##### 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, 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
(State or other jurisdiction
of incorporation or organization)
    
    34-1406303
(I.R.S. Employer
Identification No.)457 Broadway, Lorain, Ohio
(Address of principal executive offices)
    
    44052  1769
(Zip Code)
 
 
 þ o
  o þ o
 o þ




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##### Table of Contents



Part I  Financial InformationItem 1. Financial Statements.Consolidated Balance Sheets
June 30, 2006 (unaudited) and December 31, 2005Consolidated Statements of Income (unaudited)
For the three and six months ended June 30, 2006 and June 30, 2005Consolidated Statements of Changes in Shareholders Equity (unaudited)
For the six months ended June 30, 2006 and June 30, 2005Consolidated Statements of Cash Flows (unaudited)
For the six months ended June 30, 2006 and June 30, 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 Factors.Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.Item 4. Submission of Matters to a Vote of Security Holders.Item 6. Exhibits.EX-31.1EX-31.2EX-32.1EX-32.2
 2




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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 
 Consolidated Balance Sheets
 June 30, 2006
    
    
    December 31, 2005(unaudited)(Dollars in thousands except share amounts)ASSETSCash and due from Banks
    
    $
    22,857
    
    
    $
    23,923Federal funds sold and short-term investments
    
    
    
    
    
    
    Securities:Available for sale, at fair value
    
    
    160,951
    
    
    
    151,629Federal Home Loan Bank and Federal Reserve Stock
    
    
    3,162
    
    
    
    3,645Total securities
    
    
    164,113
    
    
    
    155,274Loans:Loans held for sale
    
    
    2,425
    
    
    
    2,586Portfolio loans
    
    
    598,511
    
    
    
    588,425Allowance for loan losses
    
    
    (6,568
    )
    
    
    (6,622
    )Net loans
    
    
    594,368
    
    
    
    584,389Bank premises and equipment, net
    
    
    12,054
    
    
    
    10,833Other real estate owned
    
    
    1,572
    
    
    
    432Bank owned life insurance
    
    
    14,302
    
    
    
    13,935Goodwill and intangible assets, net
    
    
    3,237
    
    
    
    3,321Accrued interest receivable
    
    
    3,542
    
    
    
    3,053Other assets
    
    
    7,578
    
    
    
    5,961Total Assets
    
    $
    823,623
    
    
    $
    801,121LIABILITIES AND SHAREHOLDERS EQUITYDepositsDemand and other noninterest-bearing
    
    $
    85,890
    
    
    $
    87,597Savings, money market and interest-bearing demand
    
    
    281,696
    
    
    
    265,831Certificates of deposit
    
    
    310,430
    
    
    
    286,788Total deposits
    
    
    678,016
    
    
    
    640,216Short-term borrowings
    
    
    22,542
    
    
    
    32,616Federal Home Loan Bank advances
    
    
    50,091
    
    
    
    53,896Accrued interest payable
    
    
    2,729
    
    
    
    2,126Accrued taxes, expenses and other liabilities
    
    
    3,387
    
    
    
    3,861Total Liabilities
    
    
    756,765
    
    
    
    732,715Shareholders EquityCommon stock, par value $1 per share, authorized
15,000,000 shares,
issued 6,771,867 shares at June 30, 2006 and
December 31, 2005
    
    
    6,772
    
    
    
    6,772Additional paid-in capital
    
    
    26,358
    
    
    
    26,334Retained earnings
    
    
    43,708
    
    
    
    42,945Accumulated other comprehensive loss
    
    
    (4,067
    )
    
    
    (2,996
    )Treasury shares at cost, 318,194 shares at June 30, 2006
and 250,694 shares at December 31, 2005
    
    
    (5,913
    )
    
    
    (4,649
    )Total Shareholders Equity
    
    
    66,858
    
    
    
    68,406Total Liabilities and Shareholders Equity
    
    $
    823,623
    
    
    $
    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 June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands except share and per share amounts)Interest IncomeLoans
    
    $
    10,448
    
    
    $
    9,302
    
    
    $
    20,526
    
    
    $
    18,135Securities:U.S. Government agencies and corporations
    
    
    1,422
    
    
    
    1,052
    
    
    
    2,761
    
    
    
    2,071State and political subdivisions
    
    
    103
    
    
    
    112
    
    
    
    206
    
    
    
    226Other debt and equity securities
    
    
    49
    
    
    
    52
    
    
    
    101
    
    
    
    102Federal funds sold and short-term investments
    
    
    27
    
    
    
    37
    
    
    
    63
    
    
    
    73Total interest income
    
    
    12,049
    
    
    
    10,555
    
    
    
    23,657
    
    
    
    20,607Interest ExpenseDeposits:Certificates of deposit, $100 and over
    
    
    1,584
    
    
    
    820
    
    
    
    2,954
    
    
    
    1,503Other deposits
    
    
    2,727
    
    
    
    1,590
    
    
    
    5,160
    
    
    
    3,037Federal Home Loan Bank advances
    
    
    335
    
    
    
    483
    
    
    
    735
    
    
    
    984Short-term borrowings
    
    
    207
    
    
    
    105
    
    
    
    409
    
    
    
    194Total interest expense
    
    
    4,853
    
    
    
    2,998
    
    
    
    9,258
    
    
    
    5,718Net Interest Income
    
    
    7,196
    
    
    
    7,557
    
    
    
    14,399
    
    
    
    14,889Provision for Loan Losses
    
    
    165
    
    
    
    399
    
    
    
    315
    
    
    
    798Net interest income after provision for loan losses
    
    
    7,031
    
    
    
    7,158
    
    
    
    14,084
    
    
    
    14,091Noninterest IncomeInvestment and trust services
    
    
    546
    
    
    
    555
    
    
    
    1,055
    
    
    
    1,072Deposit service charges
    
    
    1,142
    
    
    
    1,052
    
    
    
    2,110
    
    
    
    1,960Other service charges and fees
    
    
    489
    
    
    
    480
    
    
    
    940
    
    
    
    941Mortgage banking revenue
    
    
    
    
    
    
    355
    
    
    
    
    
    
    
    725Income from bank owned life insurance
    
    
    142
    
    
    
    116
    
    
    
    287
    
    
    
    309Other income
    
    
    58
    
    
    
    93
    
    
    
    104
    
    
    
    254Total fees and other income
    
    
    2,377
    
    
    
    2,651
    
    
    
    4,496
    
    
    
    5,261Securities gains, net
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    174Gains on sale of loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132Gains (losses) on sale of other assets, net
    
    
    
    
    
    
    (6
    )
    
    
    2
    
    
    
    (1
    )Total noninterest income
    
    
    2,377
    
    
    
    2,639
    
    
    
    4,498
    
    
    
    5,566Noninterest ExpenseSalaries and employee benefits
    
    
    3,638
    
    
    
    4,260
    
    
    
    7,216
    
    
    
    8,238Furniture and equipment
    
    
    753
    
    
    
    802
    
    
    
    1,490
    
    
    
    1,535Net occupancy
    
    
    451
    
    
    
    449
    
    
    
    929
    
    
    
    966Outside services
    
    
    435
    
    
    
    521
    
    
    
    854
    
    
    
    830Marketing and public relations
    
    
    367
    
    
    
    298
    
    
    
    758
    
    
    
    605Supplies, postage and freight
    
    
    303
    
    
    
    273
    
    
    
    601
    
    
    
    644Telecommunications
    
    
    171
    
    
    
    417
    
    
    
    370
    
    
    
    729Ohio Franchise tax
    
    
    197
    
    
    
    200
    
    
    
    429
    
    
    
    382Electronic banking expenses
    
    
    161
    
    
    
    141
    
    
    
    306
    
    
    
    264Other expense
    
    
    715
    
    
    
    1,111
    
    
    
    1,447
    
    
    
    1,950Total noninterest expense
    
    
    7,191
    
    
    
    8,472
    
    
    
    14,400
    
    
    
    16,143Income before income tax expense
    
    
    2,217
    
    
    
    1,325
    
    
    
    4,182
    
    
    
    3,514Income tax expense
    
    
    578
    
    
    
    473
    
    
    
    1,095
    
    
    
    1,091Net Income
    
    $
    1,639
    
    
    $
    852
    
    
    $
    3,087
    
    
    $
    2,423Net Income Per Common ShareBasic
    
    $
    0.25
    
    
    $
    0.13
    
    
    $
    0.48
    
    
    $
    0.36Diluted
    
    
    0.25
    
    
    
    0.13
    
    
    
    0.48
    
    
    
    0.36Dividends declared
    
    
    0.18
    
    
    
    0.18
    
    
    
    0.36
    
    
    
    0.36Average Common Shares OutstandingBasic
    
    
    6,475,651
    
    
    
    6,642,390
    
    
    
    6,477,154
    
    
    
    6,641,789Diluted
    
    
    6,475,651
    
    
    
    6,642,393
    
    
    
    6,477,292
    
    
    
    6,641,790
 See accompanying notes to consolidated financial statements
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##### Table of Contents



Consolidated Statements of Shareholders Equity (unaudited)
 Additional
    
    
    
    
    
    
    Accumulated 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
    
    
    $
    41,291
    
    
    $
    (1,297
    )
    
    $
    (2,430
    )
    
    $
    70,574Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    2,423
    
    
    
    
    
    
    
    
    
    
    
    2,423Other 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (385
    )
    
    
    
    
    
    
    (385
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,038Issuance of common stock under employment
agreement
    
    
    5
    
    
    
    91
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96Common dividends declared, $.36 per share
    
    
    
    
    
    
    
    
    
    
    (2,392
    )
    
    
    
    
    
    
    
    
    
    
    (2,392
    )Balance, June 30, 2005
    
    $
    6,772
    
    
    $
    26,334
    
    
    $
    41,322
    
    
    $
    (1,682
    )
    
    $
    (2,430
    )
    
    $
    70,316Balance, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,071
    )
    
    
    
    
    
    
    (1,071
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,016Share-based compensation expense, net of tax
    
    
    
    
    
    
    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
    )
    
    $
    66,858
 See accompanying notes to consolidated financial statements
 5




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##### Table of Contents



Consolidated Statements of Cash Flows (unaudited)
 Six Months Ended June 30,2006
    
    
    2005(Dollars in thousands)Operating ActivitiesNet income
    
    $
    3,087
    
    
    $
    2,423Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses
    
    
    315
    
    
    
    798Depreciation and amortization
    
    
    839
    
    
    
    970Amortization of premiums and discounts
    
    
    145
    
    
    
    363Amortization of intangibles
    
    
    81
    
    
    
    88Impairment of goodwill
    
    
    
    
    
    
    311Amortization of deferred loan fees
    
    
    137
    
    
    
    182Federal deferred income tax benefit
    
    
    (773
    )
    
    
    (358
    )Issuance of stock under employment agreement
    
    
    
    
    
    
    95Net gain from loan sales
    
    
    
    
    
    
    (132
    )Securities gains, net
    
    
    
    
    
    
    (180
    )Share-based compensation expense, net of tax
    
    
    24
    
    
    
    Net (gain)/loss on sale of other assets
    
    
    
    
    
    
    1Net decrease in accrued interest receivable and other assets
    
    
    (1,753
    )
    
    
    (597
    )Net decrease (increase) in accrued interest payable, taxes and other liabilities
    
    
    192
    
    
    
    2,113Net cash provided by operating activities
    
    
    2,294
    
    
    
    6,077Investing ActivitiesProceeds from sales of available-for-sale securities
    
    
    
    
    
    
    9,240Purchase of available-for-sale securities
    
    
    (26,295
    )
    
    
    (15,581
    )Proceeds from maturities of available-for-sale securities
    
    
    15,186
    
    
    
    5,897Purchase of Federal Home Loan Bank Stock
    
    
    (87
    )
    
    
    (106
    )Redemption of Federal Home Loan Bank Stock
    
    
    570
    
    
    
    Net increase in loans made to customers
    
    
    (12,429
    )
    
    
    (12,268
    )Proceeds from the sale of other real estate owned
    
    
    856
    
    
    
    367Purchase of bank premises and equipment
    
    
    (1,495
    )
    
    
    (576
    )Proceeds from sale of bank premises and equipment
    
    
    
    
    
    
    10Net cash used in investing activities
    
    
    (23,694
    )
    
    
    (13,017
    )Financing ActivitiesNet increase (decrease) in demand and other noninterest-bearing
    
    
    (1,707
    )
    
    
    (2,464
    )Net increase (decrease) in savings, money market and interest-bearing demand
    
    
    15,866
    
    
    
    (7,398
    )Net increase in certificates of deposit
    
    
    23,642
    
    
    
    43,136Net decrease in short-term borrowings
    
    
    (10,074
    )
    
    
    (18,378
    )Proceeds from loan sales
    
    
    
    
    
    
    4,549Proceeds from Federal Home Loan Bank advances
    
    
    26,000
    
    
    
    21,500Prepayment of Federal Home Loan Bank advances
    
    
    (29,805
    )
    
    
    (28,335
    )Purchase of treasury stock
    
    
    (1,264
    )
    
    
    Dividends paid
    
    
    (2,324
    )
    
    
    (2,392
    )Net cash provided by financing activities
    
    
    20,334
    
    
    
    10,218Net increase (decrease) in cash and cash equivalents
    
    
    (1,066
    )
    
    
    3,278Cash and cash equivalents, January 1
    
    
    23,923
    
    
    
    26,818Cash and cash equivalents, June 30
    
    $
    22,857
    
    
    $
    30,096Supplemental cash flow informationInterest paid
    
    $
    9,185
    
    
    $
    5,718Income taxes paid
    
    
    1,968
    
    
    
    961Transfer of loans to other real estate owned
    
    
    1,653
    
    
    
    383
 See accompanying notes to consolidated financial statements
 6




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




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##### Table of Contents



Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB) Stock
  Loans
     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
  Comprehensive Income
  Stock-Based Compensation
  9




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##### Table of Contents



(2) Earnings Per Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands except per share amounts)Weighted average shares outstanding used in Basic
Earnings per Share
    
    
    6,475,651
    
    
    
    6,642,390
    
    
    
    6,477,154
    
    
    
    6,641,789Dilutive effect of incentive stock options
    
    
    
    
    
    
    
    
    
    
    138
    
    
    
    Weighted average shares outstanding used in
Diluted Earnings Per Share
    
    
    6,475,651
    
    
    
    6,642,390
    
    
    
    6,477,292
    
    
    
    6,641,789Net Income
    
    $
    1,639
    
    
    $
    852
    
    
    $
    3,087
    
    
    $
    2,423Basic Earnings Per Share
    
    $
    0.25
    
    
    $
    0.13
    
    
    $
    0.48
    
    
    $
    0.36Diluted Earnings Per Share
    
    $
    0.25
    
    
    $
    0.13
    
    
    $
    0.48
    
    
    $
    0.36
  (3) Cash and Due from Banks
  (4) Goodwill and Intangible Assets
    10




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##### Table of Contents



June 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Core deposit intangibles
    
    $
    1,288
    
    
    $
    1,288Less: accumulated amortization
    
    
    1,152
    
    
    
    1,095Carrying value of core deposit intangibles
    
    $
    136
    
    
    $
    193
  June 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Goodwill
    
    $
    2,827
    
    
    $
    2,827Mortgage servicing rights
    
    
    274
    
    
    
    301Core deposit intangibles
    
    
    136
    
    
    
    193Total goodwill and intangible assets
    
    $
    3,237
    
    
    $
    3,321
 (5) Securities
  At June 30, 2006Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities available for sale:U.S. Government agencies and corporations
    
    $
    156,899
    
    
    $
    
    
    
    $
    (5,401
    )
    
    $
    151,498State and political subdivisions
    
    
    9,287
    
    
    
    124
    
    
    
    (79
    )
    
    
    9,332Equity securities
    
    
    52
    
    
    
    69
    
    
    
    
    
    
    
    121Federal Home Loan Bank and Federal Reserve
Bank stock
    
    
    3,162
    
    
    
    
    
    
    
    
    
    
    
    3,162Total Securities
    
    $
    169,400
    
    
    $
    193
    
    
    $
    (5,480
    )
    
    $
    164,113
 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
  June 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Commercial
    
    $
    374,721
    
    
    $
    363,144Real estate mortgage
    
    
    81,219
    
    
    
    81,367Home equity lines of credit
    
    
    66,402
    
    
    
    66,134Purchased installment
    
    
    39,002
    
    
    
    42,023Installment
    
    
    39,592
    
    
    
    38,343Total Loans
    
    
    600,936
    
    
    
    591,011Allowance for loan losses
    
    
    (6,568
    )
    
    
    (6,622
    )Net Loans
    
    $
    594,368
    
    
    $
    584,389
  June 30, 2006
    
    
    June 30, 2005(Dollars in thousands)Balance at the beginning of period
    
    $
    6,622
    
    
    $
    7,386Provision for loan losses
    
    
    315
    
    
    
    798Loans charged-off
    
    
    (560
    )
    
    
    (511
    )Recoveries on loans previously charged-off
    
    
    191
    
    
    
    120Balance at end of period
    
    $
    6,568
    
    
    $
    7,793
  (7) Stock Options and Stock Appreciation Rights
  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
    
    
    2,500
    
    
    
    10,000
    
    
    
    
    
    
    
    Assumptions:Risk free interest rate
    
    
    4.50
    %
    
    
    3.92
    %
    
    
    3.66
    %
    
    
    5.13
    %Dividend yield
    
    
    4.36
    %
    
    
    3.76
    %
    
    
    3.77
    %
    
    
    3.89
    %Volatility
    
    
    18.48
    %
    
    
    17.30
    %
    
    
    17.66
    %
    
    
    17.66
    %Expected Life  years
    
    
    6.0
    
    
    
    7.0
    
    
    
    7.0
    
    
    
    6.6
 12




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##### Table of Contents



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, June 30, 2006
    
    
    62,500
    
    
    $
    19.03
    
    
    $
    6.96Options vested and exercisable, June 30, 2006
    
    
    12,500
    
    
    $
    19.17
    
    
    $
    7.00
  Six Months EndedJune 30, 2005(Dollars in thousands except per share amounts)Net Income as reported
    
    $
    2,423Add: 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
    
    $
    2,423Pro forma net income per share:Basic  as reported
    
    $
    0.36Basic  pro forma
    
    
    0.36Diluted  as reported
    
    
    0.36Diluted  pro forma
    
    
    0.36
 (8) Deposits
  June 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Demand and other noninterest-bearing
    
    $
    85,890
    
    
    $
    87,597Interest checking
    
    
    89,491
    
    
    
    77,297Savings
    
    
    87,077
    
    
    
    93,906Money market accounts
    
    
    105,128
    
    
    
    94,628Consumer time deposits
    
    
    208,398
    
    
    
    199,190Public time deposits
    
    
    51,811
    
    
    
    32,332Brokered time deposits
    
    
    50,221
    
    
    
    55,266Total deposits
    
    $
    678,016
    
    
    $
    640,216
 13




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##### Table of Contents



After
    
    
    AfterWithin 12
    
    
    12 months but
    
    
    36 months but
    
    
    Aftermonths
    
    
    within 36 months
    
    
    within 60 months
    
    
    5 years
    
    
    Total(Dollars in thousands)Consumer time
deposits
    
    $
    129,557
    
    
    $
    69,303
    
    
    $
    9,535
    
    
    $
    3
    
    
    $
    208,398Public time deposits
    
    
    48,411
    
    
    
    3,400
    
    
    
    
    
    
    
    
    
    
    
    51,811Brokered time
deposits
    
    
    36,494
    
    
    
    13,727
    
    
    
    
    
    
    
    
    
    
    
    50,221Total time deposits
    
    $
    214,462
    
    
    $
    86,430
    
    
    $
    9,535
    
    
    $
    3
    
    
    $
    310,430
 (9) Short-Term Borrowings
   June 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Securities sold under agreements to repurchase
    
    $
    16,942
    
    
    $
    16,116Federal funds purchased
    
    
    5,600
    
    
    
    16,500Total short-term borrowings
    
    $
    22,542
    
    
    $
    32,616
 (10) Federal Home Loan Bank Advances
 14




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##### Table of Contents





June 30, 2006
    
    
    December 31, 2005(Dollars in thousands)FHLB advance - 4.27%, repaid in 2006
    
    $
    
    
    
    $
    12,801FHLB advance - 4.92%, repaid in 2006
    
    
    
    
    
    
    1,000FHLB advance - 2.70%, repaid in 2006
    
    
    
    
    
    
    10,000FHLB advance - 5.23%, due July 19, 2006
    
    
    15,000
    
    
    
    FHLB advance - 3.28%, due September 25, 2006
    
    
    5,000
    
    
    
    FHLB 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
    
    
    91
    
    
    
    95Total FHLB advances
    
    $
    50,091
    
    
    $
    53,896


(11) Commitments, Credit Risk, and Contingencies










Amount(Dollars in thousands)Commitments to extend credit
    
    $
    84,157Home equity lines of credit
    
    
    58,142Standby letters of credit
    
    
    5,063Total
    
    $
    147,362


15



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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Introduction
   Forward-Looking Statements
  
    
    significant increases in competitive pressure in the banking and financial services
industries;
    
    changes in the interest rate environment which could reduce anticipated or actual margins;
    
    changes in political conditions or the legislative or regulatory environment;
    
    general economic conditions, either nationally or regionally (especially in
northeastern Ohio), becoming less favorable than expected resulting in, among other
things, a deterioration in credit quality of assets;
    
    changes occurring in business conditions and inflation;
    
    changes in technology;
    
    changes in 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.
  Critical Accounting Policies and Estimates
  16




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
    
    Allowance for loan losses
       17




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##### Table of Contents




    
    Income Taxes
  New Accounting Pronouncements
  SFAS No. 123 (revised) Share Based Payments
  EITF No. 03-01 The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments
  18




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##### Table of Contents



SFAS No. 154 Accounting Changes and Error Corrections
  Summary of Earnings (Dollars in thousands except per share data)
  Results of Operations
 Net Interest Income
  19




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##### Table of Contents



Three Months Ended June 30, 2006 versus Three Months Ended June 30, 2005
   Six Months Ended June 30, 2006 versus Six Months Ended June 30, 2005
   20




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21




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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 30,2006
    
    
    2005Average
    
    
    
    
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Assets:U.S. Govt agencies and
corporations
    
    $
    153,687
    
    
    $
    1,471
    
    
    
    3.84
    %
    
    $
    132,013
    
    
    $
    1,106
    
    
    
    3.36
    %State and political subdivisions
    
    
    9,402
    
    
    
    150
    
    
    
    6.40
    %
    
    
    11,542
    
    
    
    128
    
    
    
    4.45
    %Federal funds sold and short-term
investments
    
    
    2,279
    
    
    
    27
    
    
    
    4.75
    %
    
    
    9,440
    
    
    
    34
    
    
    
    1.44
    %Commercial loans
    
    
    366,381
    
    
    
    6,946
    
    
    
    7.60
    %
    
    
    351,984
    
    
    
    5,881
    
    
    
    6.70
    %Real estate mortgage loans
    
    
    79,893
    
    
    
    1,208
    
    
    
    6.06
    %
    
    
    91,920
    
    
    
    1,385
    
    
    
    6.04
    %Home equity lines of credit
    
    
    66,122
    
    
    
    1,173
    
    
    
    7.12
    %
    
    
    63,210
    
    
    
    949
    
    
    
    6.02
    %Purchased installment loans
    
    
    38,030
    
    
    
    422
    
    
    
    4.45
    %
    
    
    29,755
    
    
    
    360
    
    
    
    4.85
    %Installment loans
    
    
    39,028
    
    
    
    699
    
    
    
    7.18
    %
    
    
    38,903
    
    
    
    728
    
    
    
    7.51
    %Total Earning Assets
    
    $
    754,822
    
    
    $
    12,096
    
    
    
    6.43
    %
    
    $
    728,767
    
    
    $
    10,571
    
    
    
    5.82
    %Allowance for loan loss
    
    
    (6,606
    )
    
    
    
    
    
    
    
    
    
    
    (7,618
    )Cash and due from banks
    
    
    22,787
    
    
    
    
    
    
    
    
    
    
    
    25,225Bank owned life insurance
    
    
    14,175
    
    
    
    
    
    
    
    
    
    
    
    13,522Other assets
    
    
    25,764
    
    
    
    
    
    
    
    
    
    
    
    23,597Total Assets
    
    $
    810,942
    
    
    
    
    
    
    
    
    
    
    $
    783,493Liabilities and Shareholders EquityInterest-bearing demand
    
    $
    85,833
    
    
    $
    153
    
    
    
    0.71
    %
    
    $
    83,869
    
    
    $
    44
    
    
    
    0.21
    %Savings deposits
    
    
    89,268
    
    
    
    79
    
    
    
    0.35
    %
    
    
    104,639
    
    
    
    82
    
    
    
    0.31
    %Money market accounts
    
    
    105,881
    
    
    
    842
    
    
    
    3.19
    %
    
    
    91,276
    
    
    
    370
    
    
    
    1.63
    %Consumer time deposits
    
    
    207,513
    
    
    
    2,030
    
    
    
    3.92
    %
    
    
    171,492
    
    
    
    1,317
    
    
    
    3.08
    %Brokered time deposits
    
    
    45,647
    
    
    
    466
    
    
    
    4.09
    %
    
    
    32,248
    
    
    
    243
    
    
    
    3.02
    %Public time deposits
    
    
    59,276
    
    
    
    741
    
    
    
    5.01
    %
    
    
    43,046
    
    
    
    354
    
    
    
    3.30
    %Short-term borrowings
    
    
    18,844
    
    
    
    207
    
    
    
    4.41
    %
    
    
    15,070
    
    
    
    105
    
    
    
    2.79
    %FHLB advances
    
    
    41,267
    
    
    
    335
    
    
    
    3.26
    %
    
    
    68,678
    
    
    
    483
    
    
    
    2.82
    %Total Interest-Bearing Liabilities
    
    $
    653,529
    
    
    $
    4,853
    
    
    
    2.98
    %
    
    $
    610,318
    
    
    $
    2,998
    
    
    
    1.97
    %Noninterest-bearing deposits
    
    
    83,427
    
    
    
    
    
    
    
    
    
    
    
    96,745Other liabilities
    
    
    6,280
    
    
    
    
    
    
    
    
    
    
    
    5,747Shareholders Equity
    
    
    67,706
    
    
    
    
    
    
    
    
    
    
    
    70,683Total Liabilities and
Shareholders Equity
    
    $
    810,942
    
    
    
    
    
    
    
    
    
    
    $
    783,493Net interest Income (FTE)
    
    
    
    
    
    $
    7,243
    
    
    
    3.85
    %
    
    
    
    
    
    $
    7,573
    
    
    
    4.17
    %Taxable Equivalent Adjustment
    
    
    
    
    
    
    (47
    )
    
    
    -0.02
    %
    
    
    
    
    
    
    (16
    )
    
    
    -0.01
    %Net Interest Income Per
Financial Statements
    
    
    
    
    
    $
    7,196
    
    
    
    
    
    
    
    
    
    
    $
    7,557Net Yield on Earning Assets
    
    
    
    
    
    
    
    
    
    
    3.82
    %
    
    
    
    
    
    
    
    
    
    
    4.16
    %
 22




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##### Table of Contents



Six Months Ended June 30,2006
    
    
    2005Average
    
    
    
    
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Assets:U.S. Govt agencies and
corporations
    
    $
    151,123
    
    
    $
    2,862
    
    
    
    3.82
    %
    
    $
    132,441
    
    
    $
    2,173
    
    
    
    3.31
    %State and political subdivisions
    
    
    9,449
    
    
    
    301
    
    
    
    6.42
    %
    
    
    11,587
    
    
    
    286
    
    
    
    4.98
    %Federal funds sold and short-term
investments
    
    
    2,947
    
    
    
    63
    
    
    
    4.31
    %
    
    
    9,453
    
    
    
    73
    
    
    
    1.56
    %Commercial loans
    
    
    365,685
    
    
    
    13,522
    
    
    
    7.46
    %
    
    
    350,181
    
    
    
    11,366
    
    
    
    6.55
    %Real estate mortgage loans
    
    
    79,866
    
    
    
    2,435
    
    
    
    6.15
    %
    
    
    93,171
    
    
    
    2,842
    
    
    
    6.15
    %Home equity lines of credit
    
    
    65,987
    
    
    
    2,332
    
    
    
    7.13
    %
    
    
    62,782
    
    
    
    1,782
    
    
    
    5.72
    %Purchased installment loans
    
    
    39,379
    
    
    
    869
    
    
    
    4.45
    %
    
    
    28,578
    
    
    
    652
    
    
    
    4.60
    %Installment loans
    
    
    38,750
    
    
    
    1,368
    
    
    
    7.12
    %
    
    
    39,407
    
    
    
    1,493
    
    
    
    7.64
    %Total Earning Assets
    
    $
    753,186
    
    
    $
    23,752
    
    
    
    6.36
    %
    
    $
    727,600
    
    
    $
    20,667
    
    
    
    5.73
    %Allowance for loan loss
    
    
    (6,601
    )
    
    
    
    
    
    
    
    
    
    
    (7,568
    )Cash and due from banks
    
    
    22,521
    
    
    
    
    
    
    
    
    
    
    
    25,242Bank owned life insurance
    
    
    14,151
    
    
    
    
    
    
    
    
    
    
    
    13,522Other assets
    
    
    24,506
    
    
    
    
    
    
    
    
    
    
    
    23,431Total Assets
    
    $
    807,763
    
    
    
    
    
    
    
    
    
    
    $
    782,227Liabilities and Shareholders EquityInterest-bearing demand
    
    $
    82,122
    
    
    $
    257
    
    
    
    0.63
    %
    
    $
    83,962
    
    
    $
    86
    
    
    
    0.21
    %Savings deposits
    
    
    89,969
    
    
    
    155
    
    
    
    0.35
    %
    
    
    104,415
    
    
    
    160
    
    
    
    0.31
    %Money market accounts
    
    
    102,097
    
    
    
    1,516
    
    
    
    2.99
    %
    
    
    92,141
    
    
    
    699
    
    
    
    1.53
    %Consumer time deposits
    
    
    207,460
    
    
    
    3,941
    
    
    
    3.83
    %
    
    
    169,954
    
    
    
    2,510
    
    
    
    2.98
    %Brokered time deposits
    
    
    47,850
    
    
    
    953
    
    
    
    4.02
    %
    
    
    32,248
    
    
    
    486
    
    
    
    3.04
    %Public time deposits
    
    
    54,035
    
    
    
    1,298
    
    
    
    4.84
    %
    
    
    41,321
    
    
    
    599
    
    
    
    2.92
    %Short-term borrowings
    
    
    19,605
    
    
    
    403
    
    
    
    4.15
    %
    
    
    15,055
    
    
    
    194
    
    
    
    2.60
    %FHLB advances
    
    
    44,685
    
    
    
    735
    
    
    
    3.32
    %
    
    
    69,340
    
    
    
    984
    
    
    
    2.86
    %Total Interest-Bearing Liabilities
    
    $
    647,823
    
    
    $
    9,258
    
    
    
    2.88
    %
    
    $
    608,436
    
    
    $
    5,718
    
    
    
    1.90
    %Noninterest-bearing deposits
    
    
    85,533
    
    
    
    
    
    
    
    
    
    
    
    97,404Other liabilities
    
    
    5,889
    
    
    
    
    
    
    
    
    
    
    
    5,692Shareholders Equity
    
    
    68,518
    
    
    
    
    
    
    
    
    
    
    
    70,695Total Liabilities and
Shareholders Equity
    
    $
    807,763
    
    
    
    
    
    
    
    
    
    
    $
    782,227Net interest Income (FTE)
    
    
    
    
    
    $
    14,494
    
    
    
    3.88
    %
    
    
    
    
    
    $
    14,949
    
    
    
    4.14
    %Taxable Equivalent Adjustment
    
    
    
    
    
    
    (95
    )
    
    
    -0.02
    %
    
    
    
    
    
    
    (60
    )
    
    
    -0.02
    %Net Interest Income Per
Financial Statements
    
    
    
    
    
    $
    14,399
    
    
    
    
    
    
    
    
    
    
    $
    14,889Net Yield on Earning Assets
    
    
    
    
    
    
    
    
    
    
    3.86
    %
    
    
    
    
    
    
    
    
    
    
    4.13
    %
 23




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##### Table of Contents



Rate/Volume
  Table 2: Rate/Volume Analysis of Net Interest Income (FTE)
 Three Months Ended June 30,Increase (Decrease) in Interest Income/Expense 2006 and 2005Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)U.S. Govt agencies and corporations
    
    $
    194
    
    
    $
    171
    
    
    $
    365State and political subdivisions
    
    
    (65
    )
    
    
    87
    
    
    
    22Federal funds sold and short-term investments
    
    
    (9
    )
    
    
    2
    
    
    
    (7
    )Commercial loans
    
    
    265
    
    
    
    800
    
    
    
    1,065Real estate mortgage loans
    
    
    (181
    )
    
    
    4
    
    
    
    (177
    )Home equity lines of credit
    
    
    50
    
    
    
    174
    
    
    
    224Purchased installment loans
    
    
    106
    
    
    
    (44
    )
    
    
    62Installment loans
    
    
    2
    
    
    
    (31
    )
    
    
    (29
    )Total Interest Income
    
    
    362
    
    
    
    1,163
    
    
    
    1,525Interest-bearing demand
    
    
    3
    
    
    
    106
    
    
    
    109Savings deposits
    
    
    (9
    )
    
    
    6
    
    
    
    (3
    )Money market accounts
    
    
    104
    
    
    
    368
    
    
    
    472Consumer time deposits
    
    
    319
    
    
    
    394
    
    
    
    713Brokered time deposits
    
    
    118
    
    
    
    105
    
    
    
    223Public time deposits
    
    
    172
    
    
    
    215
    
    
    
    387Short-term borrowings
    
    
    36
    
    
    
    66
    
    
    
    102FHLB advances
    
    
    (185
    )
    
    
    37
    
    
    
    (148
    )Total Interest Expense
    
    
    558
    
    
    
    1,297
    
    
    
    1,855Net Interest Income (FTE)
    
    $
    (196
    )
    
    $
    (134
    )
    
    $
    (330
    )
 24




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##### Table of Contents



Six Months Ended June 30,Increase (Decrease) in Interest Income/Expense 2006 and 2005Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)U.S. Govt agencies and corporations
    
    $
    331
    
    
    $
    358
    
    
    $
    689State and political subdivisions
    
    
    53
    
    
    
    (38
    )
    
    
    15Federal funds sold and short-term investments
    
    
    (14
    )
    
    
    4
    
    
    
    (10
    )Commercial loans
    
    
    555
    
    
    
    1,601
    
    
    
    2,156Real estate mortgage loans
    
    
    (406
    )
    
    
    (1
    )
    
    
    (407
    )Home equity lines of credit
    
    
    109
    
    
    
    441
    
    
    
    550Purchased installment loans
    
    
    248
    
    
    
    (31
    )
    
    
    217Installment loans
    
    
    (24
    )
    
    
    (101
    )
    
    
    (125
    )Total Interest Income
    
    
    852
    
    
    
    2,233
    
    
    
    3,085Interest-bearing demand
    
    
    (6
    )
    
    
    177
    
    
    
    171Savings deposits
    
    
    (16
    )
    
    
    11
    
    
    
    (5
    )Money market accounts
    
    
    136
    
    
    
    681
    
    
    
    817Consumer time deposits
    
    
    641
    
    
    
    790
    
    
    
    1,431Brokered time deposits
    
    
    267
    
    
    
    200
    
    
    
    467Public time deposits
    
    
    260
    
    
    
    439
    
    
    
    699Short-term borrowings
    
    
    80
    
    
    
    129
    
    
    
    209FHLB advances
    
    
    (331
    )
    
    
    82
    
    
    
    (249
    )Total Interest Expense
    
    
    1,031
    
    
    
    2,509
    
    
    
    3,540Net Interest Income (FTE)
    
    $
    (179
    )
    
    $
    (276
    )
    
    $
    (455
    )
   25




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##### Table of Contents



Noninterest Income
 Table 3: Details on Noninterest Income
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)Investment and trust services
    
    $
    546
    
    
    $
    555
    
    
    $
    1,055
    
    
    $
    1,072Deposit service charges
    
    
    1,142
    
    
    
    1,052
    
    
    
    2,110
    
    
    
    1,960Electronic banking fees
    
    
    403
    
    
    
    390
    
    
    
    767
    
    
    
    756Mortgage banking revenue
    
    
    
    
    
    
    355
    
    
    
    
    
    
    
    725Income from bank owned life insurance
    
    
    142
    
    
    
    116
    
    
    
    287
    
    
    
    309Other income
    
    
    144
    
    
    
    183
    
    
    
    277
    
    
    
    439Total fees and other income
    
    
    2,377
    
    
    
    2,651
    
    
    
    4,496
    
    
    
    5,261Securities gains, net
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    174Gains on sale of loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132Gains (losses) on sale of other assets
    
    
    
    
    
    
    (6
    )
    
    
    2
    
    
    
    (1
    )Total noninterest income
    
    $
    2,377
    
    
    $
    2,639
    
    
    $
    4,498
    
    
    $
    5,566
 Three Months Ended June 30, 2006 as compared to the Three Months Ended June 30, 2005
  Six Months Ended June 30, 2006 as compared to the Six Months Ended June 30, 2005
  26




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##### Table of Contents



Noninterest Expense
 Table 4: Details on Noninterest Expense
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)
    
    (Dollars in thousands)Salaries and employee benefits
    
    $
    3,638
    
    
    $
    4,260
    
    
    $
    7,216
    
    
    $
    8,238Furniture and equipment
    
    
    753
    
    
    
    802
    
    
    
    1,490
    
    
    
    1,535Net occupancy
    
    
    451
    
    
    
    449
    
    
    
    929
    
    
    
    966Outside services
    
    
    435
    
    
    
    521
    
    
    
    854
    
    
    
    830Marketing and public relations
    
    
    367
    
    
    
    298
    
    
    
    758
    
    
    
    605Supplies and postage
    
    
    303
    
    
    
    273
    
    
    
    601
    
    
    
    644Telecommunications
    
    
    171
    
    
    
    417
    
    
    
    370
    
    
    
    729Ohio Franchise tax
    
    
    197
    
    
    
    200
    
    
    
    429
    
    
    
    382Electronic banking expense
    
    
    161
    
    
    
    141
    
    
    
    306
    
    
    
    264Other expense
    
    
    715
    
    
    
    1,111
    
    
    
    1,447
    
    
    
    1,950Total noninterest expense
    
    $
    7,191
    
    
    $
    8,472
    
    
    $
    14,400
    
    
    $
    16,143
 Three Months Ended June 30, 2006 as compared to the Three Months Ended June 30, 2005
     27




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##### Table of Contents



Six Months Ended June 30, 2006 as compared to the Six Months Ended June 30, 2005
        28




---



##### Table of Contents



Income taxes
  Balance Sheet Analysis
 Overview
  Securities
  Loans
  29




---



##### Table of Contents



Table 5: Details on Loan Balances
 June 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Real estate loans (includes loans secured primarily by real estate only):Construction and land development
    
    $
    184,886
    
    
    $
    169,007One to four family residential
    
    
    170,753
    
    
    
    164,671Multi-family residential
    
    
    5,833
    
    
    
    4,676Non-farm non-residential properties
    
    
    110,182
    
    
    
    117,090Commercial and industrial loans
    
    
    59,478
    
    
    
    63,834Personal loans to individuals:Auto, single payment and installment
    
    
    64,396
    
    
    
    71,132All other loans
    
    
    5,408
    
    
    
    601Total loans
    
    
    600,936
    
    
    
    591,011Allowance for loan losses
    
    
    (6,568
    )
    
    
    (6,622
    )Net loans
    
    $
    594,368
    
    
    $
    584,389
   Deposits
 Table 6: Deposits
 June 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Demand and other noninterest-bearing
    
    $
    85,890
    
    
    $
    87,597Interest checking
    
    
    89,491
    
    
    
    77,297Savings
    
    
    87,077
    
    
    
    93,906Money market accounts
    
    
    105,128
    
    
    
    94,628Consumer time deposits
    
    
    208,398
    
    
    
    199,190Public time deposits
    
    
    51,811
    
    
    
    32,332Brokered time deposits
    
    
    50,221
    
    
    
    55,266Total deposits
    
    $
    678,016
    
    
    $
    640,216
  30




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##### Table of Contents



Borrowings
  Regulatory Capital
    Contractual Obligations
  31




---



##### Table of Contents



Table 7: Contractual Obligations
 After
    
    
    AfterWithin 12
    
    
    12 months but
    
    
    36 months but
    
    
    Aftermonths
    
    
    within 36 months
    
    
    within 60 months
    
    
    5 years
    
    
    Total(Dollars in thousands)Short-term borrowings
    
    $
    22,542
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    22,542FHLB advances
    
    
    30,000
    
    
    
    20,000
    
    
    
    
    
    
    
    91
    
    
    
    50,091Operating Leases
    
    
    807
    
    
    
    1,392
    
    
    
    734
    
    
    
    859
    
    
    
    3,792Severance Payments
    
    
    134
    
    
    
    249
    
    
    
    257
    
    
    
    132
    
    
    
    772Total
    
    $
    53,483
    
    
    $
    21,641
    
    
    $
    991
    
    
    $
    1,082
    
    
    
    77,197
 
 ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk.
 RISK ELEMENTS
  Credit Risk Management
   32




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##### Table of Contents



Nonperforming Assets
     Table 8: Nonperforming Assets
 June 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Commercial loans
    
    $
    4,919
    
    
    $
    5,129Real estate mortgage
    
    
    1,139
    
    
    
    1,182Home equity lines of credit
    
    
    163
    
    
    
    25Purchased installment
    
    
    
    
    
    
    Installment loans
    
    
    58
    
    
    
    158Total nonperforming loans
    
    
    6,279
    
    
    
    6,494Other foreclosed assets
    
    
    1,572
    
    
    
    432Total nonperforming assets
    
    $
    7,851
    
    
    $
    6,926Nonperforming loans to total loans
    
    
    1.05
    %
    
    
    1.10
    %Nonperforming assets to total assets
    
    
    0.95
    %
    
    
    0.86
    %
 Provision and Allowance for Loan Losses
  33




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##### Table of Contents



Table 9: Analysis of Allowance for Loan Losses
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)
    
    
    (Dollars in thousands)Balance at beginning of
year
    
    $
    6,568
    
    
    $
    7,545
    
    
    $
    6,622
    
    
    $
    7,386Charge-offs:Commercial
    
    
    (122
    )
    
    
    (109
    )

    
    
    (209
    )
    
    
    (283
    )Real estate mortgage
    
    
    
    
    
    
    
    
    
    
    (41
    )

    
    
    Home equity lines of credit
    
    
    
    
    
    
    (73
    )
    
    
    (25
    )
    
    
    (25
    )Purchased installment
    
    
    (25
    )
    
    
    (1
    )
    
    
    (51
    )
    
    
    (1
    )Installment
    
    
    (73
    )
    
    
    (25
    )
    
    
    (138
    )
    
    
    (202
    )DDA overdrafts
    
    
    (45
    )
    
    
    
    
    
    
    (96
    )
    
    
    Total charge-offs
    
    
    (265
    )
    
    
    (208
    )
    
    
    (560
    )
    
    
    (511
    )Recoveries:Commercial
    
    
    56
    
    
    
    10
    
    
    
    56
    
    
    
    31Real estate mortgage
    
    
    1
    
    
    
    
    
    
    
    2
    
    
    
    Home equity lines of credit
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    Purchased installment
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    2Installment
    
    
    18
    
    
    
    
    
    
    
    50
    
    
    
    87DDA overdrafts
    
    
    25
    
    
    
    
    
    
    
    83
    
    
    
    Total Recoveries
    
    
    100
    
    
    
    57
    
    
    
    191
    
    
    
    120Net Charge-offs
    
    
    (165
    )
    
    
    (151
    )
    
    
    (369
    )
    
    
    (391
    )Provision for loan losses
    
    
    165
    
    
    
    399
    
    
    
    315
    
    
    
    798Balance at end of period
    
    
    6,568
    
    
    $
    7,793
    
    
    $
    6,568
    
    
    $
    7,793
    34




---



##### Table of Contents



.
  Market Risk Management
     35




---



##### 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 number ofshares (or units)
    
    
    shares (or units)(a)
    
    
    
    
    
    
    purchased as
    
    
    that may yet beTotal number of
    
    
    (b)
    
    
    part of publicly
    
    
    purchased under theshares (or units)
    
    
    Average price paid
    
    
    announced plans
    
    
    plansPeriod
    
    purchased
    
    
    per share (or unit)
    
    
    or programs
    
    
    or programsApril 1 - 30, 2006
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    164,500May 1 - 31, 2006
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    164,500June 1 - 30, 2006
    
    
    25,000
    
    
    $
    17.60
    
    
    
    25,000
    
    
    
    139,500Total
    
    
    25,000
    
    
    $
    17.60
    
    
    
    25,000
    
    
    
    139,500
  36




---



##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders.
  Election of Directors
    
    Votes For
    
    
    Votes Withheld
    
    

%
of Total Shares Voted ForRobert M. Campana
    
    
    4,991,899
    
    
    
    233,955
    
    
    
    95.50
    %Lee C. Howley
    
    
    5,066,868
    
    
    
    158,986
    
    
    
    97.00James F. Kidd
    
    
    5,070,317
    
    
    
    155,536
    
    
    
    97.00Daniel E. Klimas
    
    
    5,064,984
    
    
    
    160,869
    
    
    
    96.90Jeffrey F. Riddell
    
    
    5,069,745
    
    
    
    156,109
    
    
    
    97.00
   37




---



##### Table of Contents



Item 6. Exhibits.
   SIGNATURES
  LNB BANCORP, INC.
(Registrant)Date: August 4, 2006
    /s/ Terry M. WhiteTerry M. WhiteChief Financial Officer

(Duly Authorized Officer, and Principal
Financial Officer) Date:  August 4, 2006
    /s/ Sharon L. ChurchillSharon L. Churchill, CPAController

(Duly Authorized Officer, and Principal
Accounting Officer) 38




---



##### Table of Contents



Exhibit10(a)
    
    LNB Bancorp, Inc. 2006 Stock Incentive Plan, incorporated by
reference herein from Appendix A to the Corporations Definitive
Proxy Statement on Schedule 14A filed with the Securities and
Exchange Commission on March 17, 2006.31(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.
 39