months ended June 30, 2007 and June 30, 2006Consolidated Statements of Cash Flows (unaudited)
For the six months ended June 30, 2007 and June 30, 2006Notes to the Consolidated Financial Statements (unaudited)Item 2. Managements Discussion and Analysis of Financial Condition and Results of
OperationsItem 3. Quantitative and Qualitative Disclosures about Market RiskItem 4. Controls and ProceduresPart II  Other InformationItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 4. Submission of Matters to a Vote of Security HoldersItem 6. ExhibitsEX-4.1EX-4.2EX-4.3EX-4.4EX-10.1EX-10.2EX-31(I)(A)EX-31(I)(B)EX-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, 2007
    
    
    December 31, 2006(unaudited)(Dollars in thousands except share amounts)ASSETSCash and due from Banks
    
    $
    23,986
    
    
    $
    29,122Federal funds sold and short-term investments
    
    
    
    
    
    
    Securities:Trading securities
    
    
    31,581
    
    
    
    Available for sale, at fair value
    
    
    147,973
    
    
    
    155,810Federal Home Loan Bank and Federal Reserve Stock
    
    
    4,537
    
    
    
    3,248Total securities
    
    
    184,091
    
    
    
    159,058Loans:Loans held for sale
    
    
    6,346
    
    
    
    Portfolio loans
    
    
    729,308
    
    
    
    628,333Allowance for loan losses
    
    
    (8,115
    )
    
    
    (7,300
    )Net loans
    
    
    727,539
    
    
    
    621,033Bank premises and equipment, net
    
    
    13,826
    
    
    
    12,599Other real estate owned
    
    
    2,132
    
    
    
    1,289Bank owned life insurance
    
    
    15,104
    
    
    
    14,755Goodwill and intangible assets, net
    
    
    23,473
    
    
    
    3,157Accrued interest receivable
    
    
    4,126
    
    
    
    3,939Other assets
    
    
    8,688
    
    
    
    6,146Total Assets
    
    $
    1,002,965
    
    
    $
    851,098LIABILITIES AND SHAREHOLDERS EQUITYDepositsDemand and other noninterest-bearing
    
    $
    89,193
    
    
    $
    91,216Savings, money market and interest-bearing demand
    
    
    333,939
    
    
    
    278,401Certificates of deposit
    
    
    399,769
    
    
    
    347,644Total deposits
    
    
    822,901
    
    
    
    717,261Short-term borrowings
    
    
    21,285
    
    
    
    22,163Federal Home Loan Bank advances
    
    
    49,206
    
    
    
    35,086Junior subordinated debentures
    
    
    10,620
    
    
    
    Accrued interest payable
    
    
    4,479
    
    
    
    3,698Accrued taxes, expenses and other liabilities
    
    
    4,950
    
    
    
    4,193Total Liabilities
    
    
    923,441
    
    
    
    782,401Shareholders EquityCommon stock, par value $1 per share, authorized 15,000,000 shares,
issued 7,623,857 shares at June 30, 2007 and
6,771,867 at December 31, 2006
    
    
    7,624
    
    
    
    6,772Additional paid-in capital
    
    
    37,677
    
    
    
    26,382Retained earnings
    
    
    42,237
    
    
    
    43,728Accumulated other comprehensive loss
    
    
    (1,922
    )
    
    
    (2,093
    )Treasury shares at cost, 328,194 shares at June 30, 2007
and December 31, 2006
    
    
    (6,092
    )
    
    
    (6,092
    )Total Shareholders Equity
    
    
    79,524
    
    
    
    68,697Total Liabilities and Shareholders Equity
    
    $
    1,002,965
    
    
    $
    851,098
 See accompanying notes to consolidated financial statements.
 3




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##### Table of Contents



Consolidated Statements of Incomes (unaudited)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands except share and per share amounts)Interest IncomeLoans
    
    $
    12,085
    
    
    $
    10,448
    
    
    $
    23,173
    
    
    $
    20,526Securities:U.S. Government agencies and corporations
    
    
    1,598
    
    
    
    1,422
    
    
    
    3,162
    
    
    
    2,761State and political subdivisions
    
    
    151
    
    
    
    103
    
    
    
    286
    
    
    
    206Other debt and equity securities
    
    
    71
    
    
    
    49
    
    
    
    126
    
    
    
    101Federal funds sold and short-term investments
    
    
    257
    
    
    
    27
    
    
    
    287
    
    
    
    63Total interest income
    
    
    14,162
    
    
    
    12,049
    
    
    
    27,034
    
    
    
    23,657Interest ExpenseDeposits:Certificates of deposit, $100 and over
    
    
    2,131
    
    
    
    1,584
    
    
    
    4,298
    
    
    
    2,954Other deposits
    
    
    4,119
    
    
    
    2,727
    
    
    
    7,433
    
    
    
    5,160Federal Home Loan Bank advances
    
    
    274
    
    
    
    335
    
    
    
    600
    
    
    
    735Short-term borrowings
    
    
    232
    
    
    
    207
    
    
    
    465
    
    
    
    409Other interest expense
    
    
    208
    
    
    
    
    
    
    
    211
    
    
    
    Total interest expense
    
    
    6,964
    
    
    
    4,853
    
    
    
    13,007
    
    
    
    9,258Net Interest Income
    
    
    7,198
    
    
    
    7,196
    
    
    
    14,027
    
    
    
    14,399Provision for Loan Losses
    
    
    853
    
    
    
    165
    
    
    
    1,236
    
    
    
    315Net interest income after provision for loan losses
    
    
    6,345
    
    
    
    7,031
    
    
    
    12,791
    
    
    
    14,084Noninterest IncomeInvestment and trust services
    
    
    524
    
    
    
    546
    
    
    
    1,046
    
    
    
    1,055Deposit service charges
    
    
    1,136
    
    
    
    1,142
    
    
    
    2,218
    
    
    
    2,110Other service charges and fees
    
    
    595
    
    
    
    489
    
    
    
    1,101
    
    
    
    940Income from bank owned life insurance
    
    
    182
    
    
    
    142
    
    
    
    349
    
    
    
    287Other income
    
    
    78
    
    
    
    58
    
    
    
    145
    
    
    
    104Total fees and other income
    
    
    2,515
    
    
    
    2,377
    
    
    
    4,859
    
    
    
    4,496Securities gains, net
    
    
    (214
    )
    
    
    
    
    
    
    259
    
    
    
    Gains on sale of loans
    
    
    118
    
    
    
    
    
    
    
    269
    
    
    
    Gains (losses) on sale of other assets, net
    
    
    14
    
    
    
    
    
    
    
    35
    
    
    
    2Total noninterest income
    
    
    2,433
    
    
    
    2,377
    
    
    
    5,422
    
    
    
    4,498Noninterest ExpenseSalaries and employee benefits
    
    
    3,935
    
    
    
    3,638
    
    
    
    7,758
    
    
    
    7,216Furniture and equipment
    
    
    907
    
    
    
    753
    
    
    
    1,614
    
    
    
    1,490Net occupancy
    
    
    535
    
    
    
    451
    
    
    
    1,090
    
    
    
    929Outside services
    
    
    474
    
    
    
    435
    
    
    
    829
    
    
    
    854Marketing and public relations
    
    
    353
    
    
    
    367
    
    
    
    615
    
    
    
    758Supplies, postage and freight
    
    
    323
    
    
    
    303
    
    
    
    633
    
    
    
    601Telecommunications
    
    
    203
    
    
    
    171
    
    
    
    391
    
    
    
    370Ohio Franchise tax
    
    
    201
    
    
    
    197
    
    
    
    416
    
    
    
    429Other real estate owned
    
    
    133
    
    
    
    17
    
    
    
    247
    
    
    
    31Electronic banking expenses
    
    
    193
    
    
    
    161
    
    
    
    382
    
    
    
    306Other charge-offs and losses
    
    
    101
    
    
    
    73
    
    
    
    195
    
    
    
    160Other expense
    
    
    651
    
    
    
    625
    
    
    
    1,197
    
    
    
    1,256Total noninterest expense
    
    
    8,009
    
    
    
    7,191
    
    
    
    15,367
    
    
    
    14,400Income before income tax expense
    
    
    769
    
    
    
    2,217
    
    
    
    2,846
    
    
    
    4,182Income tax expense
    
    
    133
    
    
    
    578
    
    
    
    675
    
    
    
    1,095Net Income
    
    $
    636
    
    
    $
    1,639
    
    
    $
    2,171
    
    
    $
    3,087Net Income Per Common ShareBasic
    
    $
    0.09
    
    
    $
    0.25
    
    
    $
    0.32
    
    
    $
    0.48Diluted
    
    
    0.09
    
    
    
    0.25
    
    
    
    0.32
    
    
    
    0.48Dividends declared
    
    
    0.18
    
    
    
    0.18
    
    
    
    0.36
    
    
    
    0.36Average Common Shares OutstandingBasic
    
    
    6,921,152
    
    
    
    6,475,651
    
    
    
    6,683,736
    
    
    
    6,477,154Diluted
    
    
    6,921,162
    
    
    
    6,475,651
    
    
    
    6,683,736
    
    
    
    6,477,292
 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, 2006
    
    $
    6,772
    
    
    $
    26,334
    
    
    $
    42,945
    
    
    $
    (2,996
    )
    
    $
    (4,649
    )
    
    $
    68,406Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    3,087
    
    
    
    
    
    
    
    
    
    
    
    3,087Other 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,071
    )
    
    
    
    
    
    
    (1,071
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,016Share-based compensation income
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24Purchase of 42,500 shares of Treasury Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,264
    )
    
    
    (1,264
    )Common dividends declared, $.36 per share
    
    
    
    
    
    
    
    
    
    
    (2,324
    )
    
    
    
    
    
    
    
    
    
    
    (2,324
    )Balance, June 30, 2006
    
    $
    6,772
    
    
    $
    26,358
    
    
    $
    43,708
    
    
    $
    (4,067
    )
    
    $
    (5,913
    )
    
    $
    66,858Balance, January 1, 2007
    
    $
    6,772
    
    
    $
    26,382
    
    
    $
    43,728
    
    
    $
    (2,093
    )
    
    $
    (6,092
    )
    
    $
    68,697Cumulative affect of adoption of SFAS 159
    
    
    
    
    
    
    
    
    
    
    (1,192
    )
    
    
    1,192
    
    
    
    
    
    
    
    Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    2,171
    
    
    
    
    
    
    
    
    
    
    
    2,171Other comprehensive income, net of tax:Change in unrealized gains and losses on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,021
    )
    
    
    
    
    
    
    (1,021
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,150Share-based compensation income
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Issuance of 851,990 shares of common stock
    
    
    852
    
    
    
    11,272
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,124Common dividends declared, $.36 per share
    
    
    
    
    
    
    
    
    
    
    (2,470
    )
    
    
    
    
    
    
    
    
    
    
    (2,470
    )Balance, June 30, 2007
    
    $
    7,624
    
    
    $
    37,677
    
    
    $
    42,237
    
    
    $
    (1,922
    )
    
    $
    (6,092
    )
    
    $
    79,524
 See accompanying notes to consolidated financial statements
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##### Table of Contents



Consolidated Statements of Cash Flows (unaudited)
 Six Months Ended June 30,2007
    
    
    2006(Dollars in thousands)Operating ActivitiesNet income
    
    $
    2,171
    
    
    $
    3,087Adjustments to reconcile net income to net cash provided by
operating activities:Provision for loan losses
    
    
    1,236
    
    
    
    315Depreciation and amortization
    
    
    869
    
    
    
    839Amortization of premiums and discounts
    
    
    (44
    )
    
    
    145Amortization of intangibles
    
    
    101
    
    
    
    81Amortization of deferred loan fees
    
    
    187
    
    
    
    137Federal deferred income tax expense (benefit)
    
    
    181
    
    
    
    (773
    )Net gain from loan sales
    
    
    (246
    )
    
    
    Securities gains, net
    
    
    (255
    )
    
    
    Share-based compensation expense, net of tax
    
    
    23
    
    
    
    24Net loss on sale of other assets
    
    
    2
    
    
    
    Net increase in accrued interest receivable and other assets
    
    
    (4,411
    )
    
    
    (1,753
    )Net decrease (increase) in accrued interest payable, taxes and
other liabilities
    
    
    1,475
    
    
    
    192Net cash provided by operating activities
    
    
    1,289
    
    
    
    2,294Investing ActivitiesPurchase of available-for-sale securities
    
    
    (72,060
    )
    
    
    (26,295
    )Proceeds from maturities of available-for-sale securities
    
    
    31,117
    
    
    
    15,186Purchase of trading securities
    
    
    (31,582
    )
    
    
    Proceeds from sale of trading securities
    
    
    47,632
    
    
    
    Purchase of Federal Home Loan Bank Stock
    
    
    (495
    )
    
    
    (87
    )Redemption of Federal Home Loan Bank Stock
    
    
    
    
    
    
    570Purchase of Federal Reserve Bank Stock
    
    
    (794
    )
    
    
    Acquisition, net of cash and cash equivalents acquired
    
    
    (4,912
    )
    
    
    Net increase in loans made to customers
    
    
    (38,588
    )
    
    
    (12,429
    )Proceeds from the sale of other real estate owned
    
    
    478
    
    
    
    856Purchase of bank premises and equipment
    
    
    (1,553
    )
    
    
    (1,495
    )Net cash used in investing activities
    
    
    (70,757
    )
    
    
    (23,694
    )Financing ActivitiesNet increase (decrease) in demand and other noninterest-bearing
    
    
    (11,370
    )
    
    
    (1,707
    )Net increase (decrease) in savings, money market and
interest-bearing demand
    
    
    275
    
    
    
    15,866Net increase in certificates of deposit
    
    
    14,866
    
    
    
    23,642Net decrease in short-term borrowings
    
    
    (2,598
    )
    
    
    (10,074
    )Proceeds from loan sales
    
    
    22,889
    
    
    
    Proceeds from Federal Home Loan Bank advances
    
    
    182,450
    
    
    
    26,000Prepayment of Federal Home Loan Bank advances
    
    
    (172,454
    )
    
    
    (29,805
    )Proceeds from issuance of junior subordinated debentures
    
    
    20,620
    
    
    
    Issuance of stock in acquisition
    
    
    12,124
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    (1,264
    )Dividends paid
    
    
    (2,470
    )
    
    
    (2,324
    )Net cash provided by financing activities
    
    
    64,332
    
    
    
    20,334Net increase (decrease) in cash and cash equivalents
    
    
    (5,136
    )
    
    
    (1,066
    )Cash and cash equivalents, January 1
    
    
    29,122
    
    
    
    23,923Cash and cash equivalents, June 30
    
    $
    23,986
    
    
    $
    22,857Supplemental cash flow informationInterest paid
    
    $
    11,090
    
    
    $
    9,185Income taxes paid
    
    
    
    
    
    
    1,968Transfer of loans to other real estate owned
    
    
    1,286
    
    
    
    1,653
 See accompanying notes to consolidated financial statements
 6




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##### Table of Contents



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




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




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##### Table of Contents



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 June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands except per share amounts)Weighted average shares outstanding used in Basic
Earnings per Share
    
    
    6,921,162
    
    
    
    6,475,651
    
    
    
    6,683,736
    
    
    
    6,477,154Dilutive effect of incentive stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138Weighted average shares outstanding used in
Diluted Earnings Per Share
    
    
    6,921,162
    
    
    
    6,475,651
    
    
    
    6,683,736
    
    
    
    6,477,292Net Income
    
    $
    636
    
    
    $
    1,639
    
    
    $
    2,171
    
    
    $
    3,087Basic Earnings Per Share
    
    $
    0.09
    
    
    $
    0.25
    
    
    $
    0.32
    
    
    $
    0.48Diluted Earnings Per Share
    
    $
    0.09
    
    
    $
    0.25
    
    
    $
    0.32
    
    
    $
    0.48
  (3) Cash and Due from Banks
  10




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##### Table of Contents



(4) Goodwill and Intangible Assets
   (Dollars in thousands)Cash
    
    $
    20,652Loans, net of reserve for loan losses
    
    
    92,019Bank premises and equipment, net
    
    
    731Acquisition Intangibles
    
    
    19,999Deposits
    
    
    101,870Short Term Borrowings
    
    
    1,720FHLB Borrowings
    
    
    4,124
  11




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##### Table of Contents



Consolidated Pro forma Statement of Income (unaudited)
Six Months Ended June 30, 2007
 Total interest income
    
    
    29,607Total interest expense
    
    
    14,465Net Interest Income
    
    
    15,142Provision for Loan Losses
    
    
    1,551Net interest income after provision for loan losses
    
    
    13,591Noninterest Income
    
    
    5,562Noninterest Expense
    
    
    18,619Income before income tax expense
    
    
    534Income tax expense
    
    
    22Net Income
    
    $
    512Net Income Per Common ShareBasic
    
    $
    0.08Diluted
    
    $
    0.08
   June 30, 2007
    
    
    December 31, 2006(Dollars in thousands)Core deposit intangibles
    
    $
    2,655
    
    
    $
    1,288Less: accumulated amortization
    
    
    1,284
    
    
    
    1,209Carrying value of core deposit intangibles
    
    $
    1,371
    
    
    $
    79
   June 30, 2007
    
    
    December 31, 2006(Dollars in thousands)Goodwill
    
    $
    21,459
    
    
    $
    2,827Loan servicing rights
    
    
    643
    
    
    
    251Core deposit intangibles
    
    
    1,371
    
    
    
    79Total goodwill and intangible assets
    
    $
    23,473
    
    
    $
    3,157
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##### Table of Contents



(5) Securities
  At June 30, 2007Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities available for sale:U.S. Government agencies and corporations
    
    $
    135,333
    
    
    $
    
    
    
    $
    (2,136
    )
    
    $
    133,197State and political subdivisions
    
    
    14,598
    
    
    
    124
    
    
    
    (167
    )
    
    
    14,555Equity and other securities
    
    
    152
    
    
    
    69
    
    
    
    
    
    
    
    221Federal Home Loan Bank and Federal Reserve
Bank stock
    
    
    4,537
    
    
    
    
    
    
    
    
    
    
    
    4,537Total Securities
    
    $
    154,620
    
    
    $
    193
    
    
    $
    (2,303
    )
    
    $
    152,510
 At December 31, 2006Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities available for sale:U.S. Government agencies and corporations
    
    $
    146,632
    
    
    $
    25
    
    
    $
    (2,736
    )
    
    $
    143,921State and political subdivisions
    
    
    11,494
    
    
    
    308
    
    
    
    (35
    )
    
    
    11,767Equity securities
    
    
    52
    
    
    
    70
    
    
    
    
    
    
    
    122Federal Home Loan Bank and Federal Reserve
Bank stock
    
    
    3,248
    
    
    
    
    
    
    
    
    
    
    
    3,248Total Securities
    
    $
    161,426
    
    
    $
    403
    
    
    $
    (2,771
    )
    
    $
    159,058
   At June 30, 2007Aggregate Unrealized Gains
    
    
    Aggregate Unrealized Lossesrecorded to income for the
    
    
    recorded to income for thequarter ended
    
    quarter ended

    FairCost
    
    
    June 30, 2007
    
    June 30, 2007
    
    
    Value(Dollars in thousands)Trading Securities
    
    $
    31,582
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    31,581
 (6) Loans and Allowance for Loan Losses
  13




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##### Table of Contents



June 30, 2007
    
    
    December 31, 2006(Dollars in thousands)Loans Held for Sale:Real estate mortgage loans held for sale, at lower of cost or fair value
    
    
    1,830
    
    
    
    Installment loans held for sale
    
    
    4,516
    
    
    
    Total Loans Held for Sale
    
    
    6,346
    
    
    
    Portfolio Loans:Commercial
    
    $
    414,649
    
    
    $
    374,055Real estate mortgage
    
    
    100,737
    
    
    
    99,182Home equity lines of credit
    
    
    77,416
    
    
    
    70,028Installment
    
    
    136,506
    
    
    
    85,068Total Portfolio Loans
    
    
    729,308
    
    
    
    628,333Allowance for loan losses
    
    
    (8,115
    )
    
    
    (7,300
    )Net Loans
    
    $
    721,193
    
    
    $
    621,033
  June 30, 2007
    
    
    June 30, 2006(Dollars in thousands)Balance at the beginning of period
    
    $
    7,300
    
    
    $
    6,622Provision for loan losses
    
    
    1,236
    
    
    
    315Allowance from merger
    
    
    1,098Loans charged-off
    
    
    (1,678
    )
    
    
    (560
    )Recoveries on loans previously charged-off
    
    
    159
    
    
    
    191Balance at end of period
    
    $
    8,115
    
    
    $
    6,568
  (7) Stock Options and Stock Appreciation Rights
  14




---



##### Table of Contents



Year Issued2005
    
    2005
    
    2006
    
    2007
    
    2006Type
    
    
    Option
    
    Option
    
    Option
    
    Option
    
    SARSNumber of Options
    
    
    
    2,500

    
    
    
    30,000

    
    
    
    30,000

    
    
    
    30,000

    
    
    30,000Strike Price
    
    
    $
    16.50
    
    
    $
    19.17
    
    
    $
    19.10
    
    
    $
    16.00

    
    $
    19.00Number of Options Vested
    
    
    
    2,500

    
    
    
    20,000

    
    
    
    10,000

    
    
    
    

    
    
    Assumptions:Risk free interest rate
    
    
    
    4.50
    %

    
    
    3.92
    %

    
    
    3.66
    %

    
    
    4.73
    %

    
    4.94
    %Dividend yield
    
    
    
    4.36
    %

    
    
    3.76
    %

    
    
    3.77
    %

    
    
    4.50
    %

    
    4.78
    %Volatility
    
    
    
    18.48
    %

    
    
    17.30
    %

    
    
    17.66
    %

    
    
    16.52
    %

    
    15.68
    %Expected Life  years
    
    
    
    6
    

    
    
    7

    
    
    
    7

    
    
    
    7

    
    
    6
  Weighted AverageExerciseShares
    
    
    Price per ShareOptions outstanding, December 31, 2006
    
    
    62,500
    
    
    $
    19.03Granted
    
    
    30,000
    
    
    
    16.00Exercised
    
    
    
    
    
    
    Forfeited, expired or cancelled
    
    
    
    
    
    
    Options outstanding, June 30, 2007
    
    
    92,500
    
    
    $
    18.05Options vested and exercisable, June 30, 2007
    
    
    32,500
    
    
    $
    18.94
 (8) Deposits
  June 30, 2007
    
    
    December 31, 2006(Dollars in thousands)Demand and other noninterest-bearing
    
    $
    89,193
    
    
    $
    91,216Interest checking
    
    
    112,175
    
    
    
    88,541Savings
    
    
    83,382
    
    
    
    80,086Money market accounts
    
    
    138,382
    
    
    
    109,774Consumer time deposits
    
    
    305,202
    
    
    
    225,947Public time deposits
    
    
    67,290
    
    
    
    56,604Brokered time deposits
    
    
    27,277
    
    
    
    65,093Total deposits
    
    $
    822,901
    
    
    $
    717,261
   15




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##### Table of Contents



After
    
    
    After12 months but
    
    
    36 months butWithin 12
    
    
    within 36
    
    
    within 60
    
    
    Aftermonths
    
    
    months
    
    
    months
    
    
    5 years
    
    
    Total(Dollars in thousands)Consumer time deposits
    
    $
    260,589
    
    
    $
    39,268
    
    
    $
    5,229
    
    
    $
    116
    
    
    $
    305,202Public time deposits
    
    
    63,815
    
    
    
    3,475
    
    
    
    
    
    
    
    
    
    
    
    67,290Brokered time deposits
    
    
    18,950
    
    
    
    8,327
    
    
    
    
    
    
    
    
    
    
    
    27,277Total time deposits
    
    $
    343,354
    
    
    $
    51,070
    
    
    $
    5,229
    
    
    $
    116
    
    
    $
    399,769
 (9) Short-Term Borrowings
   June 30, 2007
    
    
    December 31, 2006(Dollars in thousands)Securities sold under agreements to repurchase
    
    $
    21,285
    
    
    $
    20,663Federal funds purchased
    
    
    
    
    
    
    1,500Total short-term borrowings
    
    $
    21,285
    
    
    $
    22,163
 (10) Federal Home Loan Bank Advances
  16




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##### Table of Contents



June 30, 2007
    
    
    December 31, 2006(Dollars in thousands)FHLB advance - 2.95%, due January 30, 2007
    
    $
    
    
    
    $
    10,000FHLB advance - 5.26%, due July 26, 2007
    
    
    20,000
    
    
    
    FHLB advance - 3.55%, due November 21, 2007
    
    
    5,000
    
    
    
    5,000FHLB advance - 3.33%, due February 8, 2008
    
    
    5,000
    
    
    
    5,000FHLB advance - 4.47%, due April 11, 2008
    
    $
    350
    
    
    $
    FHLB advance - 4.99% due November 28, 2008
    
    
    5,000
    
    
    
    5,000FHLB advance - 5.07%, due December 12, 2008
    
    
    500
    
    
    
    FHLB advance - 3.36%, due March 27, 2009
    
    
    10,000
    
    
    
    10,000FHLB advance - 4.67%, due April 10, 2009
    
    $
    350
    
    
    $
    FHLB advance - 5.00%, due December 14, 2009
    
    
    500
    
    
    
    FHLB advance - 3.55%, due January 1, 2014
    
    
    80
    
    
    
    86FHLB advance - 4.76%, due July 6, 2015
    
    
    2,500
    
    
    
    Valuation adjustments on FHLB advances
    
    
    (74
    )
    
    
    Total FHLB advances
    
    $
    49,206
    
    
    $
    35,086
 Valuation adjustments are to adjust FHLB advances to fair market value in the acquisition of Morgan Bank NA as of May 10, 2007
 (11) Trust Preferred Securities
    (12) Commitments, Credit Risk, and Contingencies
  17




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##### Table of Contents



Amount(Dollars in thousands)Commitments to extend credit
    
    $
    99,701Home equity lines of credit
    
    
    75,434Standby letters of credit
    
    
    7,233Total
    
    $
    182,368
 
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Introduction
    18




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##### Table of Contents



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;
    
    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;
    
    customer reaction to and unforeseen complications with respect to the Corporations
integration of acquisitions;
    
    difficulties in realizing expected cost savings from acquisitions; and
    
    difficulties associated with data conversions in acquisitions.
 Critical Accounting Policies and Estimates
    
    
    Allowance for loan losses
  19




---



##### Table of Contents




    
    Income Taxes
  20




---



##### Table of Contents



New Accounting Pronouncements
  FASB Statement No. 159 The Fair Value Option for Financial Assets and Financial Liabilities
  FASB
Statement No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132R
  21




---



##### Table of Contents



FASB Statement No. 156, Accounting for Servicing of Financial Assets, an Amendment of FAS
140.
  FASB Statement No. 157, Fair Value Measurements
  Summary of Earnings (Dollars in thousands except per share data)
   22




---



##### Table of Contents



Results
of Operations
 Net
Interest Income
  Three Months Ended June 30, 2007 versus Three Months Ended June 30, 2006
   Six Months Ended June 30, 2007 versus Six Months Ended June 30, 2006
  23




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##### Table of Contents



24




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##### Table of Contents



Table 1:
    
    Condensed Consolidated Average Balance Sheets

Interest, Rate, and Rate/ Volume differentials are stated on a Fully-Tax Equivalent
(FTE) Basis.
 Three Months Ended June 30,2007
    
    
    2006Average
    
    
    
    
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Assets:U.S. Govt agencies and
corporations
    
    $
    143,626
    
    
    $
    1,669
    
    
    
    4.66
    %
    
    $
    153,687
    
    
    $
    1,471
    
    
    
    3.84
    %State and political subdivisions
    
    
    14,372
    
    
    
    218
    
    
    
    6.08
    %
    
    
    9,402
    
    
    
    150
    
    
    
    6.40
    %Federal funds sold and short-term
investments
    
    
    19,498
    
    
    
    257
    
    
    
    5.29
    %
    
    
    2,279
    
    
    
    27
    
    
    
    4.75
    %Commercial loans
    
    
    391,621
    
    
    
    7,232
    
    
    
    7.41
    %
    
    
    366,381
    
    
    
    6,946
    
    
    
    7.60
    %Real estate mortgage loans
    
    
    97,718
    
    
    
    1,497
    
    
    
    6.14
    %
    
    
    79,893
    
    
    
    1,208
    
    
    
    6.06
    %Home equity lines of credit
    
    
    73,966
    
    
    
    1,443
    
    
    
    7.83
    %
    
    
    66,122
    
    
    
    1,173
    
    
    
    7.12
    %Purchased installment loans
    
    
    36,959
    
    
    
    468
    
    
    
    5.08
    %
    
    
    38,030
    
    
    
    422
    
    
    
    4.45
    %Installment loans
    
    
    77,986
    
    
    
    1,472
    
    
    
    7.57
    %
    
    
    39,028
    
    
    
    699
    
    
    
    7.18
    %Total Earning Assets
    
    $
    855,746
    
    
    $
    14,256
    
    
    
    6.68
    %
    
    $
    754,822
    
    
    $
    12,096
    
    
    
    6.43
    %Allowance for loan loss
    
    
    (7,758
    )
    
    
    
    
    
    
    
    
    
    
    (6,606
    )Cash and due from banks
    
    
    21,942
    
    
    
    
    
    
    
    
    
    
    
    22,787Bank owned life insurance
    
    
    15,021
    
    
    
    
    
    
    
    
    
    
    
    14,175Other assets
    
    
    42,869
    
    
    
    
    
    
    
    
    
    
    
    25,764Total Assets
    
    $
    927,820
    
    
    
    
    
    
    
    
    
    
    $
    810,942Liabilities and Shareholders EquityInterest-bearing demand
    
    $
    100,793
    
    
    $
    296
    
    
    
    1.18
    %
    
    $
    85,833
    
    
    $
    153
    
    
    
    0.71
    %Savings deposits
    
    
    81,114
    
    
    
    107
    
    
    
    0.53
    %
    
    
    89,268
    
    
    
    79
    
    
    
    0.35
    %Money market accounts
    
    
    130,963
    
    
    
    1,221
    
    
    
    3.74
    %
    
    
    105,881
    
    
    
    842
    
    
    
    3.19
    %Consumer time deposits
    
    
    278,819
    
    
    
    3,271
    
    
    
    4.71
    %
    
    
    207,513
    
    
    
    2,030
    
    
    
    3.92
    %Brokered time deposits
    
    
    38,239
    
    
    
    493
    
    
    
    5.17
    %
    
    
    45,647
    
    
    
    466
    
    
    
    4.09
    %Public time deposits
    
    
    64,902
    
    
    
    859
    
    
    
    5.31
    %
    
    
    59,276
    
    
    
    741
    
    
    
    5.01
    %Short-term borrowings
    
    
    22,341
    
    
    
    232
    
    
    
    4.17
    %
    
    
    18,844
    
    
    
    207
    
    
    
    4.41
    %FHLB advances
    
    
    29,059
    
    
    
    274
    
    
    
    3.78
    %
    
    
    41,267
    
    
    
    335
    
    
    
    3.26
    %Trust preferred
    
    
    12,056
    
    
    
    205
    
    
    
    6.82
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %Other
    
    
    
    
    
    
    6
    
    
    
    0.00
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %Total Interest-Bearing Liabilities
    
    $
    758,286
    
    
    $
    6,964
    
    
    
    3.68
    %
    
    $
    653,529
    
    
    $
    4,853
    
    
    
    2.98
    %Noninterest-bearing deposits
    
    
    83,229
    
    
    
    
    
    
    
    
    
    
    
    83,427Other liabilities
    
    
    8,352
    
    
    
    
    
    
    
    
    
    
    
    6,280Shareholders Equity
    
    
    77,953
    
    
    
    
    
    
    
    
    
    
    
    67,706Total Liabilities and
Shareholders Equity
    
    $
    927,820
    
    
    
    
    
    
    
    
    
    
    $
    810,942Net interest Income (FTE)
    
    
    
    
    
    $
    7,292
    
    
    
    3.42
    %
    
    
    
    
    
    $
    7,243
    
    
    
    3.85
    %Taxable Equivalent Adjustment
    
    
    
    
    
    
    (94
    )
    
    
    -0.04
    %
    
    
    
    
    
    
    (47
    )
    
    
    -0.02
    %Net Interest Income Per
Financial Statements
    
    
    
    
    
    $
    7,198
    
    
    
    
    
    
    
    
    
    
    $
    7,196Net Yield on Earning Assets
    
    
    
    
    
    
    
    
    
    
    3.37
    %
    
    
    
    
    
    
    
    
    
    
    3.83
    %
 25




---



##### Table of Contents



Six Months Ended June 30,2007
    
    2006AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Average
Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Assets:U.S. Govt agencies and
corporations
    
    $
    144,991
    
    
    $
    3,288
    
    
    
    4.57
    %
    
    $
    151,123
    
    
    $
    2,862
    
    
    
    3.82
    %State and political subdivisions
    
    
    13,472
    
    
    
    413
    
    
    
    6.18
    %
    
    
    9,449
    
    
    
    301
    
    
    
    6.42
    %Federal funds sold and short-term
investments
    
    
    11,005
    
    
    
    287
    
    
    
    5.26
    %
    
    
    2,947
    
    
    
    63
    
    
    
    4.31
    %Commercial loans
    
    
    384,868
    
    
    
    14,184
    
    
    
    7.43
    %
    
    
    365,685
    
    
    
    13,522
    
    
    
    7.46
    %Real estate mortgage loans
    
    
    98,063
    
    
    
    2,991
    
    
    
    6.15
    %
    
    
    79,866
    
    
    
    2,435
    
    
    
    6.15
    %Home equity lines of credit
    
    
    72,293
    
    
    
    2,809
    
    
    
    7.84
    %
    
    
    65,987
    
    
    
    2,332
    
    
    
    7.13
    %Purchased installment loans
    
    
    39,125
    
    
    
    978
    
    
    
    5.04
    %
    
    
    39,379
    
    
    
    869
    
    
    
    4.45
    %Installment loans
    
    
    60,313
    
    
    
    2,267
    
    
    
    7.58
    %
    
    
    38,750
    
    
    
    1,368
    
    
    
    7.12
    %Total Earning Assets
    
    $
    824,130
    
    
    $
    27,217
    
    
    
    6.66
    %
    
    $
    753,186
    
    
    $
    23,752
    
    
    
    6.36
    %Allowance for loan loss
    
    
    (7,583
    )
    
    
    
    
    
    
    
    
    
    
    (6,601
    )Cash and due from banks
    
    
    21,987
    
    
    
    
    
    
    
    
    
    
    
    22,521Bank owned life insurance
    
    
    14,932
    
    
    
    
    
    
    
    
    
    
    
    14,151Other assets
    
    
    34,746
    
    
    
    
    
    
    
    
    
    
    
    24,506Total Assets
    
    $
    888,212
    
    
    
    
    
    
    
    
    
    
    $
    807,763Liabilities and Shareholders EquityInterest-bearing demand
    
    $
    93,708
    
    
    $
    478
    
    
    
    1.03
    %
    
    $
    82,122
    
    
    $
    257
    
    
    
    0.63
    %Savings deposits
    
    
    79,445
    
    
    
    169
    
    
    
    0.43
    %
    
    
    89,969
    
    
    
    155
    
    
    
    0.35
    %Money market accounts
    
    
    121,233
    
    
    
    2,208
    
    
    
    3.67
    %
    
    
    102,097
    
    
    
    1,516
    
    
    
    2.99
    %Consumer time deposits
    
    
    255,387
    
    
    
    5,891
    
    
    
    4.65
    %
    
    
    207,460
    
    
    
    3,941
    
    
    
    3.83
    %Brokered time deposits
    
    
    47,499
    
    
    
    1,211
    
    
    
    5.14
    %
    
    
    47,850
    
    
    
    953
    
    
    
    4.02
    %Public time deposits
    
    
    67,385
    
    
    
    1,774
    
    
    
    5.31
    %
    
    
    54,035
    
    
    
    1,298
    
    
    
    4.84
    %Short-term borrowings
    
    
    22,020
    
    
    
    465
    
    
    
    4.26
    %
    
    
    19,605
    
    
    
    403
    
    
    
    4.15
    %FHLB advances
    
    
    31,254
    
    
    
    600
    
    
    
    3.87
    %
    
    
    44,685
    
    
    
    735
    
    
    
    3.32
    %Trust preferred securities
    
    
    6,061
    
    
    
    205
    
    
    
    6.82
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %Other
    
    
    
    
    
    
    6
    
    
    
    0.00
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %Total Interest-Bearing Liabilities
    
    $
    723,992
    
    
    $
    13,007
    
    
    
    3.62
    %
    
    $
    647,823
    
    
    $
    9,258
    
    
    
    2.88
    %Noninterest-bearing deposits
    
    
    82,356
    
    
    
    
    
    
    
    
    
    
    
    85,533Other liabilities
    
    
    8,209
    
    
    
    
    
    
    
    
    
    
    
    5,889Shareholders Equity
    
    
    73,655
    
    
    
    
    
    
    
    
    
    
    
    68,518Total Liabilities and
Shareholders Equity
    
    $
    888,212
    
    
    
    
    
    
    
    
    
    
    $
    807,763Net interest Income (FTE)
    
    
    
    
    
    $
    14,210
    
    
    
    3.48
    %
    
    
    
    
    
    $
    14,494
    
    
    
    3.88
    %Taxable Equivalent Adjustment
    
    
    
    
    
    
    (183
    )
    
    
    -0.04
    %
    
    
    
    
    
    
    (95
    )
    
    
    -0.02
    %Net Interest Income Per
Financial Statements
    
    
    
    
    
    $
    14,027
    
    
    
    
    
    
    
    
    
    
    $
    14,399Net Yield on Earning Assets
    
    
    
    
    
    
    
    
    
    
    3.43
    %
    
    
    
    
    
    
    
    
    
    
    3.86
    %
 Rate/Volume
  26




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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/Expense 2007 and 2006Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)U.S. Govt agencies and corporations
    
    $
    (131
    )
    
    $
    329
    
    
    $
    198State and political subdivisions
    
    
    80
    
    
    
    (12
    )
    
    
    68Federal funds sold and short-term investments
    
    
    206
    
    
    
    24
    
    
    
    230Commercial loans
    
    
    487
    
    
    
    (201
    )
    
    
    286Real estate mortgage loans
    
    
    270
    
    
    
    19
    
    
    
    289Home equity lines of credit
    
    
    146
    
    
    
    124
    
    
    
    270Purchased installment loans
    
    
    (14
    )
    
    
    60
    
    
    
    46Installment loans
    
    
    701
    
    
    
    72
    
    
    
    773Total Interest Income
    
    
    1,745
    
    
    
    415
    
    
    
    2,160Interest-bearing demand
    
    
    39
    
    
    
    104
    
    
    
    143Savings deposits
    
    
    (12
    )
    
    
    40
    
    
    
    28Money market accounts
    
    
    214
    
    
    
    165
    
    
    
    379Consumer time deposits
    
    
    752
    
    
    
    489
    
    
    
    1,241Brokered time deposits
    
    
    498
    
    
    
    (5
    )
    
    
    493Public time deposits
    
    
    (342
    )
    
    
    (6
    )
    
    
    (348
    )Short-term borrowings
    
    
    40
    
    
    
    (15
    )
    
    
    25FHLB advances
    
    
    (91
    )
    
    
    30
    
    
    
    (61
    )Trust preferred securities and miscellaneous
    
    
    211
    
    
    
    
    
    
    
    211Total Interest Expense
    
    
    1,309
    
    
    
    802
    
    
    
    2,111Net Interest Income (FTE)
    
    $
    436
    
    
    $
    (387
    )
    
    $
    49
  27




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##### Table of Contents



Six Months Ended June 30,Increase (Decrease) in Interest Income/Expense 2007 and 2006Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)U.S. Govt agencies and corporations
    
    $
    (147
    )
    
    $
    573
    
    
    $
    426State and political subdivisions
    
    
    129
    
    
    
    (17
    )
    
    
    112Federal funds sold and short-term investments
    
    
    180
    
    
    
    44
    
    
    
    224Commercial loans
    
    
    710
    
    
    
    (48
    )
    
    
    662Real estate mortgage loans
    
    
    555
    
    
    
    1
    
    
    
    556Home equity lines of credit
    
    
    234
    
    
    
    243
    
    
    
    477Purchased installment loans
    
    
    (6
    )
    
    
    115
    
    
    
    109Installment loans
    
    
    768
    
    
    
    131
    
    
    
    899Total Interest Income
    
    
    2,423
    
    
    
    1,042
    
    
    
    3,465Interest-bearing demand
    
    
    54
    
    
    
    167
    
    
    
    221Savings deposits
    
    
    (32
    )
    
    
    46
    
    
    
    14Money market accounts
    
    
    319
    
    
    
    373
    
    
    
    692Consumer time deposits
    
    
    1,005
    
    
    
    945
    
    
    
    1,950Brokered time deposits
    
    
    (9
    )
    
    
    267
    
    
    
    258Public time deposits
    
    
    330
    
    
    
    146
    
    
    
    476Short-term borrowings
    
    
    50
    
    
    
    12
    
    
    
    62FHLB advances
    
    
    (202
    )
    
    
    67
    
    
    
    (135
    )Trust preferred securities and miscellaneous
    
    
    211
    
    
    
    
    
    
    
    211Total Interest Expense
    
    
    1,726
    
    
    
    2,023
    
    
    
    3,749Net Interest Income (FTE)
    
    $
    697
    
    
    $
    (981
    )
    
    $
    (284
    )
  Noninterest Income
 Table 3: Details on Noninterest Income
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)

    
    (Dollars in thousands)Investment and trust services
    
    $
    524
    
    
    $
    546
    
    
    $
    1,046
    
    
    $
    1,055Deposit service charges
    
    
    1,136
    
    
    
    1,142
    
    
    
    2,218
    
    
    
    2,110Electronic banking fees
    
    
    595
    
    
    
    489
    
    
    
    1,101
    
    
    
    940Income from bank owned life insurance
    
    
    182
    
    
    
    142
    
    
    
    349
    
    
    
    287Other income
    
    
    78
    
    
    
    58
    
    
    
    145
    
    
    
    104Total fees and other income
    
    
    2,515
    
    
    
    2,377
    
    
    
    4,859
    
    
    
    4,496Securities gains, net
    
    
    (214
    )
    
    
    
    
    
    
    259
    
    
    
    Unrealized gain/(loss) on loans HFS
    
    
    5
    
    
    
    
    
    
    
    (28
    )
    
    
    Gains on sale of loans
    
    
    113
    
    
    
    
    
    
    
    297
    
    
    
    Gains (losses) on sale of other assets
    
    
    14
    
    
    
    
    
    
    
    35
    
    
    
    2Total noninterest income
    
    $
    2,433
    
    
    $
    2,377
    
    
    $
    5,422
    
    
    $
    4,498
 28




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##### Table of Contents



Three Months Ended June 30, 2007 as compared to the Three Months Ended June 30, 2006
  Six Months Ended June 30, 2007 as compared to the Six Months Ended June 30, 2006
  29




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##### Table of Contents



Noninterest Expense
 Table 4: Details on Noninterest Expense
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)
    
    
    (Dollars in thousands)Salaries and employee benefits
    
    $
    3,935
    
    
    $
    3,638
    
    
    $
    7,758
    
    
    $
    7,216Furniture and equipment
    
    
    907
    
    
    
    753
    
    
    
    1,614
    
    
    
    1,490Net occupancy
    
    
    535
    
    
    
    451
    
    
    
    1,090
    
    
    
    929Outside services
    
    
    474
    
    
    
    435
    
    
    
    829
    
    
    
    854Marketing and public relations
    
    
    353
    
    
    
    367
    
    
    
    615
    
    
    
    758Supplies and postage
    
    
    323
    
    
    
    303
    
    
    
    633
    
    
    
    601Telecommunications
    
    
    203
    
    
    
    171
    
    
    
    391
    
    
    
    370Ohio Franchise tax
    
    
    201
    
    
    
    197
    
    
    
    416
    
    
    
    429Other real estate owned
    
    
    133
    
    
    
    17
    
    
    
    247
    
    
    
    31Electronic banking expense
    
    
    193
    
    
    
    161
    
    
    
    382
    
    
    
    306Other charge-offs and losses
    
    
    101
    
    
    
    73
    
    
    
    195
    
    
    
    160Other expense
    
    
    651
    
    
    
    625
    
    
    
    1,197
    
    
    
    1,256Total noninterest expense
    
    $
    8,009
    
    
    $
    7,191
    
    
    $
    15,367
    
    
    $
    14,400
 Three Months Ended June 30, 2007 as compared to the Three Months Ended June 30, 2006
    Six Months Ended June 30, 2007 as compared to the Six Months Ended June 30, 2006
  30




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##### Table of Contents



Income taxes
  Balance Sheet Analysis
 Overview
    31




---



##### Table of Contents



Securities
  Loans
  Table 5: Details on Loan Balances
 June 30, 2007
    
    
    December 31, 2006(Dollars in thousands)Real estate loans (includes loans secured primarily by real estate only):Construction and land development
    
    $
    117,420
    
    
    $
    105,633One to four family residential
    
    
    209,030
    
    
    
    190,884Multi-family residential
    
    
    22,188
    
    
    
    21,754Non-farm non-residential properties
    
    
    217,966
    
    
    
    195,547Commercial and industrial loans
    
    
    50,954
    
    
    
    40,820Personal loans to individuals:Auto and installment
    
    
    110,062
    
    
    
    65,780All other loans
    
    
    8,034
    
    
    
    7,915Total loans
    
    
    735,654
    
    
    
    628,333Allowance for loan losses
    
    
    (8,115
    )
    
    
    (7,300
    )Net loans
    
    $
    727,539
    
    
    $
    621,033
  32




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##### Table of Contents



Deposits
 Table 6: Deposits
 Average Balances OutstandingFor the Six Months Ended June 30,2007
    
    
    2006Average
    
    
    Percent of
    
    
    
    
    
    
    Average
    
    
    Percent ofBalance
    
    
    Deposits
    
    
    Rate
    
    
    Balance
    
    
    Deposits
    
    
    Rate(Dollars in thousands)Noninterest bearing demand
    
    $
    82,356
    
    
    
    11.02
    %
    
    
    0.00
    %
    
    $
    85,533
    
    
    
    12.78
    %
    
    
    0.00
    %Interest-bearing demand
    
    
    93,708
    
    
    
    12.54
    %
    
    
    1.07
    %
    
    
    82,122
    
    
    
    12.27
    %
    
    
    0.63
    %Savings deposits
    
    
    79,445
    
    
    
    10.64
    %
    
    
    0.44
    %
    
    
    89,969
    
    
    
    13.45
    %
    
    
    0.35
    %Money market accounts
    
    
    121,233
    
    
    
    16.23
    %
    
    
    3.83
    %
    
    
    102,097
    
    
    
    15.26
    %
    
    
    2.99
    %Consumer time deposits
    
    
    255,387
    
    
    
    34.19
    %
    
    
    4.79
    %
    
    
    207,460
    
    
    
    31.01
    %
    
    
    3.83
    %Brokered time deposits
    
    
    47,499
    
    
    
    6.36
    %
    
    
    4.96
    %
    
    
    47,850
    
    
    
    7.15
    %
    
    
    4.02
    %Public time deposits
    
    
    67,385
    
    
    
    9.02
    %
    
    
    5.25
    %
    
    
    54,035
    
    
    
    8.08
    %
    
    
    4.84
    %Total Deposits
    
    $
    747,013
    
    
    
    100.00
    %
    
    
    3.24
    %
    
    $
    669,066
    
    
    
    100.00
    %
    
    
    2.45
    %
  Borrowings
  33




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##### Table of Contents



Regulatory Capital
    
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
 RISK ELEMENTS
  34




---



##### Table of Contents



Credit Risk Management
  Nonperforming Assets, Delinquency and Potential Problem Loans
     35




---



##### Table of Contents



Table 8: Nonperforming Assets
 June 30, 2007
    
    
    December 31, 2006(Dollars in thousands)Commercial loans
    
    $
    10,373
    
    
    $
    10,322Real estate mortgage
    
    
    2,472
    
    
    
    2,165Home equity lines of credit
    
    
    313
    
    
    
    168Purchased installment
    
    
    
    
    
    
    Installment loans
    
    
    101
    
    
    
    157Total nonperforming loans
    
    
    13,259
    
    
    
    12,812Other foreclosed assets
    
    
    2,132
    
    
    
    1,289Total nonperforming assets
    
    $
    15,391
    
    
    $
    14,101Nonperforming loans to total loans
    
    
    1.82
    %
    
    
    2.04
    %Nonperforming assets to total assets
    
    
    1.32
    %
    
    
    1.51
    %
 Provision and Allowance for Loan Losses
  Table 9: Analysis of Allowance for Loan Losses
 36




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)
    
    
    (Dollars in thousands)Balance at beginning of year
    
    $
    7,258
    
    
    $
    6,568
    
    
    $
    7,300
    
    
    $
    6,622Charge-offs:Commercial
    
    
    (939
    )
    
    
    (122
    )
    
    
    (1,198
    )
    
    
    (209
    )Real estate mortgage
    
    
    (76
    )
    
    
    
    
    
    
    (175
    )
    
    
    (41
    )Home equity lines of credit
    
    
    (56
    )
    
    
    
    
    
    
    (56
    )
    
    
    (25
    )Purchased installment
    
    
    (17
    )
    
    
    (25
    )
    
    
    (17
    )
    
    
    (51
    )Installment
    
    
    (42
    )
    
    
    (73
    )
    
    
    (125
    )
    
    
    (138
    )DDA overdrafts
    
    
    (48
    )
    
    
    (45
    )
    
    
    (107
    )
    
    
    (96
    )Total charge-offs
    
    
    (1,178
    )
    
    
    (265
    )
    
    
    (1,678
    )
    
    
    (560
    )Recoveries:Commercial
    
    
    6
    
    
    
    56
    
    
    
    34
    
    
    
    56Real estate mortgage
    
    
    2
    
    
    
    1
    
    
    
    2
    
    
    
    2Home equity lines of credit
    
    
    25
    
    
    
    
    
    
    
    25
    
    
    
    Purchased installment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Installment
    
    
    37
    
    
    
    18
    
    
    
    67
    
    
    
    50DDA overdrafts
    
    
    14
    
    
    
    25
    
    
    
    31
    
    
    
    83Total Recoveries
    
    
    84
    
    
    
    100
    
    
    
    159
    
    
    
    191Net Charge-offs
    
    
    (1,094
    )
    
    
    (165
    )
    
    
    (1,519
    )
    
    
    (369
    )Allowance from merger
    
    
    1,098
    
    
    
    
    
    
    
    1,098
    
    
    
    Provision for loan losses
    
    
    853
    
    
    
    165
    
    
    
    1,236
    
    
    
    315Balance at end of period
    
    $
    8,115
    
    
    $
    6,568
    
    
    $
    8,115
    
    
    $
    6,568
    37




---



##### Table of Contents



Market Risk Management
     
 ITEM 4. Controls and Procedures
  38




---



##### Table of Contents




    
    Additional training is being completed to reinforce the existing procedures to assure
that adequate evidence exists to support all decisions made regarding classification of
individual loans.
    
    Additional training is being completed to reinforce the requirement that once a loan
meets the impairment criteria, such loans are deemed impaired and the impairment is valued
based on a current appraisal of the collateral securing the loan.
    
    Training has been completed to reinforce the documentation requirements for the
recognition of interest income once a loan is classified as nonperforming. Management has
also revised the approval process for recording all nonperforming loan transactions.
   
 PART II  OTHER INFORMATION
 
 Item 1A. Risk Factors
  39




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 Issuer Purchases of Equity Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  % ofTotal Shares VotedElection of Directors
    
    For
    
    Withheld
    
    ForDaniel P. Batista
    
    
    4,632,610
    
    
    
    270,956
    
    
    
    94.48
    %Eugene M. Sofranko
    
    
    4,573,380
    
    
    
    330,186
    
    
    
    93.27
    %Donald F. Zwilling, CPA
    
    
    4,689,425
    
    
    
    214,141
    
    
    
    95.64
    %
   
 Item 6. Exhibits.
  40




---



##### Table of Contents



SIGNATURES
  LNB BANCORP, INC.
(Registrant)Date: August 9, 2007
    
    /s/ Sharon L. Churchill

Sharon L. Churchill
Chief Financial Officer(Duly Authorized Officer, and PrincipalFinancial Officer)
 41




---



##### Table of Contents



Exhibit4.1
    
    Indenture, dated as of May 9, 2007, by and between LNB Bancorp, Inc. and Wells Fargo Bank,
National Association, as Trustee, relating to floating rate Junior Subordinated Debt
Securities Due June 15, 2037.4.2
    
    Indenture, dated as of May 9, 2007, by and between LNB Bancorp, Inc. and Wells Fargo Bank,
National Association, as Trustee, relating to fixed rate Junior Subordinated Debt Securities
Due June 15, 2037.4.3
    
    Amended and Restated Declaration of Trust of LNB Trust I, dated as of May 9, 2007.4.4
    
    Amended and Restated Declaration of Trust of LNB Trust II, dated as of May 9, 2007.10.1
    
    Guarantee Agreement, dated as of May 9, 2007, by and between LNB Bancorp, Inc. and Wells
Fargo Bank, National Association, as Trustee, relating to securities of LNB Trust I.10.2
    
    Guarantee Agreement, dated as of May 9, 2007, by and between LNB Bancorp, Inc. and Wells
Fargo Bank, National Association, as Trustee, relating to securities of LNB Trust II.31.1
    
    Chief Executive Officer Rule 13a -14(a)/15d -14(a) Certification.31.2
    
    Chief Financial Officer Rule 13a -14(a)/15d -14(a) Certification.32.1
    
    Certification pursuant to 18 U.S.C. section 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification pursuant to 18 U.S.C. section 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
 42