##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 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
 March 31, 2007 (unaudited) and December 31, 2006Consolidated Statements of Income (unaudited)
For the three months ended March 31, 2007 and March 31, 2006Consolidated Statements of Changes in Shareholders Equity (unaudited)
For the three months ended March 31, 2007 and March 31, 2006Consolidated Statements of Cash Flows (unaudited)
For the three months ended March 31, 2007 and March 31, 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 6. ExhibitsEX-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
 March 31, 2007
    
    
    December 31, 2006(unaudited)(Dollars in thousands except share amounts)ASSETSCash and due from banks
    
    $
    22,785
    
    
    $
    29,122Federal funds sold and short-term investments
    
    
    4,000
    
    
    
    Securities:Trading securities
    
    
    48,615
    
    
    
    Available for sale, at fair value
    
    
    110,493
    
    
    
    155,810Federal Home Loan Bank and Federal Reserve Bank Stock
    
    
    3,248
    
    
    
    3,248Total securities
    
    
    162,356
    
    
    
    159,058Loans:Loans held for sale, at lower of cost or fair value
    
    
    5,981
    
    
    
    Portfolio loans
    
    
    621,940
    
    
    
    628,333Allowance for loan losses
    
    
    (7,258
    )
    
    
    (7,300
    )Net loans
    
    
    620,663
    
    
    
    621,033Bank premises and equipment, net
    
    
    12,769
    
    
    
    12,599Other real estate owned
    
    
    1,073
    
    
    
    1,289Bank owned life insurance
    
    
    14,922
    
    
    
    14,755Goodwill and intangible assets, net
    
    
    3,268
    
    
    
    3,157Accrued interest receivable
    
    
    4,169
    
    
    
    3,939Other assets
    
    
    6,836
    
    
    
    6,146Total Assets
    
    $
    852,841
    
    
    $
    851,098LIABILITIES AND SHAREHOLDERS EQUITYDepositsDemand and other noninterest-bearing
    
    $
    78,361
    
    
    $
    91,216Savings, money market and interest-bearing demand
    
    
    289,432
    
    
    
    278,401Certificates of deposit
    
    
    354,799
    
    
    
    347,644Total deposits
    
    
    722,592
    
    
    
    717,261Short-term borrowings
    
    
    21,054
    
    
    
    22,163Federal Home Loan Bank advances
    
    
    32,083
    
    
    
    35,086Accrued interest payable
    
    
    3,821
    
    
    
    3,698Accrued taxes, expenses and other liabilities
    
    
    4,158
    
    
    
    4,193Total Liabilities
    
    
    783,708
    
    
    
    782,401Shareholders EquityCommon stock, par value $1 per share, authorized 15,000,000 shares, issued
6,771,867 shares at
March 31, 2007 and December 31, 2006
    
    
    6,772
    
    
    
    6,772Additional paid-in capital
    
    
    26,393
    
    
    
    26,382Retained earnings
    
    
    42,915
    
    
    
    43,728Accumulated other comprehensive loss
    
    
    (855
    )
    
    
    (2,093
    )Treasury shares at cost, 328,194 shares at March 31, 2007 and December 31, 2006
    
    
    (6,092
    )
    
    
    (6,092
    )Total Shareholders Equity
    
    
    69,133
    
    
    
    68,697Total Liabilities and Shareholders Equity
    
    $
    852,841
    
    
    $
    851,098
 See accompanying notes to consolidated financial statements.
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Consolidated Statements of Income (unaudited)
 Three Months Ended March 31,2007
    
    
    2006(Dollars in thousands except share and per share amounts)Interest IncomeLoans
    
    $
    11,088
    
    
    $
    10,078Securities:U.S. Government agencies and corporations
    
    
    1,564
    
    
    
    1,339State and political subdivisions
    
    
    135
    
    
    
    103Other debt and equity securities
    
    
    55
    
    
    
    52Federal funds sold and short-term investments
    
    
    30
    
    
    
    36Total interest income
    
    
    12,872
    
    
    
    11,608Interest ExpenseDeposits:Certificates of deposit, $100 and over
    
    
    2,167
    
    
    
    1,370Other deposits
    
    
    3,314
    
    
    
    2,434Federal Home Loan Bank advances
    
    
    326
    
    
    
    400Short-term borrowings
    
    
    236
    
    
    
    201Total interest expense
    
    
    6,043
    
    
    
    4,405Net Interest Income
    
    
    6,829
    
    
    
    7,203Provision for Loan Losses
    
    
    383
    
    
    
    150Net interest income after provision for loan losses
    
    
    6,446
    
    
    
    7,053Noninterest IncomeInvestment and trust services
    
    
    522
    
    
    
    509Deposit service charges
    
    
    1,082
    
    
    
    968Other service charges and fees
    
    
    506
    
    
    
    451Income from bank owned life insurance
    
    
    167
    
    
    
    145Other income
    
    
    67
    
    
    
    46Total fees and other income
    
    
    2,344
    
    
    
    2,119Loss on loans HFS
    
    
    (33
    )
    
    
    Gain on trading securities
    
    
    473
    
    
    
    Gains on sale of loans
    
    
    184
    
    
    
    Gains on sale of other assets, net
    
    
    21
    
    
    
    2Total noninterest income
    
    
    2,989
    
    
    
    2,121Noninterest ExpenseSalaries and employee benefits
    
    
    3,823
    
    
    
    3,578Furniture and equipment
    
    
    707
    
    
    
    737Net occupancy
    
    
    555
    
    
    
    478Outside services
    
    
    355
    
    
    
    419Marketing and public relations
    
    
    262
    
    
    
    391Supplies, postage and freight
    
    
    310
    
    
    
    298Telecommunications
    
    
    188
    
    
    
    199Ohio Franchise tax
    
    
    215
    
    
    
    232Electronic banking expenses
    
    
    189
    
    
    
    145Loan and collection expense
    
    
    94
    
    
    
    87Other expense
    
    
    660
    
    
    
    645Total noninterest expense
    
    
    7,358
    
    
    
    7,209Income before income tax expense
    
    
    2,077
    
    
    
    1,965Income tax expense
    
    
    542
    
    
    
    517Net Income
    
    $
    1,535
    
    
    $
    1,448Net Income Per Common ShareBasic
    
    $
    0.24
    
    
    $
    0.22Diluted
    
    
    0.24
    
    
    
    0.22Dividends declared
    
    
    0.18
    
    
    
    0.18Average Common Shares OutstandingBasic
    
    
    6,443,673
    
    
    
    6,504,981Diluted
    
    
    6,443,673
    
    
    
    6,504,981
 See accompanying notes to consolidated financial statements
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##### Table of Contents



Consolidated Statements of Shareholders Equity (unaudited)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherPaid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    TreasuryCommon Stock
    
    
    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
    
    
    
    
    
    
    
    
    
    
    1,448
    
    
    
    
    
    
    
    
    
    
    
    1,448Other comprehensive income, net of tax:Change in unrealized gains and losses on
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (495
    )
    
    
    
    
    
    
    (495
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    953Share-based comprehensive income
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12Purchase of 42,500 shares of Treasury Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (824
    )
    
    
    (824
    )Common dividends declared, $.18 per share
    
    
    
    
    
    
    
    
    
    
    (1,158
    )
    
    
    
    
    
    
    
    
    
    
    (1,158
    )Balance, March 31, 2006
    
    $
    6,772
    
    
    $
    26,346
    
    
    $
    43,235
    
    
    $
    (3,491
    )
    
    $
    (5,473
    )
    
    $
    67,389Balance, 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
    
    
    
    
    
    
    
    
    
    
    1,535
    
    
    
    
    
    
    
    
    
    
    
    1,535Other comprehensive income, net of tax:Change in unrealized gains and losses on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    46Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,581Share-based comprehensive income
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11Common dividends declared, $.18 per share
    
    
    
    
    
    
    
    
    
    
    (1,156
    )
    
    
    
    
    
    
    
    
    
    
    (1,156
    )Balance, March 31, 2007
    
    $
    6,772
    
    
    $
    26,393
    
    
    $
    42,915
    
    
    $
    (855
    )
    
    $
    (6,092
    )
    
    $
    69,133
 See accompanying notes to consolidated financial statements
 5




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Consolidated Statements of Cash Flows (unaudited)
 Three Months Ended March 31,2007
    
    
    2006(Dollars in thousands)Operating ActivitiesNet income
    
    $
    1,535
    
    
    $
    1,448Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses
    
    
    383
    
    
    
    150Depreciation and amortization
    
    
    408
    
    
    
    413Amortization of premiums and discounts
    
    
    9
    
    
    
    68Amortization of intangibles
    
    
    33
    
    
    
    39Amortization of deferred loan fees
    
    
    (162
    )
    
    
    101Federal deferred income tax benefit
    
    
    (18
    )
    
    
    (230
    )Net gain from loan sales
    
    
    (184
    )
    
    
    Securities gains, net
    
    
    (473
    )
    
    
    Net losses from loans held for sale
    
    
    33
    
    
    
    Net gains on sale of other assets
    
    
    (21
    )
    
    
    Net decrease in accrued interest receivable and other assets
    
    
    (510
    )
    
    
    (1,254
    )Net decrease (increase) in accrued interest payable, taxes and other liabilities
    
    
    98
    
    
    
    (332
    )Net cash provided by operating activities
    
    
    1,131
    
    
    
    403Investing ActivitiesProceeds from sales of available-for-sale securities
    
    
    
    
    
    
    Purchase of available-for-sale securities
    
    
    (24,450
    )
    
    
    (9,989
    )Proceeds from maturities of available-for-sale securities
    
    
    21,684
    
    
    
    2,797Purchase of Federal Home Loan Bank Stock
    
    
    
    
    
    
    (46
    )Redemption of Federal Home Loan Bank Stock
    
    
    
    
    
    
    570Net increase in loans made to customers
    
    
    (12,873
    )
    
    
    (415
    )Proceeds from the sale of other real estate owned
    
    
    198
    
    
    
    118Purchase of bank premises and equipment
    
    
    (1,274
    )
    
    
    (633
    )Proceeds from sale of bank premises and equipment
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (16,715
    )
    
    
    (7,598
    )Financing ActivitiesNet increase (decrease) in demand and other noninterest-bearing
    
    
    (12,855
    )
    
    
    400Net increase (decrease) in savings, money market and interest-bearing demand
    
    
    11,031
    
    
    
    9,474Net increase in certificates of deposit
    
    
    7,155
    
    
    
    23,967Net decrease in short-term borrowings
    
    
    (1,109
    )
    
    
    (10,715
    )Proceeds from loan sales
    
    
    13,173
    
    
    
    Proceeds from Federal Home Loan Bank advances
    
    
    97,000
    
    
    
    16,000Prepayment of Federal Home Loan Bank advances
    
    
    (100,003
    )
    
    
    (28,803
    )Share-based compensation expense, net of tax
    
    
    11
    
    
    
    12Purchase of treasury stock
    
    
    
    
    
    
    (824
    )Dividends paid
    
    
    (1,156
    )
    
    
    (1,158
    )Net cash provided by financing activities
    
    
    13,247
    
    
    
    8,353Net increase in cash and cash equivalents
    
    
    (2,337
    )
    
    
    1,158Cash and cash equivalents, January 1
    
    
    29,122
    
    
    
    23,923Cash and cash equivalents, March 31
    
    $
    26,785
    
    
    $
    25,081Supplemental cash flow informationInterest paid
    
    $
    5,341
    
    
    $
    4,424Income taxes paid
    
    
    
    
    
    
    Transfer of loans to other real estate owned
    
    
    
    
    
    
    318
 See accompanying notes to consolidated financial statements
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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (1) Summary of Significant Accounting Policies
 Basis of Presentation
  Use of Estimates
  Segment Information
  Statement of Cash Flows
  Securities
  7




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##### Table of Contents



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




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##### Table of Contents



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 March 31,2007
    
    
    2006(Dollars in thousands except per share amounts)Weighted average shares outstanding used in Basic
Earnings per Share
    
    
    6,443,673
    
    
    
    6,504,981Dilutive effect of incentive stock options
    
    
    
    
    
    
    Weighted average shares outstanding used in
Diluted Earnings Per Share
    
    
    6,443,673
    
    
    
    6,504,981Net Income
    
    $
    1,535
    
    
    $
    1,448Basic Earnings Per Share
    
    $
    0.24
    
    
    $
    0.22Diluted Earnings Per Share
    
    $
    0.24
    
    
    $
    0.22
  (3) Cash and Due from Banks
  (4) Goodwill and Intangible Assets
    March 31, 2007
    
    
    December 31, 2006(Dollars in thousands)Core deposit intangibles
    
    $
    1,287
    
    
    $
    1,287Less: accumulated amortization
    
    
    1,236
    
    
    
    1,208Carrying value of core deposit intangibles
    
    $
    51
    
    
    $
    79
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##### Table of Contents



March 31, 2007
    
    
    December 31, 2006(Dollars in thousands)Goodwill
    
    $
    2,827
    
    
    $
    2,827Mortgage servicing rights
    
    
    390
    
    
    
    251Core deposit intangibles
    
    
    51
    
    
    
    79Total goodwill and intangible assets
    
    $
    3,268
    
    
    $
    3,157
 (5) Securities
  At March 31, 2007Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities available for sale:U.S. Government agencies and corporations
    
    $
    98,458
    
    
    $
    102
    
    
    $
    (909
    )
    
    $
    97,651State and political subdivisions
    
    
    12,476
    
    
    
    288
    
    
    
    (42
    )
    
    
    12,722Equity securities
    
    
    52
    
    
    
    68
    
    
    
    
    
    
    
    120Federal Home Loan Bank and Federal Reserve Bank stock
    
    
    3,248
    
    
    
    
    
    
    
    
    
    
    
    3,248Total securities available for sale:
    
    $
    114,234
    
    
    $
    458
    
    
    $
    (951
    )
    
    $
    113,741
 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 available for sale
    
    $
    161,426
    
    
    $
    403
    
    
    $
    (2,771
    )
    
    $
    159,058
   11




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At March 31, 2007Aggregate Unrealized Gains
    
    
    Aggregate FAS 159 Lossesrecorded to income for the
    
    
    recorded to equity at
    
    
    FairCost
    
    
    quarter ended March 31, 2007
    
    
    January 1, 2007
    
    
    Value(Dollars in thousands)Trading Securities
    
    $
    49,948
    
    
    $
    473
    
    
    $
    (1,806
    )
    
    $
    48,615Adjustment to Retained Earnings at January 1, 2007, net of tax @ 34%
    
    $
    (1,192
    )
 (6) Loans and Allowance for Loan Losses
  March 31, 2007
    
    
    December 31, 2006(Dollars in thousands)Commercial
    
    $
    378,621
    
    
    $
    374,055Real estate mortgage
    
    
    90,273
    
    
    
    99,182Real estate mortgage loans held for sale, at lower of cost or fair value
    
    
    5,981
    
    
    
    Home equity lines of credit
    
    
    70,940
    
    
    
    70,028Purchased installment
    
    
    38,418
    
    
    
    43,019Installment
    
    
    43,688
    
    
    
    42,049Total Loans
    
    
    627,921
    
    
    
    628,333Allowance for loan losses
    
    
    (7,258
    )
    
    
    (7,300
    )Net Loans
    
    $
    620,663
    
    
    $
    621,033
  March 31, 2007
    
    
    March 31, 2006(Dollars in thousands)Balance at the beginning of period
    
    $
    7,300
    
    
    $
    6,622Provision for loan losses
    
    
    383
    
    
    
    150Loans charged-off
    
    
    (500
    )
    
    
    (295
    )Recoveries on loans previously charged-off
    
    
    75
    
    
    
    91Balance at end of period
    
    $
    7,258
    
    
    $
    6,568
 12




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##### Table of Contents



(7) Stock Options and Stock Appreciation Rights
  Year Issued2005
    
    2005
    
    2006
    
    2007
    
    2006Type
    
    Option
    
    Option
    
    Option
    
    Option
    
    SARsNumber 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
    %
    
    
    4.46
    %Dividend yield
    
    
    4.36
    %
    
    
    3.76
    %
    
    
    3.77
    %
    
    
    4.50
    %
    
    
    4.65
    %Volatility
    
    
    18.48
    %
    
    
    17.30
    %
    
    
    17.66
    %
    
    
    16.52
    %
    
    
    14.46
    %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, March 31, 2007
    
    
    92,500
    
    
    $
    18.05Options vested and exercisable, March 31, 2007
    
    
    32,500
    
    
    $
    18.94
 (8) Deposits
  13




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##### Table of Contents



March 31, 2007
    
    
    December 31, 2006(Dollars in thousands)Demand and other noninterest-bearing
    
    $
    78,361
    
    
    $
    91,216Interest checking
    
    
    96,822
    
    
    
    88,541Savings
    
    
    77,366
    
    
    
    80,086Money market accounts
    
    
    115,244
    
    
    
    109,774Consumer time deposits
    
    
    238,559
    
    
    
    225,947Public time deposits
    
    
    70,374
    
    
    
    56,604Brokered time deposits
    
    
    45,866
    
    
    
    65,093Total deposits
    
    $
    722,592
    
    
    $
    717,261
   After
    
    
    After12 months but
    
    
    36 months butWithin 12
    
    
    within 36
    
    
    within 60
    
    
    Aftermonths
    
    
    months
    
    
    months
    
    
    5 years
    
    
    Total(Dollars in thousands)Consumer time deposits
    
    $
    198,449
    
    
    $
    34,994
    
    
    $
    5,116
    
    
    $
    
    
    
    $
    238,559Public time deposits
    
    
    66,049
    
    
    
    4,325
    
    
    
    
    
    
    
    
    
    
    
    70,374Brokered time deposits
    
    
    35,030
    
    
    
    10,836
    
    
    
    
    
    
    
    
    
    
    
    45,866Total time deposits
    
    $
    299,528
    
    
    $
    50,155
    
    
    $
    5,116
    
    
    $
    
    
    
    $
    354,799
 (9)
    
    Short-Term Borrowings
   14




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##### Table of Contents





March 31, 2007
    
    
    December 31, 2006(Dollars in thousands)Securities sold under agreements to repurchase
    
    $
    21,054
    
    
    $
    20,663Federal funds purchased
    
    
    
    
    
    
    1,500Total short-term borrowings
    
    $
    21,054
    
    
    $
    22,163


(10) Federal Home Loan Bank Advances




March 31, 2007
    
    
    December 31, 2006(Dollars in thousands)FHLB advance - 2.95%, due January 30, 2007
    
    $
    
    
    
    $
    10,000FHLB advance - 5.42%, due April 3, 2007
    
    
    7,000
    
    
    
    FHLB advance - 3.55%, due November 21, 2007
    
    
    5,000
    
    
    
    5,000FHLB advance - 3.33%, due February 8, 2008
    
    
    5,000
    
    
    
    5,000FHLB advance- 4.99%, due November 28, 2008
    
    
    5,000
    
    
    
    5,000FHLB advance - 3.36%, due March 27, 2009
    
    
    10,000
    
    
    
    10,000FHLB advance - 3.55%, due January 1, 2014
    
    
    83
    
    
    
    86Total FHLB advances
    
    $
    32,083
    
    
    $
    35,086


(11) Commitments, Credit Risk, and Contingencies






15




---



##### Table of Contents



Amount(Dollars in thousands)Commitments to extend credit
    
    $
    90,837Home equity lines of credit
    
    
    66,701Standby letters of credit
    
    
    7,431Total
    
    $
    164,969
 
 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;
 16




---



##### Table of Contents




    
    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
    17




---



##### Table of Contents




    
    Income Taxes
  New Accounting Pronouncements
 FASB Statement No. 159 The Fair Value Option for Financial Assets and Financial Liabilities
  18
    Table of Contents       19
    Table of Contents     SFAS No. 123 (revised) Share Based Payments
  FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes  An Intrepretation
of FASB Statement No. 109
  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
 20
    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)
  21
    Table of Contents  Results of Operations
 Net Interest Income
  Three Months Ended March 31, 2007 versus Three Months Ended March 31, 2006
     22
    Table of Contents     23




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##### Table of Contents



Table 1: Condensed Consolidated Average Balance Sheets
 Interest, Rate, and Rate/ Volume differentials are stated on a Fully-Tax Equivalent
(FTE) Basis.
 Three Months Ended March 31,2007
    
    
    2006Average
    
    
    
    
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Assets:U.S. Govt agencies and
corporations
    
    $
    146,371
    
    
    $
    1,619
    
    
    
    4.49
    %
    
    $
    148,530
    
    
    $
    1,391
    
    
    
    3.80
    %State and political subdivisions
    
    
    12,561
    
    
    
    195
    
    
    
    6.30
    %
    
    
    9,497
    
    
    
    151
    
    
    
    6.45
    %Federal funds sold and short-term
investments
    
    
    2,417
    
    
    
    30
    
    
    
    5.03
    %
    
    
    3,622
    
    
    
    36
    
    
    
    4.03
    %Commercial loans
    
    
    378,040
    
    
    
    6,952
    
    
    
    7.46
    %
    
    
    360,409
    
    
    
    6,578
    
    
    
    7.40
    %Real estate mortgage loans
    
    
    98,411
    
    
    
    1,494
    
    
    
    6.16
    %
    
    
    79,839
    
    
    
    1,226
    
    
    
    6.23
    %Home equity lines of credit
    
    
    70,301
    
    
    
    1,366
    
    
    
    7.88
    %
    
    
    65,851
    
    
    
    1,159
    
    
    
    7.14
    %Purchased installment loans
    
    
    41,316
    
    
    
    510
    
    
    
    5.01
    %
    
    
    40,743
    
    
    
    427
    
    
    
    4.25
    %Installment loans
    
    
    42,746
    
    
    
    795
    
    
    
    7.54
    %
    
    
    43,046
    
    
    
    688
    
    
    
    6.48
    %Total Earning Assets
    
    $
    792,163
    
    
    $
    12,961
    
    
    
    6.64
    %
    
    $
    751,537
    
    
    $
    11,656
    
    
    
    6.29
    %Allowance for loan loss
    
    
    (7,407
    )
    
    
    
    
    
    
    
    
    
    
    (6,596
    )Cash and due from banks
    
    
    22,033
    
    
    
    
    
    
    
    
    
    
    
    22,252Bank owned life insurance
    
    
    14,841
    
    
    
    
    
    
    
    
    
    
    
    14,060Other assets
    
    
    26,578
    
    
    
    
    
    
    
    
    
    
    
    23,300Total Assets
    
    $
    848,208
    
    
    
    
    
    
    
    
    
    
    $
    804,553Liabilities and Shareholders EquityInterest-bearing demand
    
    $
    86,544
    
    
    $
    179
    
    
    
    0.84
    %
    
    $
    78,371
    
    
    $
    103
    
    
    
    0.53
    %Savings deposits
    
    
    77,756
    
    
    
    62
    
    
    
    0.32
    %
    
    
    90,676
    
    
    
    76
    
    
    
    0.34
    %Money market accounts
    
    
    111,767
    
    
    
    987
    
    
    
    3.58
    %
    
    
    98,271
    
    
    
    675
    
    
    
    2.79
    %Consumer time deposits
    
    
    231,694
    
    
    
    2,623
    
    
    
    4.59
    %
    
    
    207,411
    
    
    
    1,905
    
    
    
    3.72
    %Brokered time deposits
    
    
    56,863
    
    
    
    718
    
    
    
    5.12
    %
    
    
    50,077
    
    
    
    487
    
    
    
    3.94
    %Public time deposits
    
    
    69,526
    
    
    
    915
    
    
    
    5.34
    %
    
    
    48,736
    
    
    
    557
    
    
    
    4.64
    %Short-term borrowings
    
    
    21,696
    
    
    
    233
    
    
    
    4.36
    %
    
    
    20,375
    
    
    
    199
    
    
    
    3.96
    %FHLB advances
    
    
    33,473
    
    
    
    326
    
    
    
    3.95
    %
    
    
    48,141
    
    
    
    403
    
    
    
    3.40
    %Total Interest-Bearing Liabilities
    
    $
    689,319
    
    
    $
    6,043
    
    
    
    3.56
    %
    
    $
    642,058
    
    
    $
    4,405
    
    
    
    2.78
    %Noninterest-bearing deposits
    
    
    81,474
    
    
    
    
    
    
    
    
    
    
    
    87,662Other liabilities
    
    
    8,106
    
    
    
    
    
    
    
    
    
    
    
    5,494Shareholders Equity
    
    
    69,309
    
    
    
    
    
    
    
    
    
    
    
    69,339Total Liabilities and
Shareholders Equity
    
    $
    848,208
    
    
    
    
    
    
    
    
    
    
    $
    804,553Net interest Income (FTE)
    
    
    
    
    
    $
    6,918
    
    
    
    3.54
    %
    
    
    
    
    
    $
    7,251
    
    
    
    3.91
    %Taxable Equivalent Adjustment
    
    
    
    
    
    
    (89
    )
    
    
    -0.04
    %
    
    
    
    
    
    
    (48
    )
    
    
    -0.02
    %Net Interest Income Per
Financial Statements
    
    
    
    
    
    $
    6,829
    
    
    
    
    
    
    
    
    
    
    $
    7,203Net Yield on Earning Assets
    
    
    
    
    
    
    
    
    
    
    3.50
    %
    
    
    
    
    
    
    
    
    
    
    3.89
    %
 24




---



##### Table of Contents



Rate/Volume
  Table 2: Rate/Volume Analysis of Net Interest Income (FTE)
 Three Months Ended March 31,Increase (Decrease) in Interest Income/Expense 2007 and 2006Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)U.S. Govt agencies and corporations
    
    $
    (24
    )
    
    $
    252
    
    
    $
    228State and political subdivisions
    
    
    49
    
    
    
    (5
    )
    
    
    44Federal funds sold and short-term investments
    
    
    (10
    )
    
    
    4
    
    
    
    (6
    )Commercial loans
    
    
    322
    
    
    
    52
    
    
    
    374Real estate mortgage loans
    
    
    285
    
    
    
    (17
    )
    
    
    268Home equity lines of credit
    
    
    83
    
    
    
    124
    
    
    
    207Purchased installment loans
    
    
    7
    
    
    
    76
    
    
    
    83Installment loans
    
    
    (6
    )
    
    
    113
    
    
    
    107Total Interest Income
    
    
    706
    
    
    
    599
    
    
    
    1,305Interest-bearing demand
    
    
    16
    
    
    
    60
    
    
    
    76Savings deposits
    
    
    (11
    )
    
    
    (3
    )
    
    
    (14
    )Money market accounts
    
    
    110
    
    
    
    202
    
    
    
    312Consumer time deposits
    
    
    256
    
    
    
    462
    
    
    
    718Brokered time deposits
    
    
    79
    
    
    
    152
    
    
    
    231Public time deposits
    
    
    249
    
    
    
    109
    
    
    
    358Short-term borrowings
    
    
    14
    
    
    
    20
    
    
    
    34FHLB advances
    
    
    (113
    )
    
    
    36
    
    
    
    (77
    )Total Interest Expense
    
    
    600
    
    
    
    1,038
    
    
    
    1,638Net Interest Income (FTE)
    
    $
    106
    
    
    $
    (439
    )
    
    $
    (333
    )
  25




---



##### Table of Contents



Noninterest Income
 Table 3: Details on Noninterest Income
 Three Months Ended March 31,2007
    
    
    2006(Dollars in thousands)Investment and trust services
    
    $
    522
    
    
    $
    509Deposit service charges
    
    
    1,082
    
    
    
    968Electronic banking fees
    
    
    436
    
    
    
    364Income from bank owned life insurance
    
    
    167
    
    
    
    145Other income
    
    
    137
    
    
    
    133Total fees and other income
    
    
    2,344
    
    
    
    2,119Securities gains, net
    
    
    473
    
    
    
    Loss on loans held for sale
    
    
    (33
    )
    
    
    Gains on sale of loans
    
    
    184
    
    
    
    Gains on sale of other assets
    
    
    21
    
    
    
    2Total noninterest income
    
    $
    2,989
    
    
    $
    2,121
 Three Months Ended March 31, 2007 as compared to the Three Months Ended March 31, 2006
    26




---



##### Table of Contents



Noninterest Expense
 Table 4: Details on Noninterest Expense
 Three Months Ended March 31,2007
    
    
    2006(Dollars in thousands)Salaries and employee benefits
    
    $
    3,823
    
    
    $
    3,578Furniture and equipment
    
    
    707
    
    
    
    737Net occupancy
    
    
    555
    
    
    
    478Outside services
    
    
    355
    
    
    
    419Marketing and public relations
    
    
    262
    
    
    
    391Supplies and postage
    
    
    310
    
    
    
    298Telecommunications
    
    
    188
    
    
    
    199Ohio Franchise tax
    
    
    215
    
    
    
    232Electronic banking expense
    
    
    189
    
    
    
    145Loan and collection expense
    
    
    94
    
    
    
    87Other expense
    
    
    660
    
    
    
    645Total noninterest expense
    
    $
    7,358
    
    
    $
    7,209
 Three Months Ended March 31, 2007 as compared to the Three Months Ended March 31, 2006
     Income taxes
  27




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##### Table of Contents



Balance Sheet Analysis
 Overview
  Securities
 .
 Loans
  Table 5: Details on Loan Balances
 March 31, 2007
    
    
    December 31, 2006(Dollars in thousands)Real estate
loans (includes loans secured primarily by real estate only):Construction and land development
    
    $
    110,762
    
    
    $
    105,633One to four family residential
    
    
    191,753
    
    
    
    190,884Multi-family residential
    
    
    21,719
    
    
    
    21,754Non-farm non-residential properties
    
    
    195,953
    
    
    
    195,547Commercial and industrial loans
    
    
    40,855
    
    
    
    40,820Personal loans to individuals:Auto, single payment and installment
    
    
    59,134
    
    
    
    65,780All other loans
    
    
    7,745
    
    
    
    7,915Total loans
    
    
    627,921
    
    
    
    628,333Allowance for loan losses
    
    
    (7,258
    )
    
    
    (7,300
    )Net loans
    
    $
    620,663
    
    
    $
    621,033
  28




---



##### Table of Contents



Deposits
 Table 6: Deposits
 Average Balances OutstandingFor the Three Months Ended March 31,2007
    
    
    2006Average
    
    
    Percent of
    
    
    
    
    
    
    Average
    
    
    Percent ofBalance
    
    
    Deposits
    
    
    Rate
    
    
    Balance
    
    
    Deposits
    
    
    Rate(Dollars in thousands)Interest-bearing demand
    
    $
    86,544
    
    
    
    13.65
    %
    
    
    0.84
    %
    
    $
    78,371
    
    
    
    13.66
    %
    
    
    0.53
    %Savings deposits
    
    
    77,756
    
    
    
    12.26
    
    
    
    0.32
    
    
    
    90,676
    
    
    
    15.81
    
    
    
    0.34Money market accounts
    
    
    111,767
    
    
    
    17.62
    
    
    
    3.58
    
    
    
    98,271
    
    
    
    17.13
    
    
    
    2.79Consumer time deposits
    
    
    231,694
    
    
    
    36.54
    
    
    
    4.59
    
    
    
    207,411
    
    
    
    36.16
    
    
    
    3.72Brokered time deposits
    
    
    56,863
    
    
    
    10.96
    
    
    
    5.12
    
    
    
    50,077
    
    
    
    8.73
    
    
    
    3.94Public time deposits
    
    
    69,526
    
    
    
    8.97
    
    
    
    5.34
    
    
    
    48,736
    
    
    
    8.51
    
    
    
    4.64Total Deposits
    
    $
    634,150
    
    
    
    100.00
    %
    
    
    3.51
    %
    
    $
    573,542
    
    
    
    100.00
    %
    
    
    2.78
    %
  Borrowings
  29




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##### Table of Contents



Regulatory Capital
       
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
 RISK ELEMENTS
  30




---



##### Table of Contents



Credit Risk Management
   Nonperforming Assets
   31




---



##### Table of Contents



Table 7: Nonperforming Assets
 March 31, 2007
    
    
    December 31, 2006(Dollars in thousands)Commercial loans
    
    $
    13,516
    
    
    $
    10,322Real estate mortgage
    
    
    2,697
    
    
    
    2,165Home equity lines of credit
    
    
    351
    
    
    
    168Purchased installment
    
    
    
    
    
    
    Installment loans
    
    
    111
    
    
    
    157Total nonperforming loans
    
    
    16,675
    
    
    
    12,812Other foreclosed assets
    
    
    1,073
    
    
    
    1,289Total nonperforming assets
    
    $
    17,748
    
    
    $
    14,101Nonperforming loans to total loans
    
    
    2.68
    %
    
    
    2.04
    %Nonperforming assets to total assets
    
    
    2.08
    %
    
    
    1.66
    %
 Provision and Allowance for Loan Losses
  32




---



##### Table of Contents



Table 8: Analysis of Allowance for Loan Losses
 Three Months Ended March 31,2007
    
    
    2006(Dollars in thousands)Balance at beginning of year
    
    $
    7,300
    
    
    $
    6,622Charge-offs:Commercial
    
    
    (259
    )
    
    
    (87
    )Real estate mortgage
    
    
    (99
    )
    
    
    (41
    )Home equity lines of credit
    
    
    
    
    
    
    (25
    )Purchased installment
    
    
    
    
    
    
    (26
    )Installment
    
    
    (83
    )
    
    
    (65
    )DDA overdrafts
    
    
    (59
    )
    
    
    (51
    )Total charge-offs
    
    
    (500
    )
    
    
    (295
    )Recoveries:Commercial
    
    
    28
    
    
    
    Real estate mortgage
    
    
    
    
    
    
    1Home equity lines of credit
    
    
    
    
    
    
    Purchased installment
    
    
    
    
    
    
    Installment
    
    
    30
    
    
    
    31Credit Cards
    
    
    
    
    
    
    1DDA overdrafts
    
    
    17
    
    
    
    58Total Recoveries
    
    
    75
    
    
    
    91Net Charge-offs
    
    
    (425
    )
    
    
    (204
    )Provision for loan losses
    
    
    383
    
    
    
    150Balance at end of period
    
    $
    7,258
    
    
    $
    6,568
  Market Risk Management
   33




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##### Table of Contents












ITEM 4. Controls and Procedures







    
    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.


34



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##### Table of Contents




    
    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
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities
  
 Item 6. Exhibits.
  35




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##### Table of Contents



SIGNATURES
  LNB BANCORP, INC.
(Registrant)Date: May 10, 2007
    
    
    
    /s/ Sharon L. ChurchillSharon L. Churchill
Chief Financial Officer
(Duly Authorized Officer, and Principal

Financial Officer)
 36




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##### Table of Contents



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