##### 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 September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission file number: 0-13203
 LNB Bancorp, Inc.
  Ohio
    
    34-1406303(State or other jurisdictionof incorporation or organization)
    
    (I.R.S. Employer Identification No.)457 Broadway, Lorain, Ohio
(Address of principal executive offices)
    
    44052 - 1769
(Zip Code)
 
 
 þ o
  o þ o
 o þ




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##### Table of Contents



Part I  Financial InformationItem 1. Financial Statements.Consolidated Balance Sheets
September 30, 2006 (unaudited) and December 31, 2005Consolidated Statements of Income (unaudited)
For the three and nine months ended September 30, 2006 and September 30, 2005Consolidated Statements of Changes in Shareholders Equity (unaudited)
For the nine months ended September 30, 2006 and September 30, 2005Consolidated Statements of Cash Flows (unaudited)
For the nine months ended September 30, 2006 and September 30, 2005Notes to the Consolidated Financial Statements (unaudited)Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.Item 3. Quantitative and Qualitative Disclosures about Market Risk.Item 4. Controls and Procedures.Part II  Other InformationItem 1A. Risk Factors.Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.Item 6. Exhibits.EX-31.1EX-31.2EX-32.1EX-32.2
 2




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##### Table of Contents



Part I
 FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 
 Consolidated Balance Sheets
 September 30, 2006
    
    
    December 31, 2005(unaudited)(Dollars in thousands except share amounts)ASSETSCash and due from Banks
    
    $
    23,031
    
    
    $
    23,923Federal
funds sold and short-term investments Securities:
    
    
    
    
    
    
    Available for sale, at fair value
    
    
    160,228
    
    
    
    151,629Federal Home Loan Bank and Federal Reserve Stock
    
    
    3,204
    
    
    
    3,645Total securities
    
    
    163,432
    
    
    
    155,274Loans:Loans held for sale
    
    
    2,116
    
    
    
    2,586Portfolio loans
    
    
    607,036
    
    
    
    588,425Allowance for loan losses
    
    
    (6,304
    )
    
    
    (6,622
    )Net loans
    
    
    602,848
    
    
    
    584,389Bank premises and equipment, net
    
    
    12,435
    
    
    
    10,833Other real estate owned
    
    
    1,702
    
    
    
    432Bank owned life insurance
    
    
    14,490
    
    
    
    13,935Goodwill and intangible assets, net
    
    
    3,198
    
    
    
    3,321Accrued interest receivable
    
    
    4,032
    
    
    
    3,053Other assets
    
    
    6,376
    
    
    
    5,961Total Assets
    
    $
    831,544
    
    
    $
    801,121LIABILITIES AND SHAREHOLDERS EQUITYDepositsDemand and other noninterest-bearing
    
    $
    80,138
    
    
    $
    87,597Savings, money market and interest-bearing demand
    
    
    278,132
    
    
    
    265,831Certificates of deposit
    
    
    330,218
    
    
    
    286,788Total deposits
    
    
    688,488
    
    
    
    640,216Short-term borrowings
    
    
    17,975
    
    
    
    32,616Federal Home Loan Bank advances
    
    
    50,088
    
    
    
    53,896Accrued interest payable
    
    
    2,672
    
    
    
    2,126Accrued taxes, expenses and other liabilities
    
    
    3,750
    
    
    
    3,861Total Liabilities
    
    
    762,973
    
    
    
    732,715Shareholders EquityCommon stock, par value $1 per share, authorized 15,000,000
shares, issued 6,771,867 shares at September 30, 2006 and
December 31, 2005
    
    
    6,772
    
    
    
    6,772Additional paid-in capital
    
    
    26,370
    
    
    
    26,334Retained earnings
    
    
    43,966
    
    
    
    42,945Accumulated other comprehensive loss
    
    
    (2,445
    )
    
    
    (2,996
    )Treasury shares at cost, 328,194 shares at September 30, 2006
and 250,694 shares at December 31, 2005
    
    
    (6,092
    )
    
    
    (4,649
    )Total Shareholders Equity
    
    
    68,571
    
    
    
    68,406Total Liabilities and Shareholders Equity
    
    $
    831,544
    
    
    $
    801,121
 See accompanying notes to consolidated financial statements.
 3




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##### Table of Contents



Consolidated Statements of Income (unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands except share and per share amounts)Interest IncomeLoans
    
    $
    11,164
    
    
    $
    9,712
    
    
    $
    31,690
    
    
    $
    27,847Securities:U.S. Government agencies and corporations
    
    
    1,488
    
    
    
    1,185
    
    
    
    4,249
    
    
    
    3,256State and political subdivisions
    
    
    124
    
    
    
    107
    
    
    
    330
    
    
    
    333Other debt and equity securities
    
    
    49
    
    
    
    53
    
    
    
    150
    
    
    
    155Federal funds sold and short-term investments
    
    
    10
    
    
    
    38
    
    
    
    73
    
    
    
    111Total interest income
    
    
    12,835
    
    
    
    11,095
    
    
    
    36,492
    
    
    
    31,702Interest ExpenseDeposits:Certificates of deposit, $100 and over
    
    
    1,864
    
    
    
    1,193
    
    
    
    4,818
    
    
    
    2,696Other deposits
    
    
    2,913
    
    
    
    1,828
    
    
    
    8,073
    
    
    
    4,865Federal Home Loan Bank advances
    
    
    492
    
    
    
    403
    
    
    
    1,227
    
    
    
    1,387Short-term borrowings
    
    
    246
    
    
    
    201
    
    
    
    655
    
    
    
    395Total interest expense
    
    
    5,515
    
    
    
    3,625
    
    
    
    14,773
    
    
    
    9,343Net Interest Income
    
    
    7,320
    
    
    
    7,470
    
    
    
    21,719
    
    
    
    22,359Provision for Loan Losses
    
    
    600
    
    
    
    300
    
    
    
    915
    
    
    
    1,098Net interest income after provision for loan losses
    
    
    6,720
    
    
    
    7,170
    
    
    
    20,804
    
    
    
    21,261Noninterest IncomeInvestment and trust services
    
    
    482
    
    
    
    555
    
    
    
    1,537
    
    
    
    1,627Deposit service charges
    
    
    1,224
    
    
    
    1,152
    
    
    
    3,334
    
    
    
    3,112Other service charges and fees
    
    
    504
    
    
    
    490
    
    
    
    1,444
    
    
    
    1,431Mortgage banking revenue
    
    
    
    
    
    
    242
    
    
    
    
    
    
    
    967Income from bank owned life insurance
    
    
    187
    
    
    
    117
    
    
    
    474
    
    
    
    426Other income
    
    
    56
    
    
    
    83
    
    
    
    160
    
    
    
    337Total fees and other income
    
    
    2,453
    
    
    
    2,639
    
    
    
    6,949
    
    
    
    7,900Securities gains, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    174Gains on sale of loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132Gains (losses) on sale of other assets, net
    
    
    
    
    
    
    (31
    )
    
    
    2
    
    
    
    (32
    )Total noninterest income
    
    
    2,453
    
    
    
    2,608
    
    
    
    6,951
    
    
    
    8,174Noninterest ExpenseSalaries and employee benefits
    
    
    3,770
    
    
    
    3,414
    
    
    
    10,986
    
    
    
    11,653Furniture and equipment
    
    
    737
    
    
    
    746
    
    
    
    2,227
    
    
    
    2,281Net occupancy
    
    
    484
    
    
    
    402
    
    
    
    1,413
    
    
    
    1,368Outside services
    
    
    406
    
    
    
    394
    
    
    
    1,260
    
    
    
    1,224Marketing and public relations
    
    
    311
    
    
    
    258
    
    
    
    1,069
    
    
    
    863Supplies, postage and freight
    
    
    311
    
    
    
    290
    
    
    
    912
    
    
    
    934Telecommunications
    
    
    207
    
    
    
    207
    
    
    
    577
    
    
    
    936Ohio Franchise tax
    
    
    207
    
    
    
    179
    
    
    
    636
    
    
    
    561Electronic banking expenses
    
    
    160
    
    
    
    136
    
    
    
    466
    
    
    
    400Other expense
    
    
    686
    
    
    
    738
    
    
    
    2,133
    
    
    
    2,687Total noninterest expense
    
    
    7,279
    
    
    
    6,764
    
    
    
    21,679
    
    
    
    22,907Income before income tax expense
    
    
    1,894
    
    
    
    3,014
    
    
    
    6,076
    
    
    
    6,528Income tax expense
    
    
    475
    
    
    
    857
    
    
    
    1,570
    
    
    
    1,948Net Income
    
    $
    1,419
    
    
    $
    2,157
    
    
    $
    4,506
    
    
    $
    4,580Net Income Per Common ShareBasic
    
    $
    0.22
    
    
    $
    0.33
    
    
    $
    0.70
    
    
    $
    0.69Diluted
    
    
    0.22
    
    
    
    0.33
    
    
    
    0.70
    
    
    
    0.69Dividends declared
    
    
    0.18
    
    
    
    0.18
    
    
    
    0.54
    
    
    
    0.54Average Common Shares OutstandingBasic
    
    
    6,450,086
    
    
    
    6,625,086
    
    
    
    6,468,032
    
    
    
    6,635,752Diluted
    
    
    6,450,235
    
    
    
    6,625,168
    
    
    
    6,468,291
    
    
    
    6,635,780
 See accompanying notes to consolidated financial statements
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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, 2005
    
    $
    6,767
    
    
    $
    26,243
    
    
    $
    41,291
    
    
    $
    (1,297
    )
    
    $
    (2,430
    )
    
    $
    70,574Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    4,580
    
    
    
    
    
    
    
    
    
    
    
    4,580Other comprehensive income, net of tax:Change in unrealized gains and losses on
securities, net of reclassification
adjustment of $119 for gains on sale of
securities, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (972
    )
    
    
    
    
    
    
    (972
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,608Common stock repurchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,224
    )
    
    
    (1,224
    )Issuance of common stock under employment agreement
    
    
    5
    
    
    
    91
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96Common dividends declared, $.54 per share
    
    
    
    
    
    
    
    
    
    
    (3,576
    )
    
    
    
    
    
    
    
    
    
    
    (3,576
    )Balance, September 30, 2005
    
    $
    6,772
    
    
    $
    26,334
    
    
    $
    42,295
    
    
    $
    (2,269
    )
    
    $
    (3,654
    )
    
    $
    69,478Balance, January 1, 2006
    
    $
    6,772
    
    
    $
    26,334
    
    
    $
    42,945
    
    
    $
    (2,996
    )
    
    $
    (4,649
    )
    
    $
    68,406Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    4,506
    
    
    
    
    
    
    
    
    
    
    
    4,506Other comprehensive income, net of tax:Change in unrealized gains and losses
on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    551
    
    
    
    
    
    
    
    551Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,057Share-based compensation expense, net of tax
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36Purchase of 77,500 shares of Treasury Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,443
    )
    
    
    (1,443
    )Common dividends declared, $.54 per share
    
    
    
    
    
    
    
    
    
    
    (3,485
    )
    
    
    
    
    
    
    
    
    
    
    (3,485
    )Balance, September 30, 2006
    
    $
    6,772
    
    
    $
    26,370
    
    
    $
    43,966
    
    
    $
    (2,445
    )
    
    $
    (6,092
    )
    
    $
    68,571
 See accompanying notes to consolidated financial statements
 5




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##### Table of Contents



Consolidated Statements of Cash Flows (unaudited)
 Nine Months Ended September 30,2006
    
    
    2005(Dollars in thousands)Operating ActivitiesNet income
    
    $
    4,506
    
    
    $
    4,580Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses
    
    
    915
    
    
    
    1,098Depreciation and amortization
    
    
    1,227
    
    
    
    1,372Amortization of premiums and discounts
    
    
    232
    
    
    
    528Amortization of intangibles
    
    
    120
    
    
    
    129Impairment of goodwill
    
    
    
    
    
    
    311Amortization of deferred loan fees
    
    
    279
    
    
    
    237Federal deferred income tax benefit
    
    
    121
    
    
    
    (501
    )Issuance of stock under employment agreement
    
    
    
    
    
    
    96Net gain from loan sales
    
    
    
    
    
    
    (132
    )Securities gains, net
    
    
    
    
    
    
    (174
    )Share-based compensation expense, net of tax
    
    
    36
    
    
    
    Net loss on sale of other assets
    
    
    
    
    
    
    32Net decrease in accrued interest receivable and other assets
    
    
    (2,886
    )
    
    
    (1,199
    )Net decrease in accrued interest payable, taxes and other liabilities
    
    
    141
    
    
    
    1,226Net cash provided by operating activities
    
    
    4,691
    
    
    
    7,603Investing ActivitiesProceeds from sales of available-for-sale securities
    
    
    
    
    
    
    4,576Purchase of available-for-sale securities
    
    
    (29,005
    )
    
    
    (30,920
    )Proceeds from maturities of available-for-sale securities
    
    
    20,989
    
    
    
    18,171Purchase of Federal Home Loan Bank Stock
    
    
    (129
    )
    
    
    (154
    )Redemption of Federal Home Loan Bank Stock
    
    
    570
    
    
    
    Net increase in loans made to customers
    
    
    (22,022
    )
    
    
    (28,850
    )Proceeds from the sale of other real estate owned
    
    
    1,097
    
    
    
    689Purchase of bank premises and equipment
    
    
    (1,979
    )
    
    
    (953
    )Proceeds from sale of bank premises and equipment
    
    
    
    
    
    
    55Net cash used in investing activities
    
    
    (30,479
    )
    
    
    (37,386
    )Financing ActivitiesNet increase (decrease) in demand and other noninterest-bearing
    
    
    (7,459
    )
    
    
    257Net increase (decrease) in savings, money market and interest-bearing demand
    
    
    12,302
    
    
    
    (12,054
    )Net increase in certificates of deposit
    
    
    43,430
    
    
    
    61,994Net decrease in short-term borrowings
    
    
    (14,641
    )
    
    
    (11,342
    )Proceeds from loan sales
    
    
    
    
    
    
    4,549Proceeds from Federal Home Loan Bank advances
    
    
    91,000
    
    
    
    108,000Repayment of Federal Home Loan Bank advances
    
    
    (94,808
    )
    
    
    (116,197
    )Purchase of treasury stock
    
    
    (1,443
    )
    
    
    (1,224
    )Dividends paid
    
    
    (3,485
    )
    
    
    (3,576
    )Net cash provided by financing activities
    
    
    24,896
    
    
    
    30,407Net increase (decrease) in cash and cash equivalents
    
    
    (892
    )
    
    
    624Cash and cash equivalents, January 1
    
    
    23,923
    
    
    
    26,818Cash and cash equivalents, September 30
    
    $
    23,031
    
    
    $
    27,442Supplemental cash flow informationInterest paid
    
    $
    14,825
    
    
    $
    9,546Income taxes paid
    
    
    2,768
    
    
    
    1,764Transfer of loans to other real estate owned
    
    
    2,395
    
    
    
    668
 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
    Table of Contents    Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB) Stock
  Loans
     Allowance for Loan Losses
  8
    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
  9




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##### Table of Contents



Stock-Based Compensation
   (2) Earnings Per Share
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands except per share amounts)Weighted average shares outstanding used in Basic
Earnings per Share
    
    
    6,450,086
    
    
    
    6,625,086
    
    
    
    6,468,032
    
    
    
    6,635,752Dilutive effect of incentive stock options
    
    
    149
    
    
    
    82
    
    
    
    259
    
    
    
    28Weighted average shares outstanding used in
Diluted Earnings Per Share
    
    
    6,450,235
    
    
    
    6,625,168
    
    
    
    6,468,291
    
    
    
    6,635,780Net Income
    
    $
    1,419
    
    
    $
    2,157
    
    
    $
    4,506
    
    
    $
    4,580Basic Earnings Per Share
    
    $
    0.22
    
    
    $
    0.33
    
    
    $
    0.70
    
    
    $
    0.69Diluted Earnings Per Share
    
    $
    0.22
    
    
    $
    0.33
    
    
    $
    0.70
    
    
    $
    0.69
  (3) Cash and Due from Banks
  (4) Goodwill and Intangible Assets
   10




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##### Table of Contents



September 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Core deposit intangibles
    
    $
    1,288
    
    
    $
    1,288Less: accumulated amortization
    
    
    1,180
    
    
    
    1,095Carrying value of core deposit intangibles
    
    $
    108
    
    
    $
    193
  September 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Goodwill
    
    $
    2,827
    
    
    $
    2,827Mortgage servicing rights
    
    
    263
    
    
    
    301Core deposit intangibles
    
    
    108
    
    
    
    193Total goodwill and intangible assets
    
    $
    3,198
    
    
    $
    3,321
 (5) Securities
  At September 30, 2006Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities available for sale:U.S. Government agencies and corporations
    
    $
    151,006
    
    
    $
    27
    
    
    $
    (3,297
    )
    
    $
    147,736State and political subdivisions
    
    
    12,000
    
    
    
    396
    
    
    
    (23
    )
    
    
    12,373Equity securities
    
    
    52
    
    
    
    67
    
    
    
    
    
    
    
    119Federal Home Loan Bank and Federal Reserve
Bank stock
    
    
    3,204
    
    
    
    
    
    
    
    
    
    
    
    3,204Total Securities
    
    $
    166,262
    
    
    $
    490
    
    
    $
    (3,320
    )
    
    $
    163,432
 At December 31, 2005Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities available for sale:U.S. Government agencies and corporations
    
    $
    146,010
    
    
    $
    8
    
    
    $
    (3,965
    )
    
    $
    142,053State and political subdivisions
    
    
    9,231
    
    
    
    249
    
    
    
    (24
    )
    
    
    9,456Equity securities
    
    
    52
    
    
    
    68
    
    
    
    
    
    
    
    120Federal Home Loan Bank and Federal Reserve
Bank stock
    
    
    3,645
    
    
    
    
    
    
    
    
    
    
    
    3,645Total Securities
    
    $
    158,938
    
    
    $
    325
    
    
    $
    (3,989
    )
    
    $
    155,274
 11




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##### Table of Contents



(6) Loans and Allowance for Loan Losses
  September 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Commercial
    
    $
    368,938
    
    
    $
    363,144Real estate mortgage
    
    
    87,208
    
    
    
    81,367Home equity lines of credit
    
    
    68,739
    
    
    
    66,134Purchased installment
    
    
    42,543
    
    
    
    42,023Installment
    
    
    41,724
    
    
    
    38,343Total Loans
    
    
    609,152
    
    
    
    591,011Allowance for loan losses
    
    
    (6,304
    )
    
    
    (6,622
    )Net Loans
    
    $
    602,848
    
    
    $
    584,389
  September 30, 2006
    
    
    September 30, 2005(Dollars in thousands)Balance at the beginning of period
    
    $
    6,622
    
    
    $
    7,386Provision for loan losses
    
    
    915
    
    
    
    1,098Loans charged-off
    
    
    (1,613
    )
    
    
    (787
    )Recoveries on loans previously charged-off
    
    
    380
    
    
    
    193Balance at end of period
    
    $
    6,304
    
    
    $
    7,890
  (7) Stock Options and Stock Appreciation Rights
  12




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##### Table of Contents



Year Issued2005
    
    2005
    
    2006
    
    2006Type
    
    Option
    
    Option
    
    Option
    
    SARSNumber
    
    
    2,500
    
    
    
    30,000
    
    
    
    30,000
    
    
    
    30,000Strike Price
    
    $
    16.50
    
    
    $
    19.17
    
    
    $
    19.10
    
    
    $
    19.00Number Vested
    
    
    2,500
    
    
    
    10,000
    
    
    
    
    
    
    
    Assumptions:Risk free interest rate
    
    
    4.50
    %
    
    
    3.92
    %
    
    
    3.66
    %
    
    
    4.49
    %Dividend yield
    
    
    4.36
    %
    
    
    3.76
    %
    
    
    3.77
    %
    
    
    4.23
    %Volatility
    
    
    18.48
    %
    
    
    17.30
    %
    
    
    17.66
    %
    
    
    14.35
    %Expected Life  years
    
    
    6.0
    
    
    
    7.0
    
    
    
    7.0
    
    
    
    6.3
  Weighted AverageWeighted Average
    
    
    RemainingExercise
    
    
    Contractual TermShares
    
    
    Price per Share
    
    
    (Years)Options outstanding, December 31, 2005
    
    
    32,500
    
    
    $
    18.96Granted
    
    
    30,000
    
    
    
    19.10Exercised
    
    
    
    
    
    
    Forfeited, expired or cancelled
    
    
    
    
    
    
    Options outstanding, September 30, 2006
    
    
    62,500
    
    
    $
    19.03
    
    
    $
    6.96Options vested and exercisable,
September 30, 2006
    
    
    12,500
    
    
    $
    19.17
    
    
    $
    7.00
  Nine Months EndedSeptember 30, 2005(Dollars in thousands except per share amounts)Net Income as reported
    
    
    $
    4,580Add: Stock-based compensation, net of tax, as reported
    
    
    
    62Deduct: Stock-based compensation, net of tax, that
would have been reported if the fair value based method
had been applied to all awards
    
    
    
    (106
    )Pro forma net income
    
    
    $
    4,536Pro forma net income per share:Basic  as reported
    
    
    $
    0.69Basic  pro forma
    
    
    
    0.68Diluted  as reported
    
    
    
    0.69Diluted  pro forma
    
    
    
    0.68
 13




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##### Table of Contents



(8) Deposits
  September 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Demand and other noninterest-bearing
    
    $
    80,138
    
    
    $
    87,597Interest checking
    
    
    86,440
    
    
    
    77,297Savings
    
    
    82,731
    
    
    
    93,906Money market accounts
    
    
    108,961
    
    
    
    94,628Consumer time deposits
    
    
    218,987
    
    
    
    199,190Public time deposits
    
    
    49,806
    
    
    
    32,332Brokered time deposits
    
    
    61,425
    
    
    
    55,266Total deposits
    
    $
    688,488
    
    
    $
    640,216
   After
    
    
    After12 months but
    
    
    36 months butWithin 12
    
    
    within 36
    
    
    within 60
    
    
    Aftermonths
    
    
    months
    
    
    months
    
    
    5 years
    
    
    Total(Dollars in thousands)Consumer time deposits
    
    $
    158,002
    
    
    $
    54,859
    
    
    $
    6,126
    
    
    $
    
    
    
    $
    218,987Public time deposits
    
    
    47,006
    
    
    
    2,800
    
    
    
    
    
    
    
    
    
    
    
    49,806Brokered time deposits
    
    
    50,573
    
    
    
    10,852
    
    
    
    
    
    
    
    
    
    
    
    61,425Total time deposits
    
    $
    255,581
    
    
    $
    68,511
    
    
    $
    6,126
    
    
    $
    
    
    
    $
    330,218
 (9) Short-Term Borrowings
  14
    Table of Contents  September 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Securities sold under agreements to repurchase
    
    $
    14,475
    
    
    $
    16,116Federal funds purchased
    
    
    3,500
    
    
    
    16,500Total short-term borrowings
    
    $
    17,975
    
    
    $
    32,616
 (10) Federal Home Loan Bank Advances
  September 30, 2006
    
    
    December 31, 2005(Dollars in thousands)FHLB advance - 4.27%, repaid in 2006
    
    $
    
    
    
    $
    12,801FHLB advance - 4.92%, repaid in 2006
    
    
    
    
    
    
    1,000FHLB advance - 2.70%, repaid in 2006
    
    
    
    
    
    
    10,000FHLB advance - 5.41%, due October 3, 2006
    
    
    20,000
    
    
    
    FHLB advance - 2.95%, due January 30, 2007
    
    
    10,000
    
    
    
    10,000FHLB advance - 3.55%, due November 21, 2007
    
    
    5,000
    
    
    
    5,000FHLB advance - 3.33%, due February 8, 2008
    
    
    5,000
    
    
    
    5,000FHLB advance - 3.36%, due March 27, 2009
    
    
    10,000
    
    
    
    10,000FHLB advance - 3.55%, due January 1, 2014
    
    
    88
    
    
    
    95Total FHLB advances
    
    $
    50,088
    
    
    $
    53,896
 (11) Commitments, Credit Risk, and Contingencies
   15
    Table of Contents      Amount(Dollars in thousands)Commitments to extend credit
    
    $
    84,116Home equity lines of credit
    
    
    60,593Standby letters of credit
    
    
    7,504Total
    
    $
    152,213
 16




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Introduction
   Forward-Looking Statements
  
    
    significant increases in competitive pressure in the banking and financial services
industries;
    
    changes in the interest rate environment which could reduce anticipated or actual margins;
    
    changes in political conditions or the legislative or regulatory environment;
    
    general economic conditions, either nationally or regionally (especially in
northeastern Ohio), becoming less favorable than expected resulting in, among other
things, a deterioration in credit quality of assets;
    
    changes occurring in business conditions and inflation;
    
    changes in technology;
    
    changes in monetary and tax policies;
    
    changes in the securities markets;
    
    changes in economic conditions and competition in the geographic and business areas
in which the Corporation conducts its operations; as well as the risks and
uncertainties described from time to time in the Corporations reports as filed with
the Securities and Exchange Commission.
  Critical Accounting Policies and Estimates
  17




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##### Table of Contents




    
    Allowance for loan losses
       18




---



##### Table of Contents








    
    Income Taxes




New Accounting Pronouncements




SFAS No. 123 (revised) Share Based Payments




SFAS No. 154 Accounting Changes and Error Corrections




FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes  An Intrepretation
of FASB Statement No. 109


19




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##### Table of Contents



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
  SEC and SAB 108 Top 1N Financial Statements  Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial Statements
  Summary of Earnings (Dollars in thousands except per share data)
  20




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##### Table of Contents



Results of Operations
 Net Interest Income
  Three Months Ended September 30, 2006 versus Three Months Ended September 30, 2005
   Nine Months Ended September 30, 2006 versus Nine Months Ended September 30, 2005
   21




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##### Table of Contents



22




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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 September 30,2006
    
    
    2005Average
    
    
    
    
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Assets:U.S. Govt agencies and
corporations
    
    $
    152,385
    
    
    $
    1,537
    
    
    
    4.00
    %
    
    $
    145,451
    
    
    $
    1,238
    
    
    
    3.38
    %State and political subdivisions
    
    
    11,425
    
    
    
    179
    
    
    
    6.22
    %
    
    
    11,521
    
    
    
    156
    
    
    
    5.37
    %Federal funds sold and short-term
investments
    
    
    773
    
    
    
    10
    
    
    
    5.13
    %
    
    
    4,598
    
    
    
    38
    
    
    
    3.28
    %Commercial loans
    
    
    372,428
    
    
    
    7,354
    
    
    
    7.83
    %
    
    
    361,000
    
    
    
    6,235
    
    
    
    6.85
    %Real estate mortgage loans
    
    
    82,596
    
    
    
    1,288
    
    
    
    6.19
    %
    
    
    84,359
    
    
    
    1,309
    
    
    
    6.16
    %Home equity lines of credit
    
    
    66,211
    
    
    
    1,329
    
    
    
    7.96
    %
    
    
    66,030
    
    
    
    1,068
    
    
    
    6.42
    %Purchased installment loans
    
    
    40,962
    
    
    
    482
    
    
    
    4.67
    %
    
    
    41,128
    
    
    
    479
    
    
    
    4.62
    %Installment loans
    
    
    40,989
    
    
    
    741
    
    
    
    7.17
    %
    
    
    37,167
    
    
    
    621
    
    
    
    6.63
    %Total Earning Assets
    
    $
    767,769
    
    
    $
    12,920
    
    
    
    6.68
    %
    
    $
    751,254
    
    
    $
    11,144
    
    
    
    5.89
    %Allowance for loan loss
    
    
    (6,343
    )
    
    
    
    
    
    
    
    
    
    
    (7,928
    )Cash and due from banks
    
    
    22,518
    
    
    
    
    
    
    
    
    
    
    
    24,287Bank owned life insurance
    
    
    14,382
    
    
    
    
    
    
    
    
    
    
    
    13,721Other assets
    
    
    27,489
    
    
    
    
    
    
    
    
    
    
    
    23,463Total Assets
    
    $
    825,815
    
    
    
    
    
    
    
    
    
    
    $
    804,797Liabilities and Shareholders EquityInterest-bearing demand
    
    $
    86,973
    
    
    $
    183
    
    
    
    0.84
    %
    
    $
    82,970
    
    
    $
    64
    
    
    
    0.31
    %Savings deposits
    
    
    84,552
    
    
    
    71
    
    
    
    0.33
    %
    
    
    100,680
    
    
    
    87
    
    
    
    0.34
    %Money market accounts
    
    
    106,692
    
    
    
    913
    
    
    
    3.40
    %
    
    
    91,261
    
    
    
    461
    
    
    
    2.00
    %Consumer time deposits
    
    
    212,138
    
    
    
    2,248
    
    
    
    4.20
    %
    
    
    181,242
    
    
    
    1,467
    
    
    
    3.21
    %Brokered time deposits
    
    
    53,015
    
    
    
    619
    
    
    
    4.63
    %
    
    
    42,108
    
    
    
    378
    
    
    
    3.56
    %Public time deposits
    
    
    55,884
    
    
    
    742
    
    
    
    5.27
    %
    
    
    62,777
    
    
    
    568
    
    
    
    3.59
    %Short-term borrowings
    
    
    21,312
    
    
    
    247
    
    
    
    4.60
    %
    
    
    22,093
    
    
    
    197
    
    
    
    3.54
    %FHLB advances
    
    
    48,023
    
    
    
    492
    
    
    
    4.06
    %
    
    
    53,590
    
    
    
    403
    
    
    
    2.98
    %Total Interest-Bearing Liabilities
    
    $
    668,589
    
    
    $
    5,515
    
    
    
    3.27
    %
    
    $
    636,721
    
    
    $
    3,625
    
    
    
    2.26
    %Noninterest-bearing deposits
    
    
    82,527
    
    
    
    
    
    
    
    
    
    
    
    91,475Other liabilities
    
    
    6,391
    
    
    
    
    
    
    
    
    
    
    
    5,797Shareholders Equity
    
    
    68,308
    
    
    
    
    
    
    
    
    
    
    
    70,804Total Liabilities and
Shareholders Equity
    
    $
    825,815
    
    
    
    
    
    
    
    
    
    
    $
    804,797Net interest Income (FTE)
    
    
    
    
    
    $
    7,405
    
    
    
    3.83
    %
    
    
    
    
    
    $
    7,519
    
    
    
    3.97
    %Taxable Equivalent Adjustment
    
    
    
    
    
    
    (85
    )
    
    
    -0.04
    %
    
    
    
    
    
    
    (49
    )
    
    
    -0.03
    %Net Interest Income Per
Financial Statements
    
    
    
    
    
    $
    7,320
    
    
    
    
    
    
    
    
    
    
    $
    7,470Net Yield on Earning Assets
    
    
    
    
    
    
    
    
    
    
    3.78
    %
    
    
    
    
    
    
    
    
    
    
    3.94
    %
 23




---



##### Table of Contents



Nine Months Ended September 30,2006
    
    
    2005Average
    
    
    
    
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Assets:U.S. Govt agencies and
corporations
    
    $
    151,548
    
    
    $
    4,399
    
    
    
    3.88
    %
    
    $
    139,250
    
    
    $
    3,461
    
    
    
    3.32
    %State and political subdivisions
    
    
    10,115
    
    
    
    477
    
    
    
    6.30
    %
    
    
    11,535
    
    
    
    486
    
    
    
    5.63
    %Federal funds sold and short-term
investments
    
    
    2,214
    
    
    
    73
    
    
    
    4.41
    %
    
    
    5,100
    
    
    
    61
    
    
    
    1.60
    %Commercial loans
    
    
    367,958
    
    
    
    20,880
    
    
    
    7.59
    %
    
    
    355,022
    
    
    
    17,601
    
    
    
    6.63
    %Real estate mortgage loans
    
    
    80,786
    
    
    
    3,722
    
    
    
    6.16
    %
    
    
    89,373
    
    
    
    4,150
    
    
    
    6.21
    %Home equity lines of credit
    
    
    66,063
    
    
    
    3,661
    
    
    
    7.41
    %
    
    
    64,160
    
    
    
    2,850
    
    
    
    5.94
    %Purchased installment loans
    
    
    39,913
    
    
    
    1,352
    
    
    
    4.53
    %
    
    
    33,588
    
    
    
    1,131
    
    
    
    4.50
    %Installment loans
    
    
    39,505
    
    
    
    2,108
    
    
    
    7.13
    %
    
    
    38,318
    
    
    
    2,115
    
    
    
    7.38
    %Total Earning Assets
    
    $
    758,102
    
    
    $
    36,672
    
    
    
    6.47
    %
    
    $
    736,346
    
    
    $
    31,855
    
    
    
    5.78
    %Allowance for loan loss
    
    
    (6,514
    )
    
    
    
    
    
    
    
    
    
    
    (7,722
    )Cash and due from banks
    
    
    22,520
    
    
    
    
    
    
    
    
    
    
    
    24,909Bank owned life insurance
    
    
    14,229
    
    
    
    
    
    
    
    
    
    
    
    13,585Other assets
    
    
    25,510
    
    
    
    
    
    
    
    
    
    
    
    23,554Total Assets
    
    $
    813,847
    
    
    
    
    
    
    
    
    
    
    $
    790,672Liabilities and Shareholders EquityInterest-bearing demand
    
    $
    83,757
    
    
    $
    440
    
    
    
    0.70
    %
    
    $
    83,566
    
    
    $
    151
    
    
    
    0.24
    %Savings deposits
    
    
    88,144
    
    
    
    226
    
    
    
    0.34
    %
    
    
    103,305
    
    
    
    246
    
    
    
    0.32
    %Money market accounts
    
    
    103,646
    
    
    
    2,430
    
    
    
    3.13
    %
    
    
    91,271
    
    
    
    1,160
    
    
    
    1.70
    %Consumer time deposits
    
    
    209,037
    
    
    
    6,182
    
    
    
    3.95
    %
    
    
    174,777
    
    
    
    3,986
    
    
    
    3.05
    %Brokered time deposits
    
    
    49,591
    
    
    
    1,572
    
    
    
    4.24
    %
    
    
    35,543
    
    
    
    880
    
    
    
    3.31
    %Public time deposits
    
    
    54,658
    
    
    
    2,041
    
    
    
    4.99
    %
    
    
    49,723
    
    
    
    1,151
    
    
    
    3.09
    %Short-term borrowings
    
    
    20,180
    
    
    
    655
    
    
    
    4.34
    %
    
    
    17,437
    
    
    
    382
    
    
    
    2.93
    %FHLB advances
    
    
    45,810
    
    
    
    1,227
    
    
    
    3.58
    %
    
    
    63,593
    
    
    
    1,387
    
    
    
    2.92
    %Total Interest-Bearing Liabilities
    
    $
    654,823
    
    
    $
    14,773
    
    
    
    3.02
    %
    
    $
    619,215
    
    
    $
    9,343
    
    
    
    2.02
    %Noninterest-bearing deposits
    
    
    84,520
    
    
    
    
    
    
    
    
    
    
    
    94,969Other liabilities
    
    
    6,057
    
    
    
    
    
    
    
    
    
    
    
    5,764Shareholders Equity
    
    
    68,447
    
    
    
    
    
    
    
    
    
    
    
    70,724Total Liabilities and
Shareholders Equity
    
    $
    813,847
    
    
    
    
    
    
    
    
    
    
    $
    790,672Net interest Income (FTE)
    
    
    
    
    
    $
    21,899
    
    
    
    3.86
    %
    
    
    
    
    
    $
    22,512
    
    
    
    4.09
    %Taxable Equivalent Adjustment
    
    
    
    
    
    
    (180
    )
    
    
    -0.03
    %
    
    
    
    
    
    
    (153
    )
    
    
    -0.03
    %Net Interest Income Per
Financial Statements
    
    
    
    
    
    $
    21,719
    
    
    
    
    
    
    
    
    
    
    $
    22,359Net Yield on Earning Assets
    
    
    
    
    
    
    
    
    
    
    3.83
    %
    
    
    
    
    
    
    
    
    
    
    4.06
    %
 24




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##### Table of Contents



Rate/Volume
  Table 2: Rate/Volume Analysis of Net Interest Income (FTE)
 Three Months Ended September 30,Increase (Decrease) in Interest Income/Expense 2006 and 2005Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)U.S. Govt agencies and corporations
    
    $
    67
    
    
    $
    232
    
    
    $
    299State and political subdivisions
    
    
    (2
    )
    
    
    25
    
    
    
    23Federal funds sold and short-term investments
    
    
    (30
    )
    
    
    2
    
    
    
    (28
    )Commercial loans
    
    
    220
    
    
    
    899
    
    
    
    1,119Real estate mortgage loans
    
    
    (27
    )
    
    
    6
    
    
    
    (21
    )Home equity lines of credit
    
    
    4
    
    
    
    257
    
    
    
    261Purchased installment loans
    
    
    (2
    )
    
    
    5
    
    
    
    3Installment loans
    
    
    66
    
    
    
    54
    
    
    
    120Total Interest Income
    
    
    296
    
    
    
    1,480
    
    
    
    1,776Interest-bearing demand
    
    
    8
    
    
    
    111
    
    
    
    119Savings deposits
    
    
    (14
    )
    
    
    (2
    )
    
    
    (16
    )Money market accounts
    
    
    118
    
    
    
    334
    
    
    
    452Consumer time deposits
    
    
    298
    
    
    
    483
    
    
    
    781Brokered time deposits
    
    
    113
    
    
    
    128
    
    
    
    241Public time deposits
    
    
    (110
    )
    
    
    284
    
    
    
    174Short-term borrowings
    
    
    (9
    )
    
    
    59
    
    
    
    50FHLB advances
    
    
    (69
    )
    
    
    158
    
    
    
    89Total Interest Expense
    
    
    335
    
    
    
    1,555
    
    
    
    1,890Net Interest Income (FTE)
    
    $
    (39
    )
    
    $
    (75
    )
    
    $
    (114
    )
 25




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##### Table of Contents



Nine Months Ended September 30,Increase (Decrease) in Interest Income/Expense 2006 and 2005Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)U.S. Govt agencies and corporations
    
    $
    338
    
    
    $
    600
    
    
    $
    938State and political subdivisions
    
    
    (37
    )
    
    
    28
    
    
    
    (9
    )Federal funds sold and short-term investments
    
    
    23
    
    
    
    (11
    )
    
    
    12Commercial loans
    
    
    714
    
    
    
    2,565
    
    
    
    3,279Real estate mortgage loans
    
    
    (399
    )
    
    
    (29
    )
    
    
    (428
    )Home equity lines of credit
    
    
    103
    
    
    
    708
    
    
    
    811Purchased installment loans
    
    
    213
    
    
    
    8
    
    
    
    221Installment loans
    
    
    48
    
    
    
    (55
    )
    
    
    (7
    )Total Interest Income
    
    
    1,003
    
    
    
    3,814
    
    
    
    4,817Interest-bearing demand
    
    
    1
    
    
    
    288
    
    
    
    289Savings deposits
    
    
    (34
    )
    
    
    14
    
    
    
    (20
    )Money market accounts
    
    
    263
    
    
    
    1,007
    
    
    
    1,270Consumer time deposits
    
    
    916
    
    
    
    1,280
    
    
    
    2,196Brokered time deposits
    
    
    390
    
    
    
    302
    
    
    
    692Public time deposits
    
    
    171
    
    
    
    719
    
    
    
    890Short-term borrowings
    
    
    80
    
    
    
    193
    
    
    
    273FHLB advances
    
    
    (307
    )
    
    
    147
    
    
    
    (160
    )Total Interest Expense
    
    
    1,480
    
    
    
    3,950
    
    
    
    5,430Net Interest Income (FTE)
    
    $
    (477
    )
    
    $
    (136
    )
    
    $
    (613
    )
  Noninterest Income
 Table 3: Details on Noninterest Income
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)
    
    
    (Dollars in thousands)Investment and trust services
    
    $
    482
    
    
    $
    555
    
    
    $
    1,537
    
    
    $
    1,627Deposit service charges
    
    
    1,224
    
    
    
    1,152
    
    
    
    3,334
    
    
    
    3,112Other service charges and fees
    
    
    504
    
    
    
    490
    
    
    
    1,444
    
    
    
    1,431Mortgage banking revenue
    
    
    
    
    
    
    242
    
    
    
    
    
    
    
    967Income from bank owned life insurance
    
    
    187
    
    
    
    117
    
    
    
    474
    
    
    
    426Other income
    
    
    56
    
    
    
    83
    
    
    
    160
    
    
    
    337Total fees and other income
    
    
    2,453
    
    
    
    2,639
    
    
    
    6,949
    
    
    
    7,900Securities gains, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    174Gains on sale of loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132Gains on sale of other assets
    
    
    
    
    
    
    (31
    )
    
    
    2
    
    
    
    (32
    )Total noninterest income
    
    $
    2,453
    
    
    $
    2,608
    
    
    $
    6,951
    
    
    $
    8,174
 26




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##### Table of Contents



Three Months Ended September 30, 2006 as compared to the Three Months Ended September 30,
2005
  Nine Months Ended September 30, 2006 as compared to the Nine Months Ended September 30, 2005
  Noninterest Expense
 27




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##### Table of Contents



Table 4: Details on Noninterest Expense
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)
    
    
    (Dollars in thousands)Salaries and employee benefits
    
    $
    3,770
    
    
    $
    3,414
    
    
    $
    10,986
    
    
    $
    11,653Furniture and equipment
    
    
    737
    
    
    
    746
    
    
    
    2,227
    
    
    
    2,281Net occupancy
    
    
    484
    
    
    
    402
    
    
    
    1,413
    
    
    
    1,368Outside services
    
    
    406
    
    
    
    394
    
    
    
    1,260
    
    
    
    1,224Marketing and public relations
    
    
    311
    
    
    
    258
    
    
    
    1,069
    
    
    
    863Supplies and postage
    
    
    311
    
    
    
    290
    
    
    
    912
    
    
    
    934Telecommunications
    
    
    207
    
    
    
    207
    
    
    
    577
    
    
    
    936Ohio Franchise tax
    
    
    207
    
    
    
    179
    
    
    
    636
    
    
    
    561Electronic banking expense
    
    
    160
    
    
    
    136
    
    
    
    466
    
    
    
    400Other expense
    
    
    686
    
    
    
    738
    
    
    
    2,133
    
    
    
    2,687Total noninterest expense
    
    $
    7,279
    
    
    $
    6,764
    
    
    $
    21,679
    
    
    $
    22,907
 Three Months Ended September 30, 2006 as compared to the Three Months Ended September 30,
2005
     Nine Months Ended September 30, 2006 as compared to the Nine Months Ended September 30, 2005
  28




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##### Table of Contents



Income taxes
  29




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##### Table of Contents



Balance Sheet Analysis
 Overview
  Securities
  Loans
  Table 5: Details on Loan Balances
 September 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Real estate loans (includes loans secured primarily by real estate only):Construction and land development
    
    $
    184,849
    
    
    $
    169,007One to four family residential
    
    
    179,353
    
    
    
    164,671Multi-family residential
    
    
    4,591
    
    
    
    4,676Non-farm non-residential properties
    
    
    112,129
    
    
    
    117,090Commercial and industrial loans
    
    
    56,519
    
    
    
    63,834Personal loans to individuals:Auto, single payment and installment
    
    
    66,129
    
    
    
    71,132All other loans
    
    
    5,582
    
    
    
    601Total loans
    
    
    609,152
    
    
    
    591,011Allowance for loan losses
    
    
    (6,304
    )
    
    
    (6,622
    )Net loans
    
    $
    602,848
    
    
    $
    584,389
 30




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##### Table of Contents



Deposits
 Table 6: Deposits
 September 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Demand and other noninterest-bearing
    
    $
    80,138
    
    
    $
    87,597Interest checking
    
    
    86,440
    
    
    
    77,297Savings
    
    
    82,731
    
    
    
    93,906Money market accounts
    
    
    108,961
    
    
    
    94,628Consumer time deposits
    
    
    218,987
    
    
    
    199,190Public time deposits
    
    
    49,806
    
    
    
    32,332Brokered time deposits
    
    
    61,425
    
    
    
    55,266Total deposits
    
    $
    688,488
    
    
    $
    640,216
   Borrowings
  31




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##### Table of Contents



Regulatory Capital
    Contractual Obligations
  Table 7: Contractual Obligations
 After
    
    
    After12 months but
    
    
    36 months butWithin 12
    
    
    within 36
    
    
    within 60
    
    
    Aftermonths
    
    
    months
    
    
    months
    
    
    5 years
    
    
    Total(Dollars in thousands)Short-term borrowings
    
    $
    17,975
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    17,975FHLB advances
    
    
    30,000
    
    
    
    20,000
    
    
    
    
    
    
    
    88
    
    
    
    50,088Operating Leases
    
    
    994
    
    
    
    1,762
    
    
    
    1,149
    
    
    
    1,590
    
    
    
    5,495Severance Payments
    
    
    129
    
    
    
    378
    
    
    
    131
    
    
    
    99
    
    
    
    737Total
    
    $
    49,098
    
    
    $
    22,140
    
    
    $
    1,280
    
    
    $
    1,777
    
    
    
    74,295
 32




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##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
 RISK ELEMENTS
  Credit Risk Management
   Nonperforming Assets
  33




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##### Table of Contents



Table 8: Nonperforming Assets
 September 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Commercial loans
    
    $
    5,633
    
    
    $
    5,129Real estate mortgage
    
    
    1,034
    
    
    
    1,182Home equity lines of credit
    
    
    293
    
    
    
    25Purchased installment
    
    
    
    
    
    
    Installment loans
    
    
    63
    
    
    
    158Total nonperforming loans
    
    
    7,023
    
    
    
    6,494Other foreclosed assets
    
    
    1,702
    
    
    
    432Total nonperforming assets
    
    $
    8,725
    
    
    $
    6,926Nonperforming loans to total loans
    
    
    1.16
    %
    
    
    1.10
    %Nonperforming assets to total assets
    
    
    1.05
    %
    
    
    0.86
    %
 Provision and Allowance for Loan Losses
  34




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##### Table of Contents



Table 9: Analysis of Allowance for Loan Losses
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)
    
    
    (Dollars in thousands)Balance at beginning of year
    
    $
    6,568
    
    
    $
    7,793
    
    
    $
    6,622
    
    
    $
    7,386Charge-offs:Commercial
    
    
    (675
    )
    
    
    (104
    )
    
    
    (884
    )
    
    
    (387
    )Real estate mortgage
    
    
    (92
    )
    
    
    
    
    
    
    (133
    )
    
    
    Home equity lines of credit
    
    
    (26
    )
    
    
    (35
    )
    
    
    (51
    )
    
    
    (60
    )Purchased installment
    
    
    (5
    )
    
    
    (32
    )
    
    
    (56
    )
    
    
    (33
    )Installment
    
    
    (179
    )
    
    
    (105
    )
    
    
    (317
    )
    
    
    (307
    )DDA overdrafts
    
    
    (77
    )
    
    
    
    
    
    
    (173
    )
    
    
    Total charge-offs
    
    
    (1,054
    )
    
    
    (276
    )
    
    
    (1,614
    )
    
    
    (787
    )Recoveries:Commercial
    
    
    94
    
    
    
    20
    
    
    
    150
    
    
    
    51Real estate mortgage
    
    
    5
    
    
    
    
    
    
    
    7
    
    
    
    Home equity lines of credit
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Purchased installment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Installment
    
    
    78
    
    
    
    53
    
    
    
    128
    
    
    
    141DDA overdrafts
    
    
    12
    
    
    
    
    
    
    
    95
    
    
    
    Total Recoveries
    
    
    190
    
    
    
    73
    
    
    
    381
    
    
    
    193Net Charge-offs
    
    
    (864
    )
    
    
    (203
    )
    
    
    (1,233
    )
    
    
    (594
    )Provision for loan losses
    
    
    600
    
    
    
    300
    
    
    
    915
    
    
    
    1,098Balance at end of period
    
    
    6,304
    
    
    $
    7,890
    
    
    $
    6,304
    
    
    $
    7,890
    35




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##### Table of Contents



.
  Market Risk Management
     36




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##### Table of Contents



ITEM 4. Controls and Procedures
  
 PART II  OTHER INFORMATION
 
 Item 1A. Risk Factors
 .
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 Issuer Purchases of Equity Securities
  (c)
    
    
    (d)Total number of
    
    
    Maximum numbershares (or units)
    
    
    of shares (or units)(a)
    
    
    
    
    
    purchased as
    
    
    that may yet beTotal number of
    
    
    (b)
    
    
    part of publicly
    
    
    purchased undershares (or units)
    
    
    Average price paid
    
    
    announced plans
    
    
    the plansPeriod
    
    purchased
    
    
    per share (or unit)
    
    
    or programs
    
    
    or programsJuly 1 - 31, 2006
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    139,500August 1 - 31, 2006
    
    
    10,000
    
    
    $
    17.85
    
    
    
    10,000
    
    
    
    129,500September 1 - 30, 2006
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    129,500Total
    
    
    10,000
    
    
    $
    17.85
    
    
    
    10,000
    
    
    
    129,500
  37




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##### Table of Contents



38




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##### Table of Contents



Item 6. Exhibits.
  
 SIGNATURES
  LNB BANCORP, INC.(Registrant)Date: November 8, 2006
    
    
    
    /s/ Terry M. WhiteTerry M. WhiteChief Financial Officer(Duly Authorized Officer, and Principal Financial Officer)Date: November 8, 2006
    
    
    
    /s/ Sharon L. ChurchillSharon L. Churchill, CPA
Controller(Duly Authorized Officer, and Principal Accounting Officer)
 39




---



##### 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.
 40