##### 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, 2008
 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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ




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##### 



Part I  Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets
June 30, 2008 (unaudited) and December 31, 2007Consolidated Statements of Income (unaudited)
For the three and six months ended June 30, 2008 and June 30, 2007Consolidated Statements of Changes in Shareholders Equity (unaudited)
For the six months ended June 30, 2008 and June 30, 2007Consolidated Statements of Cash Flows (unaudited)
For the six months ended June 30, 2008 and June 30, 2007Notes 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 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 4. Submission of Matters to a Vote of Security HoldersItem 6. ExhibitsEX-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, 2008
    
    
    December 31, 2007(unaudited)(Dollars in thousands except share amounts)ASSETSCash and due from Banks (Note 3)
    
    $
    28,755
    
    
    $
    23,523Securities: (Note 5)Trading securities, at fair value
    
    
    37,195
    
    
    
    33,402Available for sale, at fair value
    
    
    173,610
    
    
    
    179,424Federal Home Loan Bank and Federal Reserve Stock
    
    
    4,789
    
    
    
    4,579Total securities
    
    
    215,594
    
    
    
    217,405Loans held for sale
    
    
    4,358
    
    
    
    4,724Loans:Portfolio loans
    
    
    769,785
    
    
    
    753,598Allowance for loan losses (Note 6)
    
    
    (11,874
    )
    
    
    (7,820
    )Net loans
    
    
    757,911
    
    
    
    745,778Bank premises and equipment, net
    
    
    12,787
    
    
    
    13,328Other real estate owned
    
    
    2,351
    
    
    
    2,478Bank owned life insurance
    
    
    15,346
    
    
    
    15,487Goodwill, net (Note 4)
    
    
    21,570
    
    
    
    21,570Intangible assets, net (Note 4)
    
    
    1,211
    
    
    
    1,280Accrued interest receivable
    
    
    4,033
    
    
    
    4,074Other assets
    
    
    9,058
    
    
    
    6,998Total Assets
    
    $
    1,072,974
    
    
    $
    1,056,645LIABILITIES AND SHAREHOLDERS EQUITYDeposits (Note 8)Demand and other noninterest-bearing
    
    $
    90,657
    
    
    $
    88,812Savings, money market and interest-bearing demand
    
    
    317,640
    
    
    
    331,306Certificates of deposit
    
    
    452,905
    
    
    
    436,823Total deposits
    
    
    861,202
    
    
    
    856,941Short-term borrowings (Note 9)
    
    
    43,681
    
    
    
    42,105Federal Home Loan Bank advances (Note 10)
    
    
    58,857
    
    
    
    44,207Junior subordinated debentures (Note 11)
    
    
    20,620
    
    
    
    20,620Accrued interest payable
    
    
    3,868
    
    
    
    4,620Accrued taxes, expenses and other liabilities
    
    
    5,999
    
    
    
    5,499Total Liabilities
    
    
    994,227
    
    
    
    973,992Shareholders EquityCommon stock, par value $1 per share, authorized 15,000,000 shares,
issued 7,623,857 shares at June 30, 2008 and December 31, 2007
    
    
    7,624
    
    
    
    7,624Preferred Shares, Series A Voting, no par value, authorized 750,000
shares, none issued at June 30, 2008 and December 31, 2007
    
    
    
    
    
    
    Additional paid-in capital
    
    
    37,734
    
    
    
    37,712Retained earnings
    
    
    39,912
    
    
    
    42,951Accumulated other comprehensive income (loss)
    
    
    (431
    )
    
    
    458Treasury shares at cost, 328,194 shares at June 30, 2008 and
December 31, 2007
    
    
    (6,092
    )
    
    
    (6,092
    )Total Shareholders Equity
    
    
    78,747
    
    
    
    82,653Total Liabilities and Shareholders Equity
    
    $
    1,072,974
    
    
    $
    1,056,645
 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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands except share and per share amounts)Interest IncomeLoans
    
    $
    11,962
    
    
    $
    12,085
    
    
    $
    24,538
    
    
    $
    23,173Securities:U.S. Government agencies and corporations
    
    
    1,964
    
    
    
    1,575
    
    
    
    3,934
    
    
    
    3,139State and political subdivisions
    
    
    186
    
    
    
    151
    
    
    
    348
    
    
    
    286Trading securities
    
    
    236
    
    
    
    23
    
    
    
    529
    
    
    
    23Other debt and equity securities
    
    
    67
    
    
    
    71
    
    
    
    132
    
    
    
    126Federal funds sold and short-term investments
    
    
    28
    
    
    
    257
    
    
    
    76
    
    
    
    287Total interest income
    
    
    14,443
    
    
    
    14,162
    
    
    
    29,557
    
    
    
    27,034Interest ExpenseDeposits
    
    
    5,397
    
    
    
    6,250
    
    
    
    11,906
    
    
    
    11,731Federal Home Loan Bank advances
    
    
    553
    
    
    
    274
    
    
    
    1,123
    
    
    
    600Short-term borrowings
    
    
    86
    
    
    
    232
    
    
    
    261
    
    
    
    465Trust preferred securities
    
    
    268
    
    
    
    208
    
    
    
    608
    
    
    
    211Total interest expense
    
    
    6,304
    
    
    
    6,964
    
    
    
    13,898
    
    
    
    13,007Net Interest Income
    
    
    8,139
    
    
    
    7,198
    
    
    
    15,659
    
    
    
    14,027Provision for Loan Losses(Note 6)
    
    
    4,664
    
    
    
    853
    
    
    
    5,138
    
    
    
    1,236Net interest income after provision for loan losses
    
    
    3,475
    
    
    
    6,345
    
    
    
    10,521
    
    
    
    12,791Noninterest IncomeInvestment and trust services
    
    
    587
    
    
    
    524
    
    
    
    1,119
    
    
    
    1,046Deposit service charges
    
    
    1,190
    
    
    
    1,136
    
    
    
    2,301
    
    
    
    2,218Other service charges and fees
    
    
    682
    
    
    
    595
    
    
    
    1,326
    
    
    
    1,101Income from bank owned life insurance
    
    
    398
    
    
    
    182
    
    
    
    581
    
    
    
    349Other income
    
    
    70
    
    
    
    78
    
    
    
    669
    
    
    
    145Total fees and other income
    
    
    2,927
    
    
    
    2,515
    
    
    
    5,996
    
    
    
    4,859Securities gains (losses), net
    
    
    69
    
    
    
    (214
    )
    
    
    283
    
    
    
    259Gains on sale of loans
    
    
    157
    
    
    
    118
    
    
    
    344
    
    
    
    269Gains (losses) on sale of other assets, net
    
    
    1
    
    
    
    14
    
    
    
    (135
    )
    
    
    35Total noninterest income
    
    
    3,154
    
    
    
    2,433
    
    
    
    6,488
    
    
    
    5,422Noninterest ExpenseSalaries and employee benefits (Note 7)
    
    
    3,861
    
    
    
    3,935
    
    
    
    7,639
    
    
    
    7,758Furniture and equipment
    
    
    1,035
    
    
    
    907
    
    
    
    2,031
    
    
    
    1,614Net occupancy
    
    
    603
    
    
    
    535
    
    
    
    1,260
    
    
    
    1,090Outside services
    
    
    591
    
    
    
    474
    
    
    
    1,474
    
    
    
    829Marketing and public relations
    
    
    274
    
    
    
    353
    
    
    
    582
    
    
    
    615Supplies, postage and freight
    
    
    335
    
    
    
    323
    
    
    
    684
    
    
    
    633Telecommunications
    
    
    202
    
    
    
    203
    
    
    
    446
    
    
    
    391Ohio Franchise tax
    
    
    225
    
    
    
    201
    
    
    
    445
    
    
    
    416Intangible asset amortization
    
    
    34
    
    
    
    48
    
    
    
    68
    
    
    
    76Other real estate owned
    
    
    509
    
    
    
    131
    
    
    
    607
    
    
    
    245Electronic banking expenses
    
    
    300
    
    
    
    193
    
    
    
    510
    
    
    
    382Loan and collection expense
    
    
    232
    
    
    
    101
    
    
    
    460
    
    
    
    195Other expense
    
    
    639
    
    
    
    605
    
    
    
    1,156
    
    
    
    1,123Total noninterest expense
    
    
    8,840
    
    
    
    8,009
    
    
    
    17,362
    
    
    
    15,367Income (loss) before income tax expense
    
    
    (2,211
    )
    
    
    769
    
    
    
    (353
    )
    
    
    2,846Income tax expense (benefit)
    
    
    (1,076
    )
    
    
    133
    
    
    
    (665
    )
    
    
    675Net Income (Loss)
    
    $
    (1,135
    )
    
    $
    636
    
    
    $
    312
    
    
    $
    2,171Net Income (Loss) Per Common ShareBasic
    
    $
    (0.16
    )
    
    $
    0.09
    
    
    $
    0.04
    
    
    $
    0.32Diluted
    
    
    (0.16
    )
    
    
    0.09
    
    
    
    0.04
    
    
    
    0.32Dividends declared
    
    
    0.18
    
    
    
    0.18
    
    
    
    0.36
    
    
    
    0.36Average Common Shares OutstandingBasic
    
    
    7,295,663
    
    
    
    6,921,162
    
    
    
    7,295,663
    
    
    
    6,683,736Diluted
    
    
    7,295,663
    
    
    
    6,921,162
    
    
    
    7,295,663
    
    
    
    6,683,736
 See accompanying notes to consolidated financial statements
 4




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##### Table of Contents



Consolidated Statements of Shareholders Equity (unaudited)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    TreasuryStock
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Stock
    
    
    Total(Dollars in thousands except share and per share amounts)Balance, January 1, 2007
    
    $
    6,772
    
    
    $
    26,382
    
    
    $
    43,728
    
    
    $
    (2,093
    )
    
    $
    (6,092
    )
    
    $
    68,697Cumulative affect of adoption of SFAS 159
    
    
    
    
    
    
    
    
    
    
    (1,192
    )
    
    
    1,192
    
    
    
    
    
    
    
    Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    2,171
    
    
    
    
    
    
    
    
    
    
    
    2,171Other comprehensive income, net of tax:Change in unrealized gains and losses on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,021
    )
    
    
    
    
    
    
    (1,021
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,150Share-based compensation income
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Issuance of 851,990 shares of common stock
    
    
    852
    
    
    
    11,272
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,124Common dividends declared, $.36 per share
    
    
    
    
    
    
    
    
    
    
    (2,470
    )
    
    
    
    
    
    
    
    
    
    
    (2,470
    )Balance, June 30, 2007
    
    $
    7,624
    
    
    $
    37,677
    
    
    $
    42,237
    
    
    $
    (1,922
    )
    
    $
    (6,092
    )
    
    $
    79,524Balance, January 1, 2008
    
    $
    7,624
    
    
    $
    37,712
    
    
    $
    42,951
    
    
    $
    458
    
    
    $
    (6,092
    )
    
    $
    82,653Cumulative effect of change in accounting principle for
split-dollar life insurance coverage
    
    
    
    
    
    
    
    
    
    
    (725
    )
    
    
    
    
    
    
    
    
    
    
    (725
    )Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    312
    
    
    
    
    
    
    
    
    
    
    
    312Other comprehensive income, net of tax:Change in unrealized gains and losses on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (889
    )
    
    
    
    
    
    
    (889
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (577
    )Share-based compensation income
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22Common dividends declared, $.36 per share
    
    
    
    
    
    
    
    
    
    
    (2,626
    )
    
    
    
    
    
    
    
    
    
    
    (2,626
    )Balance, June 30, 2008
    
    $
    7,624
    
    
    $
    37,734
    
    
    $
    39,912
    
    
    $
    (431
    )
    
    $
    (6,092
    )
    
    $
    78,747
 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 30,2008
    
    
    2007(Dollars in thousands)Operating ActivitiesNet income
    
    $
    312
    
    
    $
    2,171Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses
    
    
    5,138
    
    
    
    1,236Depreciation and amortization
    
    
    927
    
    
    
    869Amortization of premiums and discounts
    
    
    (425
    )
    
    
    (44
    )Amortization of intangibles
    
    
    68
    
    
    
    75Amortization of loan servicing rights
    
    
    112
    
    
    
    26Amortization of deferred loan fees
    
    
    (164
    )
    
    
    187Federal deferred income tax expense
    
    
    48
    
    
    
    181Net gain from loan sales
    
    
    (372
    )
    
    
    (246
    )Net losses from loans held for sale
    
    
    28
    
    
    
    Securities gains, net
    
    
    (283
    )
    
    
    (255
    )Share-based compensation expense, net of tax
    
    
    22
    
    
    
    23Net loss on sale of other assets
    
    
    135
    
    
    
    2Net increase in accrued interest receivable and other assets
    
    
    (1,203
    )
    
    
    (4,411
    )Net decrease (increase) in accrued interest payable, taxes and other liabilities
    
    
    (977
    )
    
    
    1,475Net cash provided by operating activities
    
    
    3,366
    
    
    
    1,289Investing ActivitiesPurchase of available-for-sale securities
    
    
    (67,108
    )
    
    
    (72,060
    )Proceeds from sales of available-for-sale securities
    
    
    40,396
    
    
    
    31,117Proceeds from maturities of available-for-sale securities
    
    
    31,474
    
    
    
    Purchase of trading securities
    
    
    (55,479
    )
    
    
    (31,582
    )Proceeds from sale of trading securities
    
    
    52,100
    
    
    
    47,632Purchase of Federal Home Loan Bank Stock
    
    
    (117
    )
    
    
    (495
    )Purchase of Federal Reserve Bank Stock
    
    
    
    
    
    
    (794
    )Acquisition, net of cash and cash equivalents acquired
    
    
    
    
    
    
    (4,912
    )Net increase in loans made to customers
    
    
    (61,657
    )
    
    
    (38,588
    )Proceeds from the sale of other real estate owned
    
    
    512
    
    
    
    478Proceeds from the sale of bank premises and equipment
    
    
    5
    
    
    
    Purchase of bank premises and equipment
    
    
    (386
    )
    
    
    (1,553
    )Net cash used in investing activities
    
    
    (60,260
    )
    
    
    (70,757
    )Financing ActivitiesNet increase (decrease) in demand and other noninterest-bearing
    
    
    1,845
    
    
    
    (11,370
    )Net increase in savings, money market and interest-bearing demand
    
    
    20,629
    
    
    
    275Net increase (decrease) in certificates of deposit
    
    
    (18,212
    )
    
    
    14,866Net increase (decrease) in short-term borrowings
    
    
    1,576
    
    
    
    (2,598
    )Proceeds from loan sales
    
    
    44,264
    
    
    
    22,889Proceeds from Federal Home Loan Bank advances
    
    
    50,000
    
    
    
    182,450Prepayment of Federal Home Loan Bank advances
    
    
    (35,350
    )
    
    
    (172,454
    )Proceeds from issuance of junior subordinated debentures
    
    
    
    
    
    
    20,620Issuance of stock in acquisition
    
    
    
    
    
    
    12,124Dividends paid
    
    
    (2,626
    )
    
    
    (2,470
    )Net cash provided by financing activities
    
    
    62,126
    
    
    
    64,332Net increase (decrease) in cash and cash equivalents
    
    
    5,232
    
    
    
    (5,136
    )Cash and cash equivalents, January 1
    
    
    23,523
    
    
    
    29,122Cash and cash equivalents, June 30
    
    $
    28,755
    
    
    $
    23,986Supplemental cash flow informationInterest paid
    
    $
    14,214
    
    
    $
    11,090Income taxes paid
    
    
    1,405
    
    
    
    Transfer of loans to other real estate owned
    
    
    996
    
    
    
    1,286
 See accompanying notes to consolidated financial statements
 6




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



Servicing
  Bank Premises and Equipment
  Goodwill and Core Deposit Intangibles
   Other Real Estate Owned
  Investment and Trust Services Assets and Income
  Income Taxes
  9




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##### Table of Contents



Comprehensive Income
  Stock-Based Compensation
  Recent Accounting Pronouncements
 Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements,
 FASB Statement No. 159 The Fair Value Option for Financial Assets and Financial Liabilities
 FASB Statement No. 156, Accounting for Servicing of Financial Assets  an Amendment of FASB
Statement No. 140
  10




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##### Table of Contents



FASB Statement No. 157, Fair Value Measurements
  (2) Earnings (Loss) Per Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands except per share amounts)Weighted average shares outstanding used in Basic
Earnings per Share
    
    
    7,295,663
    
    
    
    6,921,162
    
    
    
    7,295,663
    
    
    
    6,683,736Dilutive effect of incentive stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares outstanding used in
Diluted Earnings Per Share
    
    
    7,295,663
    
    
    
    6,921,162
    
    
    
    7,295,663
    
    
    
    6,683,736Net Income (Loss)
    
    $
    (1,135
    )
    
    $
    636
    
    
    $
    312
    
    
    $
    2,171Basic Earnings (Loss) Per Share
    
    $
    (0.16
    )
    
    $
    0.09
    
    
    $
    0.04
    
    
    $
    0.32Diluted Earnings (Loss) Per Share
    
    $
    (0.16
    )
    
    $
    0.09
    
    
    $
    0.04
    
    
    $
    0.32
  (3) Cash and Due from Banks
  (4) Goodwill and Intangible Assets
  11




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##### Table of Contents



(Dollars in thousands)Cash
    
    $
    20,652Loans, net of reserve for loan losses
    
    
    92,019Bank premises and equipment, net
    
    
    731Acquisition Intangibles
    
    
    20,122Deposits
    
    
    101,870Short Term Borrowings
    
    
    1,720FHLB Borrowings
    
    
    4,124
   June 30, 2008
    
    
    December 31, 2007(Dollars in thousands)Core deposit intangibles
    
    $
    2,555
    
    
    $
    2,655Less: accumulated amortization
    
    
    1,344
    
    
    
    1,375Carrying value of core deposit intangibles
    
    $
    1,211
    
    
    $
    1,280
  (5) Securities
  At June 30, 2008Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities available for sale:U.S. Government agencies and corporations
    
    $
    43,228
    
    
    $
    656
    
    
    $
    (161
    )
    
    $
    43,723Mortgage backed securities
    
    
    110,324
    
    
    $
    746
    
    
    $
    (856
    )
    
    
    110,214State and political subdivisions
    
    
    19,521
    
    
    
    134
    
    
    
    (250
    )
    
    
    19,405Equity securities
    
    
    153
    
    
    
    115
    
    
    
    
    
    
    
    268Total Securities
    
    $
    173,226
    
    
    $
    1,651
    
    
    $
    (1,267
    )
    
    $
    173,610
 12




---



##### Table of Contents



At December 31, 2007Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities available for sale:U.S. Government agencies and corporations
    
    $
    90,046
    
    
    $
    992
    
    
    $
    (87
    )
    
    $
    90,951Mortgage backed securities
    
    
    72,534
    
    
    $
    585
    
    
    $
    (100
    )
    
    
    73,019State and political subdivisions
    
    
    14,961
    
    
    
    294
    
    
    
    (33
    )
    
    
    15,222Equity securities
    
    
    152
    
    
    
    80
    
    
    
    
    
    
    
    232Total Securities
    
    $
    177,693
    
    
    $
    1,951
    
    
    $
    (220
    )
    
    $
    179,424
   At June 30, 2008Aggregate Unrealized Gains
    
    
    Aggregate Unrealized Lossesrecorded to income for the
    
    
    recorded to income for thequarter ended
    
    
    quarter ended
    
    
    FairCost
    
    
    June 30, 2008
    
    
    June 30, 2008
    
    
    Value(Dollars in thousands)Trading Securities
    
    $
    37,220
    
    
    $
    10
    
    
    $
    (35
    )
    
    $
    37,195
 (6) Loans and Allowance for Loan Losses
  June 30, 2008
    
    
    December 31, 2007(Dollars in thousands)Loans Held for Sale, at lower of cost or fair value;Real estate mortgage loans held for sale
    
    
    2,043
    
    
    
    1,483Installment loans held for sale
    
    
    2,315
    
    
    
    3,241Total Loans Held for Sale
    
    
    4,358
    
    
    
    4,724Portfolio Loans:Commercial
    
    $
    433,878
    
    
    $
    433,081Real estate mortgage
    
    
    96,505
    
    
    
    100,419Home equity lines of credit
    
    
    90,990
    
    
    
    80,049Installment
    
    
    148,412
    
    
    
    140,049Total Portfolio Loans
    
    
    769,785
    
    
    
    753,598Allowance for loan losses
    
    
    (11,874
    )
    
    
    (7,820
    )Net Loans
    
    $
    757,911
    
    
    $
    745,778
 13




---



##### Table of Contents



June 30, 2008
    
    
    June 30, 2007(Dollars in thousands)Balance at the beginning of period
    
    $
    7,820
    
    
    $
    7,300Provision for loan losses
    
    
    5,138
    
    
    
    1,236Allowance from merger
    
    
    
    
    
    
    1,098Loans charged-off
    
    
    (1,248
    )
    
    
    (1,678
    )Recoveries on loans previously charged-off
    
    
    164
    
    
    
    159Balance at end of period
    
    $
    11,874
    
    
    $
    8,115
  (7) Stock Options and Stock Appreciation Rights
  Year Issued2005
    
    2005
    
    2006
    
    2007
    
    2007
    
    2007
    
    2007
    
    2006Type
    
    Option
    
    Option
    
    Option
    
    Option
    
    Option
    
    Option
    
    Option
    
    SARsNumber of Options
    
    
    2,500
    
    
    
    30,000
    
    
    
    30,000
    
    
    
    30,000
    
    
    
    20,000
    
    
    
    50,000
    
    
    
    49,500
    
    
    
    18,000Strike Price
    
    $
    16.50
    
    
    $
    19.17
    
    
    $
    19.10
    
    
    $
    16.00
    
    
    $
    15.35
    
    
    $
    14.47
    
    
    $
    14.47
    
    
    $
    19.00Number of Options Vested
    
    
    2,500
    
    
    
    30,000
    
    
    
    20,000
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Assumptions:Risk free interest rate
    
    
    4.50
    %
    
    
    3.92
    %
    
    
    3.66
    %
    
    
    4.73
    %
    
    
    4.72
    %
    
    
    2.94
    %
    
    
    2.94
    %
    
    
    2.43
    %Dividend yield
    
    
    4.36
    %
    
    
    3.76
    %
    
    
    3.77
    %
    
    
    4.50
    %
    
    
    4.69
    %
    
    
    4.98
    %
    
    
    4.98
    %
    
    
    5.78
    %Volatility
    
    
    18.48
    %
    
    
    17.30
    %
    
    
    17.66
    %
    
    
    16.52
    %
    
    
    16.52
    %
    
    
    15.68
    %
    
    
    15.68
    %
    
    
    13.00
    %Expected Life - years
    
    
    5
    
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    5
  Weighted AverageExerciseShares
    
    
    Price per ShareOptions outstanding, December 31, 2007
    
    
    112,500
    
    
    $
    17.57Granted
    
    
    99,500
    
    
    
    14.47Exercised
    
    
    
    
    
    
    Forfeited, expired or cancelled
    
    
    
    
    
    
    Options outstanding, June 30, 2008
    
    
    212,000
    
    
    $
    16.11Options vested and exercisable, June 30, 2008
    
    
    62,500
    
    
    $
    18.53
 14




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##### Table of Contents



(8) Deposits
  June 30, 2008
    
    
    December 31, 2007(Dollars in thousands)Demand and other noninterest-bearing
    
    $
    90,657
    
    
    $
    88,812Interest checking
    
    
    121,423
    
    
    
    120,052Savings
    
    
    84,965
    
    
    
    81,293Money market accounts
    
    
    111,252
    
    
    
    129,961Consumer time deposits
    
    
    389,143
    
    
    
    344,279Public time deposits
    
    
    55,441
    
    
    
    64,913Brokered time deposits
    
    
    8,321
    
    
    
    27,631Total deposits
    
    $
    861,202
    
    
    $
    856,941
   After
    
    
    After12 months but
    
    
    36 months butWithin 12
    
    
    within 36
    
    
    within 60
    
    
    Aftermonths
    
    
    months
    
    
    months
    
    
    5 years
    
    
    Total(Dollars in thousands)Consumer time deposits
    
    $
    339,481
    
    
    $
    46,780
    
    
    $
    2,878
    
    
    $
    4
    
    
    $
    389,143Public time deposits
    
    
    53,828
    
    
    
    1,156
    
    
    
    457
    
    
    
    
    
    
    
    55,441Brokered time deposits
    
    
    5,827
    
    
    
    2,494
    
    
    
    
    
    
    
    
    
    
    
    8,321Total time deposits
    
    $
    399,136
    
    
    $
    50,430
    
    
    $
    3,335
    
    
    $
    4
    
    
    $
    452,905
 (9) Short-Term Borrowings
   June 30, 2008
    
    
    December 31, 2007(Dollars in thousands)Securities sold under agreements to repurchase
    
    $
    30,781
    
    
    $
    22,105Federal funds purchased
    
    
    12,900
    
    
    
    20,000Total short-term borrowings
    
    $
    43,681
    
    
    $
    42,105
 15




---



##### Table of Contents



(10) FHLB Advances
  June 30, 2008
    
    
    December 31, 2007(Dollars in thousands)FHLB advance - 3.33%, due February 8, 2008
    
    
    
    
    
    
    5,000FHLB advance - 4.47%, due April 11, 2008
    
    $
    
    
    
    $
    349FHLB advance - 4.99% due November 28, 2008
    
    
    5,000
    
    
    
    5,000FHLB advance - 5.07%, due December 12, 2008
    
    
    500
    
    
    
    499FHLB advance - 3.36%, due March 27, 2009
    
    
    10,000
    
    
    
    10,000FHLB advance - 4.67%, due April 10, 2009
    
    $
    349
    
    
    $
    349FHLB advance - 5.00%, due December 14, 2009
    
    
    499
    
    
    
    499FHLB advance - 3.58%, due January 8, 2010
    
    $
    10,000
    
    
    $
    10,000FHLB advance - 3.67%, due January 8, 2011
    
    
    10,000
    
    
    
    10,000FHLB advance - 3.55%, due January 1, 2014
    
    $
    69
    
    
    $
    76FHLB advance - 4.76%, due July 6, 2015
    
    
    2,440
    
    
    
    2,435FHLB advance - 3.69%, due January 9, 2009
    
    $
    15,000
    
    
    $
    FHLB advance - 3.17%, due February 8, 2011
    
    
    5,000
    
    
    
    Total FHLB advances
    
    $
    58,857
    
    
    $
    44,207
 (11) Trust Preferred Securities
   16




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##### Table of Contents



(12) Commitments, Credit Risk, and Contingencies
     Amount(Dollars in thousands)Commitments to extend credit
    
    $
    90,828Home equity lines of credit
    
    
    82,799Standby letters of credit
    
    
    8,149Total
    
    $
    181,776
 (13) Estimated Fair Value of Financial Instruments
   
    
    The carrying value of Cash and due from banks, Federal funds sold,
short-term investments and accrued interest receivable and other
financial assets is a reasonable estimate of fair value due to the
short-term nature of the asset.
    
    The fair value of investment securities is based on quoted market
prices, where available. If quoted market prices are not available,
fair value is estimated using the quoted market prices of comparable
instruments.
 17




---



##### Table of Contents




    
    For variable rate loans with interest rates that may be adjusted on a
quarterly, or more frequent basis, the carrying amount is a reasonable
estimate of fair value. The fair value of other types of loans is
estimated by discounting future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
    
    The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings, money market, checking
and interest-bearing checking, is equal to the amount payable on
demand as of December 31, for each year presented. The fair value of
fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities. For
variable rate certificates of deposit, the carrying amount is a
reasonable estimate of fair value.
    
    Securities sold under repurchase agreements, other short-term
borrowings, accrued interest payable and other financial liabilities
approximate fair value due to the short-term nature of the liability.
    
    The fair value of FHLB advances is estimated by discounting future
cash flows using current FHLB rates for the remaining term to
maturity.
    
    The fair value of junior subordinated debentures is based on the
discounted value of contractual cash flows using rates currently
offered for similar maturities.
    
    The fair value of commitments to extend credit approximates the fees
charged to make these commitments; since rates and fees of the
commitment contracts approximates those currently charged to originate
similar commitments. The carrying amount and fair value of
off-balance sheet instruments is not significant as of June 30, 2008
and December 31, 2007.
  Quoted Prices in
    
    
    
    
    
    
    SignificantActive Markets for
    
    
    Significant Other
    
    
    UnobservableFair Value as of
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    InputsDescription
    
    June 30, 2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Trading Securities
    
    $
    37,195
    
    
    $
    37,195
    
    
    $
    
    
    
    $
    Available for Sale
Securities
    
    
    173,610
    
    
    
    159,181
    
    
    
    15,454
    
    
    
    Total
    
    $
    210,805
    
    
    $
    196,376
    
    
    $
    15,454
    
    
    $
    
  Limitations
  18




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##### Table of Contents



At June 30, 2008
    
    
    At December 31, 2007Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedValue
    
    
    Fair Value
    
    
    Value
    
    
    Fair Value(Dollars in thousands)Financial assetsCash and due from banks, Federal funds sold and short-term investments
    
    $
    28,755
    
    
    $
    28,755
    
    
    $
    23,523
    
    
    $
    23,523Securities
    
    
    173,610
    
    
    
    173,610
    
    
    
    179,424
    
    
    
    179,424Trading securities, at fair value
    
    
    37,195
    
    
    
    37,195
    
    
    
    33,402
    
    
    
    33,402Portfolio loans, net
    
    
    757,911
    
    
    
    764,548
    
    
    
    745,778
    
    
    
    751,578Loans held for sale
    
    
    4,358
    
    
    
    4,386
    
    
    
    4,724
    
    
    
    4,724Accrued interest receivable
    
    
    4,033
    
    
    
    4,033
    
    
    
    4,074
    
    
    
    4,074Financial liabilitiesDeposits:Demand, savings and money market
    
    
    408,297
    
    
    
    408,297
    
    
    
    420,118
    
    
    
    420,118Certificates of deposit
    
    
    452,905
    
    
    
    457,130
    
    
    
    436,823
    
    
    
    441,400Total deposits
    
    
    861,202
    
    
    
    408,297
    
    
    
    856,941
    
    
    
    861,518Short-term borrowings
    
    
    43,681
    
    
    
    43,681
    
    
    
    42,105
    
    
    
    42,105Federal Home Loan Bank advances
    
    
    58,857
    
    
    
    58,521
    
    
    
    44,207
    
    
    

    43,500Junior subordinated debentures
    
    
    20,620
    
    
    
    22,057
    
    
    
    20,620
    
    
    
    21,716Accrued interest payable
    
    
    3,868
    
    
    
    3,888
    
    
    
    4,620
    
    
    
    4,620
 19




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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;
 20




---



##### Table of Contents



Critical Accounting Policies and Estimates
    
    
    Allowance for loan losses
     21




---



##### Table of Contents




    
    Income Taxes
  New Accounting Pronouncements
 
 Summary of Earnings (Dollars in thousands except per share data)
    22




---



##### Table of Contents



Results of Operations
 Net Interest Income
  Three Months Ended June 30, 2008 versus Three Months Ended June 30, 2007
    23




---



##### Table of Contents



Six Months Ended June 30, 2008 versus Six Months Ended June 30, 2007
     24




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##### Table of Contents



Table 1: Condensed Consolidated Average Balance Sheets
 Interest, Rate, and Rate/ Volume differentials are stated on a Fully-Tax Equivalent (FTE)
Basis.
 Three Months Ended June 30,2008
    
    
    2007Average
    
    
    
    
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Assets:U.S. Govt agencies and
corporations
    
    $
    200,028
    
    
    $
    2,200
    
    
    
    4.42
    %
    
    $
    143,626
    
    
    $
    1,669
    
    
    
    4.66
    %State and political subdivisions
    
    
    18,004
    
    
    
    268
    
    
    
    5.99
    %
    
    
    14,372
    
    
    
    218
    
    
    
    6.08
    %Federal funds sold and short-term
investments
    
    
    5,107
    
    
    
    95
    
    
    
    7.48
    %
    
    
    19,498
    
    
    
    257
    
    
    
    5.29
    %Commercial loans
    
    
    432,354
    
    
    
    6,997
    
    
    
    6.51
    %
    
    
    391,621
    
    
    
    7,232
    
    
    
    7.41
    %Real estate mortgage loans
    
    
    97,951
    
    
    
    1,490
    
    
    
    6.12
    %
    
    
    97,718
    
    
    
    1,497
    
    
    
    6.14
    %Home equity lines of credit
    
    
    86,298
    
    
    
    999
    
    
    
    4.66
    %
    
    
    73,966
    
    
    
    1,443
    
    
    
    7.83
    %Purchased installment loans
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    36,959
    
    
    
    468
    
    
    
    5.08
    %Installment loans
    
    
    148,087
    
    
    
    2,499
    
    
    
    6.79
    %
    
    
    77,986
    
    
    
    1,472
    
    
    
    7.57
    %Total Earning Assets
    
    $
    987,829
    
    
    $
    14,548
    
    
    
    5.92
    %
    
    $
    855,746
    
    
    $
    14,256
    
    
    
    6.68
    %Allowance for loan loss
    
    
    (7,890
    )
    
    
    
    
    
    
    
    
    
    
    (7,758
    )Cash and due from banks
    
    
    20,573
    
    
    
    
    
    
    
    
    
    
    
    21,942Bank owned life insurance
    
    
    15,703
    
    
    
    
    
    
    
    
    
    
    
    15,021Other assets
    
    
    49,378
    
    
    
    
    
    
    
    
    
    
    
    42,869Total Assets
    
    $
    1,065,593
    
    
    
    
    
    
    
    
    
    
    $
    927,820Liabilities and Shareholders EquityInterest-bearing demand
    
    $
    125,478
    
    
    $
    245
    
    
    
    0.79
    %
    
    $
    100,793
    
    
    $
    296
    
    
    
    1.18
    %Savings deposits
    
    
    84,261
    
    
    
    129
    
    
    
    0.62
    %
    
    
    81,114
    
    
    
    107
    
    
    
    0.53
    %Money market accounts
    
    
    117,872
    
    
    
    494
    
    
    
    1.69
    %
    
    
    130,963
    
    
    
    1,221
    
    
    
    3.74
    %Consumer time deposits
    
    
    383,751
    
    
    
    3,833
    
    
    
    4.02
    %
    
    
    278,819
    
    
    
    3,271
    
    
    
    4.71
    %Brokered time deposits
    
    
    10,789
    
    
    
    145
    
    
    
    5.41
    %
    
    
    38,239
    
    
    
    493
    
    
    
    5.17
    %Public time deposits
    
    
    55,206
    
    
    
    551
    
    
    
    4.01
    %
    
    
    64,902
    
    
    
    859
    
    
    
    5.31
    %Short-term borrowings
    
    
    28,830
    
    
    
    86
    
    
    
    1.20
    %
    
    
    22,341
    
    
    
    232
    
    
    
    4.17
    %FHLB advances
    
    
    58,895
    
    
    
    553
    
    
    
    3.78
    %
    
    
    29,059
    
    
    
    274
    
    
    
    3.78
    %Trust preferred
    
    
    20,796
    
    
    
    268
    
    
    
    5.18
    %
    
    
    12,056
    
    
    
    211
    
    
    
    7.02
    %Total Interest-Bearing Liabilities
    
    $
    885,878
    
    
    $
    6,304
    
    
    
    2.86
    %
    
    $
    758,286
    
    
    $
    6,964
    
    
    
    3.68
    %Noninterest-bearing deposits
    
    
    86,874
    
    
    
    
    
    
    
    
    
    
    
    83,229Other liabilities
    
    
    9,991
    
    
    
    
    
    
    
    
    
    
    
    8,352Shareholders Equity
    
    
    82,850
    
    
    
    
    
    
    
    
    
    
    
    77,953Total Liabilities and
Shareholders Equity
    
    $
    1,065,593
    
    
    
    
    
    
    
    
    
    
    $
    927,820Net interest Income (FTE)
    
    
    
    
    
    $
    8,244
    
    
    
    3.35
    %
    
    
    
    
    
    $
    7,292
    
    
    
    3.41
    %Taxable Equivalent Adjustment
    
    
    
    
    
    
    (105
    )
    
    
    -0.04
    %
    
    
    
    
    
    
    (94
    )
    
    
    -0.04
    %Net Interest Income Per
Financial Statements
    
    
    
    
    
    $
    8,139
    
    
    
    
    
    
    
    
    
    
    $
    7,198Net Yield on Earning Assets
    
    
    
    
    
    
    
    
    
    
    3.31
    %
    
    
    
    
    
    
    
    
    
    
    3.37
    %
 25




---



##### Table of Contents



Six Months Ended June 30,2008
    
    
    2007Average
    
    
    
    
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Assets:U.S. Govt agencies and
corporations
    
    $
    201,759
    
    
    $
    4,463
    
    
    
    4.45
    %
    
    $
    144,991
    
    
    $
    3,288
    
    
    
    4.57
    %State and political subdivisions
    
    
    16,487
    
    
    
    502
    
    
    
    6.12
    %
    
    
    13,472
    
    
    
    413
    
    
    
    6.18
    %Federal funds sold and short-term
investments
    
    
    7,222
    
    
    
    207
    
    
    
    5.76
    %
    
    
    11,005
    
    
    
    287
    
    
    
    5.26
    %Commercial loans
    
    
    434,646
    
    
    
    14,315
    
    
    
    6.62
    %
    
    
    384,868
    
    
    
    14,184
    
    
    
    7.43
    %Real estate mortgage loans
    
    
    99,492
    
    
    
    2,975
    
    
    
    6.01
    %
    
    
    98,063
    
    
    
    2,991
    
    
    
    6.15
    %Home equity lines of credit
    
    
    83,504
    
    
    
    2,177
    
    
    
    5.24
    %
    
    
    72,293
    
    
    
    2,809
    
    
    
    7.84
    %Purchased installment loans
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    39,125
    
    
    
    978
    
    
    
    5.04
    %Installment loans
    
    
    145,935
    
    
    
    5,116
    
    
    
    7.05
    %
    
    
    60,313
    
    
    
    2,267
    
    
    
    7.58
    %Total Earning Assets
    
    $
    989,045
    
    
    $
    29,755
    
    
    
    6.05
    %
    
    $
    824,130
    
    
    $
    27,217
    
    
    
    6.66
    %Allowance for loan loss
    
    
    (7,901
    )
    
    
    
    
    
    
    
    
    
    
    (7,583
    )Cash and due from banks
    
    
    22,852
    
    
    
    
    
    
    
    
    
    
    
    21,987Bank owned life insurance
    
    
    15,610
    
    
    
    
    
    
    
    
    
    
    
    14,932Other assets
    
    
    45,341
    
    
    
    
    
    
    
    
    
    
    
    34,746Total Assets
    
    $
    1,064,947
    
    
    
    
    
    
    
    
    
    
    $
    888,212Liabilities and Shareholders EquityInterest-bearing demand
    
    $
    120,954
    
    
    $
    571
    
    
    
    0.95
    %
    
    $
    93,708
    
    
    $
    478
    
    
    
    1.03
    %Savings deposits
    
    
    82,913
    
    
    
    273
    
    
    
    0.66
    %
    
    
    79,445
    
    
    
    169
    
    
    
    0.43
    %Money market accounts
    
    
    121,278
    
    
    
    1,321
    
    
    
    2.19
    %
    
    
    121,233
    
    
    
    2,208
    
    
    
    3.67
    %Consumer time deposits
    
    
    372,151
    
    
    
    7,991
    
    
    
    4.32
    %
    
    
    255,387
    
    
    
    5,891
    
    
    
    4.65
    %Brokered time deposits
    
    
    18,628
    
    
    
    441
    
    
    
    4.76
    %
    
    
    47,499
    
    
    
    1,211
    
    
    
    5.14
    %Public time deposits
    
    
    61,866
    
    
    
    1,310
    
    
    
    4.26
    %
    
    
    67,385
    
    
    
    1,774
    
    
    
    5.31
    %Short-term borrowings
    
    
    27,162
    
    
    
    258
    
    
    
    1.91
    %
    
    
    22,020
    
    
    
    465
    
    
    
    4.26
    %FHLB advances
    
    
    59,714
    
    
    
    1,123
    
    
    
    3.78
    %
    
    
    31,254
    
    
    
    600
    
    
    
    3.87
    %Trust preferred securities
    
    
    20,787
    
    
    
    607
    
    
    
    5.87
    %
    
    
    6,061
    
    
    
    211
    
    
    
    7.02
    %Total Interest-Bearing Liabilities
    
    $
    885,453
    
    
    $
    13,895
    
    
    
    3.16
    %
    
    $
    723,992
    
    
    $
    13,007
    
    
    
    3.62
    %Noninterest-bearing deposits
    
    
    85,862
    
    
    
    
    
    
    
    
    
    
    
    82,356Other liabilities
    
    
    10,130
    
    
    
    
    
    
    
    
    
    
    
    8,209Shareholders Equity
    
    
    83,502
    
    
    
    
    
    
    
    
    
    
    
    73,655Total Liabilities and
Shareholders Equity
    
    $
    1,064,947
    
    
    
    
    
    
    
    
    
    
    $
    888,212Net interest Income (FTE)
    
    
    
    
    
    $
    15,860
    
    
    
    3.22
    %
    
    
    
    
    
    $
    14,210
    
    
    
    3.48
    %Taxable Equivalent Adjustment
    
    
    
    
    
    
    (201
    )
    
    
    -0.04
    %
    
    
    
    
    
    
    (183
    )
    
    
    -0.04
    %Net Interest Income Per
Financial Statements
    
    
    
    
    
    $
    15,659
    
    
    
    
    
    
    
    
    
    
    $
    14,027Net Yield on Earning Assets
    
    
    
    
    
    
    
    
    
    
    3.18
    %
    
    
    
    
    
    
    
    
    
    
    3.44
    %
 Rate/Volume
  26




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##### Table of Contents



Table 2: Rate/Volume Analysis of Net Interest Income (FTE)
 Three Months Ended June 30,Increase (Decrease) in Interest Income/Expense 2008 and 2007Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)U.S. Govt agencies and corporations
    
    $
    656
    
    
    $
    (125
    )
    
    $
    531State and political subdivisions
    
    
    54
    
    
    
    (4
    )
    
    
    50Federal funds sold and short-term investments
    
    
    (181
    )
    
    
    19
    
    
    
    (162
    )Commercial loans
    
    
    506
    
    
    
    (741
    )
    
    
    (235
    )Real estate mortgage loans
    
    
    9
    
    
    
    (16
    )
    
    
    (7
    )Home equity lines of credit
    
    
    118
    
    
    
    (562
    )
    
    
    (444
    )Installment loans
    
    
    553
    
    
    
    6
    
    
    
    559Total Interest Income
    
    
    1,715
    
    
    
    (1,423
    )
    
    
    292Interest-bearing demand
    
    
    33
    
    
    
    (84
    )
    
    
    (51
    )Savings deposits
    
    
    5
    
    
    
    17
    
    
    
    22Money market accounts
    
    
    (61
    )
    
    
    (666
    )
    
    
    (727
    )Consumer time deposits
    
    
    1,503
    
    
    
    (940
    )
    
    
    563Brokered time deposits
    
    
    (354
    )
    
    
    6
    
    
    
    (348
    )Public time deposits
    
    
    (109
    )
    
    
    (199
    )
    
    
    (308
    )Short-term borrowings
    
    
    15
    
    
    
    (161
    )
    
    
    (146
    )FHLB advances
    
    
    279
    
    
    
    
    
    
    
    279Trust preferred securities and miscellaneous
    
    
    387
    
    
    
    (331
    )
    
    
    56Total Interest Expense
    
    
    1,698
    
    
    
    (2,358
    )
    
    
    (660
    )Net Interest Income (FTE)
    
    $
    17
    
    
    $
    935
    
    
    $
    952
  27




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##### Table of Contents



Six Months Ended June 30,Increase (Decrease) in Interest Income/Expense 2008 and 2007Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)U.S. Govt agencies and corporations
    
    $
    1,305
    
    
    $
    (130
    )
    
    $
    1,175State and political subdivisions
    
    
    94
    
    
    
    (5
    )
    
    
    89Federal funds sold and short-term investments
    
    
    (96
    )
    
    
    16
    
    
    
    (80
    )Commercial loans
    
    
    (1,963
    )
    
    
    2,094
    
    
    
    131Real estate mortgage loans
    
    
    27
    
    
    
    (43
    )
    
    
    (16
    )Home equity lines of credit
    
    
    235
    
    
    
    (867
    )
    
    
    (632
    )Installment loans
    
    
    1,548
    
    
    
    323
    
    
    
    1,871Total Interest Income
    
    
    1,150
    
    
    
    1,388
    
    
    
    2,538Interest-bearing demand
    
    
    148
    
    
    
    (55
    )
    
    
    93Savings deposits
    
    
    11
    
    
    
    93
    
    
    
    104Money market accounts
    
    
    
    
    
    
    (887
    )
    
    
    (887
    )Consumer time deposits
    
    
    2,786
    
    
    
    (686
    )
    
    
    2,100Brokered time deposits
    
    
    (732
    )
    
    
    (38
    )
    
    
    (770
    )Public time deposits
    
    
    (123
    )
    
    
    (341
    )
    
    
    (464
    )Short-term borrowings
    
    
    38
    
    
    
    (245
    )
    
    
    (207
    )FHLB advances
    
    
    550
    
    
    
    (27
    )
    
    
    523Trust preferred securities and miscellaneous
    
    
    546
    
    
    
    (150
    )
    
    
    396Total Interest Expense
    
    
    3,224
    
    
    
    (2,336
    )
    
    
    888Net Interest Income (FTE)
    
    $
    (2,074
    )
    
    $
    3,724
    
    
    $
    1,650
  Noninterest Income
 Table 3: Details on Noninterest Income
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)
    
    
    (Dollars in thousands)Investment and trust services
    
    $
    587
    
    
    $
    524
    
    
    $
    1,119
    
    
    $
    1,046Deposit service charges
    
    
    1,190
    
    
    
    1,136
    
    
    
    2,301
    
    
    
    2,218Electronic banking fees
    
    
    682
    
    
    
    595
    
    
    
    1,326
    
    
    
    1,101Income from bank owned life insurance
    
    
    398
    
    
    
    182
    
    
    
    581
    
    
    
    349Other income
    
    
    70
    
    
    
    78
    
    
    
    669
    
    
    
    145Total fees and other income
    
    
    2,927
    
    
    
    2,515
    
    
    
    5,996
    
    
    
    4,859Securities gains, net
    
    
    69
    
    
    
    (214
    )
    
    
    283
    
    
    
    259Unrealized gain/(loss) on loans HFS
    
    
    (28
    )
    
    
    5
    
    
    
    (28
    )
    
    
    (28
    )Gains on sale of loans
    
    
    185
    
    
    
    113
    
    
    
    372
    
    
    
    297Gains (losses) on sale of other assets
    
    
    1
    
    
    
    14
    
    
    
    (135
    )
    
    
    35Total noninterest income
    
    $
    3,154
    
    
    $
    2,433
    
    
    $
    6,488
    
    
    $
    5,422
 28




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##### Table of Contents



Three Months Ended June 30, 2008 as compared to the Three Months Ended June 30, 2007
   Six Months Ended June 30, 2008 as compared to the Six Months Ended June 30, 2007
    29




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##### Table of Contents



Noninterest Expense
 Table 4: Details on Noninterest Expense
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)
    
    
    (Dollars in thousands)Salaries and employee benefits
    
    $
    3,861
    
    
    $
    3,935
    
    
    $
    7,639
    
    
    $
    7,758Furniture and equipment
    
    
    1,035
    
    
    
    907
    
    
    
    2,031
    
    
    
    1,614Net occupancy
    
    
    603
    
    
    
    535
    
    
    
    1,260
    
    
    
    1,090Outside services
    
    
    591
    
    
    
    474
    
    
    
    1,474
    
    
    
    829Marketing and public relations
    
    
    274
    
    
    
    353
    
    
    
    582
    
    
    
    615Supplies and postage
    
    
    335
    
    
    
    323
    
    
    
    684
    
    
    
    633Telecommunications
    
    
    202
    
    
    
    203
    
    
    
    446
    
    
    
    391Ohio Franchise tax
    
    
    225
    
    
    
    201
    
    
    
    445
    
    
    
    416Other real estate owned
    
    
    509
    
    
    
    131
    
    
    
    607
    
    
    
    245Electronic banking expense
    
    
    300
    
    
    
    193
    
    
    
    510
    
    
    
    382Other charge-offs and losses
    
    
    207
    
    
    
    101
    
    
    
    269
    
    
    
    195Other expense
    
    
    698
    
    
    
    653
    
    
    
    1,415
    
    
    
    1,199Total noninterest expense
    
    $
    8,840
    
    
    $
    8,009
    
    
    $
    17,362
    
    
    $
    15,367
 Three Months Ended June 30, 2008 as compared to the Three Months Ended June 30, 2007
   Six Months Ended June 30, 2008 as compared to the Six Months Ended June 30, 2007
  30




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##### Table of Contents



Income taxes
    Balance Sheet Analysis
 Overview
  Securities
  31




---



##### Table of Contents



Loans
  Table 5: Details on Loan Balances
 June 30, 2008
    
    
    December 31, 2007(Dollars in thousands)Real estate loans (includes loans secured primarily by real estate only):Construction and land development
    
    $
    77,091
    
    
    $
    74,379One to four family residential
    
    
    221,527
    
    
    
    213,238Multi-family residential
    
    
    25,470
    
    
    
    24,473Non-farm non-residential properties
    
    
    266,800
    
    
    
    275,552Commercial and industrial loans
    
    
    58,074
    
    
    
    56,688Personal loans to individuals:Auto, single payment and installment
    
    
    115,925
    
    
    
    104,360All other loans
    
    
    4,898
    
    
    
    4,908Total loans
    
    
    769,785
    
    
    
    753,598Allowance for loan losses
    
    
    (11,874
    )
    
    
    (7,820
    )Net loans
    
    $
    757,911
    
    
    $
    745,778
   32




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##### Table of Contents



Deposits
 Table 6: Deposits
 Average Balances OutstandingFor the Six Months Ended June 30,2008
    
    
    2007Average
    
    
    Percent of
    
    
    
    
    
    
    Average
    
    
    Percent ofBalance
    
    
    Deposits
    
    
    Rate
    
    
    Balance
    
    
    Deposits
    
    
    Rate(Dollars in thousands)Noninterest bearing demand
    
    $
    85,862
    
    
    
    9.95
    %
    
    
    0.00
    %
    
    $
    82,356
    
    
    
    11.02
    %
    
    
    0.00
    %Interest-bearing demand
    
    
    120,954
    
    
    
    14.00
    %
    
    
    0.95
    %
    
    
    93,708
    
    
    
    12.54
    %
    
    
    1.07
    %Savings deposits
    
    
    82,913
    
    
    
    9.60
    %
    
    
    0.66
    %
    
    
    79,445
    
    
    
    10.64
    %
    
    
    0.44
    %Money market accounts
    
    
    121,278
    
    
    
    14.04
    %
    
    
    2.19
    %
    
    
    121,233
    
    
    
    16.23
    %
    
    
    3.83
    %Consumer time deposits
    
    
    372,151
    
    
    
    43.09
    %
    
    
    4.32
    %
    
    
    255,387
    
    
    
    34.19
    %
    
    
    4.79
    %Brokered time deposits
    
    
    18,628
    
    
    
    2.16
    %
    
    
    4.98
    %
    
    
    47,499
    
    
    
    6.36
    %
    
    
    4.96
    %Public time deposits
    
    
    61,866
    
    
    
    7.16
    %
    
    
    4.19
    %
    
    
    67,385
    
    
    
    9.02
    %
    
    
    5.25
    %Total Deposits
    
    $
    863,652
    
    
    
    100.00
    %
    
    
    3.08
    %
    
    $
    747,013
    
    
    
    100.00
    %
    
    
    3.24
    %
    Borrowings
  33




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



Table 8: Nonperforming Assets
 June 30, 2008
    
    
    December 31, 2007(Dollars in thousands)Commercial loans
    
    $
    11,162
    
    
    $
    7,927Real estate mortgage
    
    
    2,909
    
    
    
    2,097Home equity lines of credit
    
    
    391
    
    
    
    429Installment loans
    
    
    966
    
    
    
    378Total nonperforming loans
    
    
    15,428
    
    
    
    10,831Other foreclosed assets
    
    
    2,351
    
    
    
    2,478Total nonperforming assets
    
    $
    17,779
    
    
    $
    13,309Allowance for loan losses to nonperforming loans
    
    
    51.03
    %
    
    
    72.20
    %Nonperforming assets to total assets
    
    
    1.68
    %
    
    
    1.26
    %
 Provision and Allowance for Loan Losses
  36




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##### Table of Contents



Table 9: Analysis of Allowance for Loan Losses
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)
    
    
    (Dollars in thousands)Balance at beginning of year
    
    $
    8,000
    
    
    $
    7,258
    
    
    $
    7,820
    
    
    $
    7,300Charge-offs:
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    (425
    )
    
    
    (939
    )
    
    
    (443
    )
    
    
    (1,198
    )Real estate mortgage
    
    
    (169
    )
    
    
    (76
    )
    
    
    (275
    )
    
    
    (175
    )Home equity lines of credit
    
    
    (79
    )
    
    
    (56
    )
    
    
    (89
    )
    
    
    (56
    )Purchased installment
    
    
    
    
    
    
    (17
    )
    
    
    
    
    
    
    (17
    )Installment
    
    
    (139
    )
    
    
    (42
    )
    
    
    (325
    )
    
    
    (125
    )DDA overdrafts
    
    
    (62
    )
    
    
    (48
    )
    
    
    (114
    )
    
    
    (107
    )Total charge-offs
    
    
    (874
    )
    
    
    (1,178
    )
    
    
    (1,246
    )
    
    
    (1,678
    )Recoveries:Commercial
    
    
    14
    
    
    
    6
    
    
    
    41
    
    
    
    34Real estate mortgage
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Home equity lines of credit
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    25Purchased installment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Installment
    
    
    59
    
    
    
    37
    
    
    
    92
    
    
    
    67DDA overdrafts
    
    
    11
    
    
    
    14
    
    
    
    29
    
    
    
    31Total Recoveries
    
    
    84
    
    
    
    84
    
    
    
    162
    
    
    
    159Net Charge-offs
    
    
    (790
    )
    
    
    (1,094
    )
    
    
    (1,084
    )
    
    
    (1,519
    )Allowance from merger
    
    
    
    
    
    
    1,098
    
    
    
    
    
    
    
    1,098Provision for loan losses
    
    
    4,664
    
    
    
    853
    
    
    
    5,138
    
    
    
    1,236Balance at end of period
    
    
    11,874
    
    
    
    8,115
    
    
    $
    11,874
    
    
    $
    8,115
    37




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##### Table of Contents



Market Risk Management
     
 ITEM 4. Controls and Procedures
  38




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 Issuer Purchases of Equity Securities
  39




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders.
  % ofTotal Shares VotedElection of Directors
    
    For
    
    Withheld
    
    ForTerry D. Goode
    
    
    4,558,831
    
    
    
    309,603
    
    
    
    93.60
    %James R. Herrick
    
    
    4,132,301
    
    
    
    736,133
    
    
    
    84.90
    %Kevin C. Martin
    
    
    4,572,580
    
    
    
    295,854
    
    
    
    93.90
    %Benjamin G. Norton
    
    
    4,725,639
    
    
    
    142,794
    
    
    
    97.10
    %
  
 Item 6. Exhibits.
  40




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##### Table of Contents



SIGNATURES
  LNB BANCORP, INC.
(Registrant)Date: August 11, 2008
    /s/  Sharon L. ChurchillSharon L. ChurchillChief Financial Officer
(Duly Authorized Officer, and Principal
Financial Officer) 41




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##### Table of Contents



Exhibit
 31.1
    
    Chief Executive Officer Rule 13a -14(a)/15d -14(a) Certification.31.2
    
    Chief Financial Officer Rule 13a -14(a)/15d -14(a) Certification.32.1
    
    Certification pursuant to 18 U.S.C. section 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification pursuant to 18 U.S.C. section 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
 42