##### 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, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                      to
 Commission file number: 0-13203
 LNB Bancorp, Inc.
  Ohio
(State of Incorporation)
    
    34-1406303
(I.R.S. Employer Identification No.)457 Broadway, Lorain, Ohio
(Address of principal executive offices)
    
    44052-1769
(Zip Code)
 
 
 þ o
 o o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ(Do not check if a smaller reporting company)
Smaller reporting company o o þ




---



##### 



Part I  Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets September 30, 2010 (unaudited) and December 31, 2009
    
    
    3Consolidated Statements of Income (unaudited) for the three and nine months
ended September 30, 2010 and September 30, 2009
    
    
    4Consolidated Statements of Shareholders Equity (unaudited) for the nine months
ended September 30, 2010 and September 30, 2009
    
    
    5Consolidated Statements of Cash Flows (unaudited) for the nine months ended
September 30, 2010 and September 30, 2009
    
    
    6Notes to the Consolidated Financial Statements (unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    36Item 4. Controls and Procedures
    
    
    38Part II  Other Information
    
    
    38Item 1. Legal Proceedings
    
    
    38Item 1A. Risk Factors
    
    
    39Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 6. Exhibits
    
    
    39EX-31.1EX-31.2EX-32.1EX-32.2
  2




---



##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 
 Consolidated Balance Sheets
 September 30, 2010
    
    
    December 31, 2009(unaudited)(Dollars in thousands except share amounts)ASSETSCash and due from banks (Note 3)
    
    $
    20,524
    
    
    $
    16,318Federal funds sold and short-term investments
    
    
    62,550
    
    
    
    10,615Cash and cash equivalents
    
    
    83,074
    
    
    
    26,933Interest-bearing deposits in other banks
    
    
    347
    
    
    
    359Securities: (Note 5)Trading securities, at fair value
    
    
    
    
    
    
    8,445Available for sale, at fair value
    
    
    214,920
    
    
    
    247,037Total securities
    
    
    214,920
    
    
    
    255,482Restricted stock
    
    
    5,741
    
    
    
    4,985Loans held for sale
    
    
    4,676
    
    
    
    3,783Loans: (Note 6)Portfolio loans
    
    
    795,909
    
    
    
    803,197Allowance for loan losses
    
    
    (17,197
    )
    
    
    (18,792
    )Net loans
    
    
    778,712
    
    
    
    784,405Bank premises and equipment, net
    
    
    9,548
    
    
    
    10,105Other real estate owned
    
    
    2,206
    
    
    
    1,264Bank owned life insurance
    
    
    16,951
    
    
    
    16,435Goodwill, net (Note 4)
    
    
    21,582
    
    
    
    21,582Intangible assets, net (Note 4)
    
    
    903
    
    
    
    1,005Accrued interest receivable
    
    
    3,740
    
    
    
    4,072Other assets
    
    
    14,202
    
    
    
    19,099Total Assets
    
    $
    1,156,602
    
    
    $
    1,149,509LIABILITIES AND SHAREHOLDERS EQUITYDeposits (Note 7)Demand and other noninterest-bearing
    
    $
    112,721
    
    
    $
    118,505Savings, money market and interest-bearing demand
    
    
    326,674
    
    
    
    305,045Certificates of deposit
    
    
    539,636
    
    
    
    547,883Total deposits
    
    
    979,031
    
    
    
    971,433Short-term borrowings (Note 8)
    
    
    1,491
    
    
    
    1,457Federal Home Loan Bank advances (Note 9)
    
    
    42,502
    
    
    
    42,505Junior subordinated debentures (Note 10)
    
    
    16,238
    
    
    
    20,620Accrued interest payable
    
    
    1,718
    
    
    
    2,074Accrued taxes, expenses and other liabilities
    
    
    4,279
    
    
    
    7,279Total Liabilities
    
    
    1,045,259
    
    
    
    1,045,368Shareholders EquityPreferred stock, Series A Voting, no par value,
authorized 750,000 shares, none issued at September
30, 2010 and December 31, 2009.
    
    
    
    
    
    
    Fixed rate cumulative perpetual preferred stock,
Series B, no par value, $1,000 liquidation value,
25,223 shares authorized and issued at September 30,
2010 and December 31, 2009.
    
    
    25,223
    
    
    
    25,223Discount on Series B preferred stock
    
    
    (120
    )
    
    
    (131
    )Warrant to purchase common stock
    
    
    146
    
    
    
    146Common stock, par value $1 per share, authorized
15,000,000 shares, issued
8,153,589 shares at September 30, 2010 and
7,623,857 at December 31, 2009.
    
    
    8,154
    
    
    
    7,624Additional paid-in capital
    
    
    39,442
    
    
    
    37,862Retained earnings
    
    
    41,006
    
    
    
    36,883Accumulated other comprehensive income
    
    
    3,584
    
    
    
    2,626Treasury shares at cost, 328,194 shares at September
30, 2010 and at December 31, 2009
    
    
    (6,092
    )
    
    
    (6,092
    )Total Shareholders Equity
    
    
    111,343
    
    
    
    104,141Total Liabilities and Shareholders Equity
    
    $
    1,156,602
    
    
    $
    1,149,509
 See accompanying notes to consolidated financial statements.
 3




---



##### Table of Contents



Consolidated Statements of Income (unaudited)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands except share and per share amounts)Interest and Dividend IncomeLoans
    
    $
    10,740
    
    
    $
    11,536
    
    
    $
    32,112
    
    
    $
    34,507Securities:U.S. Government agencies and corporations
    
    
    1,395
    
    
    
    2,554
    
    
    
    5,601
    
    
    
    7,566State and political subdivisions
    
    
    246
    
    
    
    261
    
    
    
    737
    
    
    
    760Trading securities
    
    
    
    
    
    
    88
    
    
    
    49
    
    
    
    334Other debt and equity securities
    
    
    72
    
    
    
    65
    
    
    
    202
    
    
    
    183Federal funds sold and short-term investments
    
    
    10
    
    
    
    19
    
    
    
    30
    
    
    
    52Total interest and dividend income
    
    
    12,463
    
    
    
    14,523
    
    
    
    38,731
    
    
    
    43,402Interest ExpenseDeposits
    
    
    2,554
    
    
    
    4,326
    
    
    
    8,279
    
    
    
    13,829Federal Home Loan Bank advances
    
    
    319
    
    
    
    351
    
    
    
    953
    
    
    
    1,131Short-term borrowings
    
    
    1
    
    
    
    43
    
    
    
    3
    
    
    
    111Junior subordinated debentures
    
    
    217
    
    
    
    225
    
    
    
    648
    
    
    
    721Total interest expense
    
    
    3,091
    
    
    
    4,945
    
    
    
    9,883
    
    
    
    15,792Net Interest Income
    
    
    9,372
    
    
    
    9,578
    
    
    
    28,848
    
    
    
    27,610Provision for Loan Losses (Note 6)
    
    
    2,076
    
    
    
    11,067
    
    
    
    6,294
    
    
    
    15,360Net interest income (loss) after
provision for loan losses
    
    
    7,296
    
    
    
    (1,489
    )
    
    
    22,554
    
    
    
    12,250Noninterest IncomeInvestment and trust services
    
    
    403
    
    
    
    496
    
    
    
    1,411
    
    
    
    1,405Deposit service charges
    
    
    1,146
    
    
    
    1,211
    
    
    
    3,179
    
    
    
    3,332Other service charges and fees
    
    
    792
    
    
    
    766
    
    
    
    2,412
    
    
    
    2,108Income from bank owned life insurance
    
    
    171
    
    
    
    213
    
    
    
    515
    
    
    
    540Other income
    
    
    86
    
    
    
    52
    
    
    
    248
    
    
    
    216Total fees and other income
    
    
    2,598
    
    
    
    2,738
    
    
    
    7,765
    
    
    
    7,601Securities gains, net
    
    
    
    
    
    
    88
    
    
    
    38
    
    
    
    674Gains on sale of loans
    
    
    264
    
    
    
    341
    
    
    
    651
    
    
    
    963Losses on sale of other assets, net
    
    
    (28
    )
    
    
    (43
    )
    
    
    (73
    )
    
    
    (13
    )Gain on extinguishment of debt
    
    
    2,210
    
    
    
    
    
    
    
    2,210
    
    
    
    Total noninterest income
    
    
    5,044
    
    
    
    3,124
    
    
    
    10,591
    
    
    
    9,225Noninterest ExpenseSalaries and employee benefits
    
    
    3,898
    
    
    
    3,610
    
    
    
    11,727
    
    
    
    11,130Furniture and equipment
    
    
    866
    
    
    
    1,039
    
    
    
    2,716
    
    
    
    3,370Net occupancy
    
    
    579
    
    
    
    571
    
    
    
    1,775
    
    
    
    1,785Outside services
    
    
    538
    
    
    
    657
    
    
    
    1,686
    
    
    
    2,001Marketing and public relations
    
    
    256
    
    
    
    228
    
    
    
    828
    
    
    
    767Supplies, postage and freight
    
    
    292
    
    
    
    311
    
    
    
    936
    
    
    
    951Telecommunications
    
    
    200
    
    
    
    208
    
    
    
    623
    
    
    
    596Ohio franchise tax
    
    
    274
    
    
    
    232
    
    
    
    836
    
    
    
    689FDIC assessments
    
    
    568
    
    
    
    743
    
    
    
    1,653
    
    
    
    2,032Other real estate owned
    
    
    95
    
    
    
    89
    
    
    
    247
    
    
    
    263Electronic banking expenses
    
    
    237
    
    
    
    209
    
    
    
    659
    
    
    
    598Loan and collection expense
    
    
    433
    
    
    
    385
    
    
    
    1,206
    
    
    
    963Other expense
    
    
    532
    
    
    
    455
    
    
    
    1,527
    
    
    
    1,432Total noninterest expense
    
    
    8,768
    
    
    
    8,737
    
    
    
    26,419
    
    
    
    26,577Income (loss) before income tax expense
    
    
    3,572
    
    
    
    (7,102
    )
    
    
    6,726
    
    
    
    (5,102
    )Income tax expense (benefit)
    
    
    842
    
    
    
    (2,726
    )
    
    
    1,422
    
    
    
    (2,559
    )Net Income (Loss)
    
    $
    2,730
    
    
    $
    (4,376
    )
    
    $
    5,304
    
    
    $
    (2,543
    )Dividends and accretion on preferred stock
    
    
    320
    
    
    
    319
    
    
    
    957
    
    
    
    937Net Income (Loss) Available to Common
Shareholders
    
    $
    2,410
    
    
    $
    (4,695
    )
    
    $
    4,347
    
    
    $
    (3,480
    )Net Income (Loss) Per Common Share (Note 2)Basic
    
    $
    0.32
    
    
    $
    (0.64
    )
    
    $
    0.59
    
    
    $
    (0.48
    )Diluted
    
    
    0.32
    
    
    
    (0.64
    )
    
    
    0.59
    
    
    
    (0.48
    )Dividends declared
    
    
    0.01
    
    
    
    0.01
    
    
    
    0.03
    
    
    
    0.19Average Common Shares OutstandingBasic
    
    
    7,514,935
    
    
    
    7,295,663
    
    
    
    7,400,957
    
    
    
    7,295,663Diluted
    
    
    7,514,935
    
    
    
    7,295,663
    
    
    
    7,400,957
    
    
    
    7,295,663
 See accompanying notes to consolidated financial statements
 4




---



##### Table of Contents



Consolidated Statements of Shareholders Equity (unaudited)
 PreferredStock
    
    
    Warrant to
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    Accumulated Other(net of
    
    
    Purchase
    
    
    Common
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    Treasurydiscount)
    
    
    Common Stock
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    Stock
    
    
    Total(Dollars in thousands except share and per share amounts)Balance, January 1, 2009
    
    $
    25,077
    
    
    $
    146
    
    
    $
    7,624
    
    
    $
    37,783
    
    
    $
    41,682
    
    
    $
    839
    
    
    $
    (6,092
    )
    
    $
    107,059Comprehensive income:Net Income (Loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,543
    )
    
    
    
    
    
    
    
    
    
    
    (2,543
    )Other comprehensive income, net of tax:Change in unrealized gains and losses
on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,807
    
    
    
    
    
    
    
    2,807Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    264Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69Preferred dividends and accretion of discount
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,020
    )
    
    
    
    
    
    
    
    
    
    
    (1,008
    )Common dividends declared, $.19 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,386
    )
    
    
    
    
    
    
    
    
    
    
    (1,386
    )Balance, September 30, 2009
    
    $
    25,089
    
    
    $
    146
    
    
    $
    7,624
    
    
    $
    37,852
    
    
    $
    36,733
    
    
    $
    3,646
    
    
    $
    (6,092
    )
    
    $
    104,998Balance, January 1, 2010
    
    $
    25,092
    
    
    $
    146
    
    
    $
    7,624
    
    
    $
    37,862
    
    
    $
    36,883
    
    
    $
    2,626
    
    
    $
    (6,092
    )
    
    $
    104,141Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,304
    
    
    
    
    
    
    
    
    
    
    
    5,304Other comprehensive income, net of tax:Change in unrealized gains and losses on
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    958
    
    
    
    
    
    
    
    958Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,262Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70Common shares issued (462,234 shares)
    
    
    
    
    
    
    
    
    
    
    462
    
    
    
    1,578
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,040Restricted shares granted (67,498 shares)
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    (68
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred dividends and accretion of discount
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (956
    )
    
    
    
    
    
    
    
    
    
    
    (945
    )Common dividends declared, $.03 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (225
    )
    
    
    
    
    
    
    
    
    
    
    (225
    )Balance, September 30, 2010
    
    $
    25,103
    
    
    $
    146
    
    
    $
    8,154
    
    
    $
    39,442
    
    
    $
    41,006
    
    
    $
    3,584
    
    
    $
    (6,092
    )
    
    $
    111,343
 See accompanying notes to consolidated financial statements
 5




---



##### Table of Contents



Consolidated Statements of Cash Flows (unaudited)
 Nine Months Ended September 30,2010
    
    
    2009(Dollars in thousands)Operating ActivitiesNet income (loss)
    
    $
    5,304
    
    
    $
    (2,543
    )Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses
    
    
    6,294
    
    
    
    15,360Depreciation and amortization
    
    
    1,041
    
    
    
    1,243Amortization of premiums and accretion of discounts, net
    
    
    1,571
    
    
    
    1,152Amortization of intangibles
    
    
    102
    
    
    
    102Amortization of loan servicing rights
    
    
    189
    
    
    
    253Amortization of deferred loan fees
    
    
    (46
    )
    
    
    175Federal deferred income tax expense (benefit)
    
    
    796
    
    
    
    (3,614
    )Securities gains, net
    
    
    (38
    )
    
    
    (674
    )Share-based compensation expense
    
    
    70
    
    
    
    69Loans originated for sale
    
    
    (60,319
    )
    
    
    (92,988
    )Proceeds from sales of loan originations
    
    
    59,426
    
    
    
    90,130Net gain from loan sales
    
    
    (651
    )
    
    
    (963
    )Net loss on sale of other assets
    
    
    73
    
    
    
    13Net gain on extinguishment of debt
    
    
    (2,210
    )
    
    
    Net decrease (increase) in accrued interest receivable and other assets
    
    
    3,436
    
    
    
    (1,584
    )Net increase (decrease) in accrued interest payable, taxes and other liabilities
    
    
    (3,356
    )
    
    
    990Net cash provided by operating activities
    
    
    11,682
    
    
    
    7,121Investing ActivitiesProceeds from sales of available-for-sale securities
    
    
    4,170
    
    
    
    28,089Proceeds from maturities of available-for-sale securities
    
    
    102,338
    
    
    
    45,242Purchase of available-for-sale securities
    
    
    (74,355
    )
    
    
    (119,941
    )Purchase of trading securities
    
    
    
    
    
    
    (9,005
    )Proceeds from maturities of trading securities
    
    
    436
    
    
    
    1,292Proceeds from sale of trading securities
    
    
    7,774
    
    
    
    10,462Change in interest-bearing deposits in other banks
    
    
    12
    
    
    
    Purchase of Federal Home Loan Bank Stock
    
    
    
    
    
    
    (101
    )Purchase of Federal Reserve Bank Stock
    
    
    (756
    )
    
    
    Net increase in loans made to customers
    
    
    (1,544
    )
    
    
    (9,632
    )Proceeds from the sale of other real estate owned
    
    
    419
    
    
    
    869Purchase of bank premises and equipment
    
    
    (484
    )
    
    
    (366
    )Net cash provided by (used in) investing activities
    
    
    38,010
    
    
    
    (53,091
    )Financing ActivitiesNet decrease in demand and other noninterest-bearing
    
    
    (5,784
    )
    
    
    (794
    )Net increase (decrease) in savings, money market and interest-bearing demand
    
    
    21,629
    
    
    
    (2,126
    )Net increase (decrease) in certificates of deposit
    
    
    (8,247
    )
    
    
    50,736Net increase in short-term borrowings
    
    
    34
    
    
    
    8,494Proceeds from Federal Home Loan Bank advances
    
    
    34,000
    
    
    
    15,000Payment of Federal Home Loan Bank advances
    
    
    (34,003
    )
    
    
    (25,352
    )Extinguishment of debt, net
    
    
    (10
    )
    
    
    Dividends paid-preferred
    
    
    (945
    )
    
    
    (851
    )Dividends paid-common
    
    
    (225
    )
    
    
    (1,386
    )Net cash provided by financing activities
    
    
    6,449
    
    
    
    43,721Net increase (decrease) in cash and cash equivalents
    
    
    56,141
    
    
    
    (2,249
    )Cash and cash equivalents, January 1
    
    
    26,933
    
    
    
    36,923Cash and cash equivalents, September 30
    
    $
    83,074
    
    
    $
    34,674Supplemental cash flow informationInterest paid
    
    $
    10,239
    
    
    $
    16,773Income taxes paid
    
    
    675
    
    
    
    400Transfer of loans to other real estate owned
    
    
    1,640
    
    
    
    646Common stock issued for extinguishment of debt
    
    
    2,040
    
    
    
    
  6




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
 (1) Summary of Significant Accounting Policies
 Basis of Presentation
  New Accounting Pronouncements
 ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses.
 ASC Topic 860, Transfers and Servicing
 ASC Topic 810, Consolidation
 Use of Estimates
  Segment Information
  7




---



##### Table of Contents



Statement of Cash Flows
  Securities
  Restricted Stock
  Loans Held For Sale
  Loans
    8




---



##### Table of Contents



Allowance for Loan Losses
   Servicing
  Bank Premises and Equipment
  Goodwill and Core Deposit Intangibles
   Other Real Estate Owned
  Split-Dollar Life Insurance
  Investment and Trust Services Assets and Income
  9




---



##### Table of Contents



Income Taxes
  Stock-Based Compensation
  Comprehensive Income
   Preferred Stock
  (2) Earnings Per Share
  10




---



##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands except per share amounts)Weighted average shares outstanding used in Basic
Earnings per Common Share
    
    
    7,514,935
    
    
    
    7,295,663
    
    
    
    7,400,957
    
    
    
    7,295,663Dilutive effect of incentive stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dilutive effect of common stock warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares outstanding used in
Diluted Earnings Per Common Share
    
    
    7,514,935
    
    
    
    7,295,663
    
    
    
    7,400,957
    
    
    
    7,295,663Net Income (Loss)
    
    $
    2,730
    
    
    $
    (4,376
    )
    
    $
    5,304
    
    
    $
    (2,543
    )Preferred stock dividend and accretion
    
    
    320
    
    
    
    319
    
    
    
    957
    
    
    
    937Income (Loss) Available to Common Shareholders
    
    $
    2,410
    
    
    $
    (4,695
    )
    
    $
    4,347
    
    
    $
    (3,480
    )Basic Earnings (Loss) Per Common Share
    
    $
    0.32
    
    
    $
    (0.64
    )
    
    $
    0.59
    
    
    $
    (0.48
    )Diluted Earnings (Loss) Per Common Share
    
    $
    0.32
    
    
    $
    (0.64
    )
    
    $
    0.59
    
    
    $
    (0.48
    )
  (3) Cash and Due from Banks
  (4) Goodwill and Intangible Assets
    September 30, 2010
    
    
    December 31, 2009(Dollars in thousands)Core deposit intangibles
    
    $
    1,367
    
    
    $
    1,367Less: accumulated amortization
    
    
    464
    
    
    
    362Carrying value of core deposit intangibles
    
    $
    903
    
    
    $
    1,005
 11




---



##### Table of Contents



5) Securities
  At September 30, 2010Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueSecurities available for sale:U.S. Government agencies and corporations
    
    $
    31,250
    
    
    $
    674
    
    
    $
    
    
    
    $
    31,924Mortgage backed securities
    
    
    152,514
    
    
    
    6,170
    
    
    
    (15
    )
    
    
    158,669State and political subdivisions
    
    
    23,106
    
    
    
    1,325
    
    
    
    (104
    )
    
    
    24,327Total securities available for sale
    
    $
    206,870
    
    
    $
    8,169
    
    
    $
    (119
    )
    
    $
    214,920
 At December 31, 2009Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities available for sale:U.S. Government agencies and corporations
    
    $
    45,142
    
    
    $
    354
    
    
    $
    (281
    )
    
    $
    45,215Mortgage backed securities
    
    
    172,708
    
    
    
    6,092
    
    
    
    (21
    )
    
    
    178,779State and political subdivisions
    
    
    22,588
    
    
    
    571
    
    
    
    (116
    )
    
    
    23,043Total securities available for sale
    
    $
    240,438
    
    
    $
    7,017
    
    
    $
    (418
    )
    
    $
    247,037
  Trading Securities held at December 31, 2009Aggregate
    
    
    AggregateUnrealized Gains
    
    
    Unrealized Losses
    
    
    FairCost
    
    
    recorded to income
    
    
    recorded to income
    
    
    Value(Dollars in thousands)Trading Securities
    
    $
    8,327
    
    
    $
    118
    
    
    $
    
    
    
    $
    8,445
 (6) Loans and Allowance for Loan Losses
  September 30, 2010
    
    
    December 31, 2009(Dollars in thousands)Real estate loans (includes loans secured primarily by real estate only):Construction and land development
    
    $
    52,486
    
    
    $
    65,052One to four family residential
    
    
    210,600
    
    
    
    219,508Multi-family residential
    
    
    29,450
    
    
    
    28,988Non-farm non-residential properties
    
    
    284,043
    
    
    
    286,778Commercial and industrial loans
    
    
    60,808
    
    
    
    61,929Personal loans to individuals:Auto, single payment and installment
    
    
    152,328
    
    
    
    135,097All other loans
    
    
    6,194
    
    
    
    5,845Total loans
    
    
    795,909
    
    
    
    803,197Allowance for loan losses
    
    
    (17,197
    )
    
    
    (18,792
    )Net loans
    
    $
    778,712
    
    
    $
    784,405
 12




---



##### Table of Contents



September 30, 2010
    
    September 30, 2009(Dollars in thousands)Balance at the beginning of period
    
    $
    18,792
    
    
    $
    11,652Provision for loan losses
    
    
    6,294
    
    
    
    15,360Loans charged-off
    
    
    (8,499
    )
    
    
    (4,875
    )Recoveries on loans previously charged-off
    
    
    610
    
    
    
    419Balance at the end of the period
    
    $
    17,197
    
    
    $
    22,556
  (7) Deposits
  September 30, 2010
    
    
    December 31, 2009(Dollars in thousands)Demand and other noninterest-bearing
    
    $
    112,721
    
    
    $
    118,505Interest checking
    
    
    138,311
    
    
    
    137,807Savings
    
    
    87,968
    
    
    
    82,771Money market accounts
    
    
    100,395
    
    
    
    84,467Consumer time deposits
    
    
    464,719
    
    
    
    476,798Public time deposits
    
    
    74,917
    
    
    
    71,085Total deposits
    
    $
    979,031
    
    
    $
    971,433
   After 12 months
    
    
    After 36 monthsWithin
    
    
    but within 36
    
    
    but within 6012 months
    
    
    months
    
    
    months
    
    
    After 5 years
    
    
    Total(Dollars in thousands)Consumer time deposits
    
    $
    278,797
    
    
    $
    144,957
    
    
    $
    40,965
    
    
    $
    
    
    
    $
    464,719Public time deposits
    
    
    71,092
    
    
    
    2,825
    
    
    
    1,000
    
    
    
    
    
    
    
    74,917Total time deposits
    
    $
    349,889
    
    
    $
    147,782
    
    
    $
    41,965
    
    
    $
    
    
    
    $
    539,636
 (8) Short-Term Borrowings
   13




---



##### Table of Contents



(9) Federal Home Loan Bank Advances
   September 30, 2010
    
    
    December 31, 2009(Dollars in thousands)Maturity January 2010, fixed rate 3.58%
    
    $
    
    
    
    $
    10,000Maturities January 2011 through February
2011, with fixed rates ranging from 3.17%
to 3.67%, averaging 3.50% for 2010 and
2009.
    
    
    15,000
    
    
    
    15,000Maturity January 2012, fixed rate 2.37%
    
    
    15,000
    
    
    
    15,000Maturities January 2014, fixed rates
ranging from 2.57% to 3.55%, averaging
2.57% for 2010 and 3.55% for 2009.
    
    
    10,043
    
    
    
    55Maturity July 2015, fixed rate 4.76%
    
    
    2,459
    
    
    
    2,450Total FHLB advances
    
    $
    42,502
    
    
    $
    42,505
 (10) Trust Preferred Securities
     (11) Commitments, Credit Risk, and Contingencies
  14




---



##### Table of Contents



Amount(Dollars in thousands)Commitments to extend credit
    
    $
    76,895Home equity lines of credit
    
    
    76,684Standby letters of credit
    
    
    8,677Total
    
    $
    162,256
 (12) Estimated Fair Value of Financial Instruments
   
    
    The carrying value of cash and due from banks, Federal funds sold,
short-term investments, interest-bearing deposits in other banks 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.
    
    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 carrying value approximates the fair value for bank owned life insurance.
    
    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
the balance sheet date, 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 Federal Home Loan Bank 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
 15




---



##### Table of Contents



commitments. The
carrying amount and fair value of off-balance sheet instruments is not
significant as of September 30, 2010 and December 31, 2009.Limitations
    September 30, 2010
    
    
    December 31, 2009Carrying
    
    
    Estimated Fair
    
    
    Carrying
    
    
    Estimated FairValue
    
    
    Value
    
    
    Value
    
    
    Value(Dollars in thousands)Financial assetsCash and due from banks, Federal
funds sold, short-term investments
and interest-bearing deposits in
other banks
    
    $
    83,421
    
    
    $
    83,421
    
    
    $
    27,292
    
    
    $
    27,292Securities
    
    
    214,920
    
    
    
    214,920
    
    
    
    255,482
    
    
    
    255,482Portfolio loans, net
    
    
    778,712
    
    
    
    780,683
    
    
    
    784,405
    
    
    
    786,154Loans held for sale
    
    
    4,676
    
    
    
    4,676
    
    
    
    3,783
    
    
    
    3,783Accrued interest receivable
    
    
    3,740
    
    
    
    3,740
    
    
    
    4,072
    
    
    
    4,072Financial liabilitiesDeposits:Demand, savings and money market
    
    
    439,395
    
    
    
    439,395
    
    
    
    423,550
    
    
    
    423,550Certificates of deposit
    
    
    539,636
    
    
    
    551,553
    
    
    
    547,883
    
    
    
    555,302Total deposits
    
    
    979,031
    
    
    
    990,948
    
    
    
    971,433
    
    
    
    978,852Short-term borrowings
    
    
    1,491
    
    
    
    1,491
    
    
    
    1,457
    
    
    
    1,457Federal Home Loan Bank advances
    
    
    42,502
    
    
    
    43,935
    
    
    
    42,505
    
    
    
    43,708Junior subordinated debentures
    
    
    16,238
    
    
    
    15,465
    
    
    
    20,620
    
    
    
    18,489Accrued interest payable
    
    
    1,718
    
    
    
    1,718
    
    
    
    2,074
    
    
    
    2,074
  
    
    Level 1 Valuations based on quoted prices in active markets, such as the New York Stock
Exchange. Valuations are obtained from readily available pricing sources for market transactions
involving identical assets or liabilities.
    
    Level 2 Valuations of assets and liabilities traded in less active dealer or broker markets.
Valuations include quoted prices for similar assets and liabilities traded in the same market;
quoted prices for identical or similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant value drivers are
observable. Valuations may be obtained from, or corroborated by, third-party pricing services.
    
    Level 3 Assets and liabilities with valuations that include methodologies and assumptions that
may not be readily observable, including option pricing models, discounted cash flow models, yield
curves and similar techniques. Level 3 valuations incorporate certain assumptions and projections
in determining the fair value assigned to such assets or liabilities, but in all cases are
corroborated by external data, which may include third-party pricing services.
 16




---



##### Table of Contents



Quoted Prices in Active
    
    
    Significant Other
    
    
    SignificantFair Value as of
    
    
    Markets for Identical
    
    
    Observable Inputs
    
    
    Unobservable InputsDescription
    
    September 30, 2010
    
    
    Assets (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Securities available for sale:U.S. Government agencies and
corporations
    
    $
    31,924
    
    
    
    
    
    
    $
    31,924Mortgage backed securities
    
    
    158,669
    
    
    
    
    
    
    
    158,669State and political subdivisions
    
    
    24,327
    
    
    
    
    
    
    
    24,327
    
    
    
    Total
    
    $
    214,920
    
    
    $
    
    
    
    $
    214,920
    
    
    $
    
 Quoted Prices in Active
    
    
    Significant Other
    
    
    SignificantFair Value as of
    
    
    Markets for Identical
    
    
    Observable Inputs
    
    
    Unobservable InputsDescription
    
    December 31, 2009
    
    
    Assets (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Trading Securities
    
    $
    8,445
    
    
    
    
    
    
    $
    8,445
    
    
    $
    Securities available for sale:U.S. Government agencies and
corporations
    
    
    45,215
    
    
    
    
    
    
    
    45,215Mortgage backed securities
    
    
    178,779
    
    
    
    
    
    
    
    178,779State and political subdivisions
    
    
    23,043
    
    
    
    
    
    
    
    23,043
    
    
    
    Total
    
    $
    255,482
    
    
    $
    
    
    
    $
    255,482
    
    
    $
    
   (13) Stock-Based Compensation
     17




---



##### Table of Contents



Outstanding
    
    ExercisableWeightedAverageRemaining
    
    
    
    
    
    WeightedContractual Life
    
    
    
    
    
    Average ExerciseNumber
    
    (Years)
    
    Number
    
    PriceRange of Exercise Prices$5.34-$14.46
    
    
    2,500
    
    
    
    8.62
    
    
    
    833
    
    
    $
    5.34$14.47-$15.34
    
    
    83,000
    
    
    
    7.35
    
    
    
    55,329
    
    
    
    14.47$15.35-$16.50
    
    
    52,500
    
    
    
    6.46
    
    
    
    52,500
    
    
    
    15.78$16.51-$19.10
    
    
    30,000
    
    
    
    5.34
    
    
    
    30,000
    
    
    
    19.10$19.11-$19.17
    
    
    30,000
    
    
    
    4.34
    
    
    
    30,000
    
    
    
    19.17Outstanding at end of period
    
    
    198,000
    
    
    
    6.37
    
    
    
    168,662
    
    
    $
    16.49
  2010
    
    
    2009Weighted
    
    
    
    
    
    
    WeightedAverage Exercise
    
    
    
    
    
    
    Average ExerciseOptions
    
    
    Price per Share
    
    
    Options
    
    
    Price per ShareOutstanding at beginning of period
    
    
    198,000
    
    
    $
    16.11
    
    
    
    203,500
    
    
    $
    16.18Granted
    
    
    
    
    
    
    
    
    
    
    2,500
    
    
    
    5.34Forfeited or expired
    
    
    
    
    
    
    
    
    
    
    (2,500
    )
    
    
    14.47Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock dividend or split
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of period
    
    
    198,000
    
    
    $
    16.11
    
    
    
    203,500
    
    
    $
    16.07Exercisable at end of period
    
    
    168,662
    
    
    $
    16.49
    
    
    
    125,498
    
    
    $
    17.08
 18




---



##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Summary
         19




---



##### Table of Contents



20




---



##### 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 30,2010
    
    
    2009Average
    
    
    
    
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Assets:U.S. Govt agencies and corporations
    
    $
    218,452
    
    
    $
    1,395
    
    
    
    2.53
    %
    
    $
    260,133
    
    
    $
    2,642
    
    
    
    4.03
    %State and political subdivisions
    
    
    23,720
    
    
    
    353
    
    
    
    5.91
    
    
    
    25,774
    
    
    
    376
    
    
    
    5.79Federal funds sold and short-term
investments
    
    
    30,708
    
    
    
    10
    
    
    
    0.13
    
    
    
    59,492
    
    
    
    19
    
    
    
    0.13Restricted stock
    
    
    5,741
    
    
    
    72
    
    
    
    4.98
    
    
    
    4,953
    
    
    
    65
    
    
    
    5.21Commercial loans
    
    
    442,194
    
    
    
    5,902
    
    
    
    5.30
    
    
    
    453,829
    
    
    
    6,325
    
    
    
    5.53Real estate mortgage loans
    
    
    70,309
    
    
    
    964
    
    
    
    5.44
    
    
    
    83,723
    
    
    
    1,176
    
    
    
    5.57Home equity lines of credit
    
    
    110,393
    
    
    
    1,092
    
    
    
    3.93
    
    
    
    107,668
    
    
    
    1,088
    
    
    
    4.01Installment loans
    
    
    179,517
    
    
    
    2,801
    
    
    
    6.19
    
    
    
    173,657
    
    
    
    2,968
    
    
    
    6.78Total Earning Assets
    
    $
    1,081,034
    
    
    $
    12,589
    
    
    
    4.62
    %
    
    $
    1,169,229
    
    
    $
    14,659
    
    
    
    4.97
    %Allowance for loan loss
    
    
    (19,089
    )
    
    
    
    
    
    
    
    
    
    
    (13,451
    )Cash and due from banks
    
    
    18,335
    
    
    
    
    
    
    
    
    
    
    
    16,921Bank owned life insurance
    
    
    16,841
    
    
    
    
    
    
    
    
    
    
    
    16,122Other assets
    
    
    53,063
    
    
    
    
    
    
    
    
    
    
    
    47,234Total Assets
    
    $
    1,150,184
    
    
    
    
    
    
    
    
    
    
    $
    1,236,055Liabilities and Shareholders EquityConsumer time deposits
    
    $
    457,667
    
    
    $
    2,239
    
    
    
    1.94
    %
    
    $
    494,926
    
    
    $
    3,615
    
    
    
    2.90
    %Public time deposits
    
    
    78,022
    
    
    
    120
    
    
    
    0.61
    
    
    
    88,223
    
    
    
    370
    
    
    
    1.66Brokered time deposits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,707
    
    
    
    55
    
    
    
    3.84Money market accounts
    
    
    93,486
    
    
    
    98
    
    
    
    0.41
    
    
    
    135,694
    
    
    
    168
    
    
    
    0.49Savings deposits
    
    
    87,961
    
    
    
    38
    
    
    
    0.17
    
    
    
    80,054
    
    
    
    41
    
    
    
    0.20Interest-bearing demand
    
    
    139,598
    
    
    
    58
    
    
    
    0.17
    
    
    
    119,875
    
    
    
    77
    
    
    
    0.25Short-term borrowings
    
    
    1,708
    
    
    
    1
    
    
    
    0.25
    
    
    
    33,684
    
    
    
    43
    
    
    
    0.51FHLB advances
    
    
    42,589
    
    
    
    319
    
    
    
    2.97
    
    
    
    43,005
    
    
    
    351
    
    
    
    3.24Trust preferred securities
    
    
    19,269
    
    
    
    218
    
    
    
    4.48
    
    
    
    20,732
    
    
    
    225
    
    
    
    4.31Total Interest-Bearing Liabilities
    
    $
    920,300
    
    
    $
    3,091
    
    
    
    1.33
    %
    
    $
    1,021,900
    
    
    $
    4,945
    
    
    
    1.92
    %Noninterest-bearing deposits
    
    
    114,826
    
    
    
    
    
    
    
    
    
    
    
    94,489Other liabilities
    
    
    6,186
    
    
    
    
    
    
    
    
    
    
    
    11,359Shareholders Equity
    
    
    108,872
    
    
    
    
    
    
    
    
    
    
    
    108,307Total Liabilities and
Shareholders Equity
    
    $
    1,150,184
    
    
    
    
    
    
    
    
    
    
    $
    1,236,055Net interest Income (FTE)
    
    
    
    
    
    $
    9,498
    
    
    
    3.49
    %
    
    
    
    
    
    $
    9,714
    
    
    
    3.30
    %Taxable Equivalent Adjustment
    
    
    
    
    
    
    (126
    )
    
    
    (0.05
    )
    
    
    
    
    
    
    (136
    )
    
    
    (0.05
    )Net Interest Income Per
Financial Statements
    
    
    
    
    
    $
    9,372
    
    
    
    
    
    
    
    
    
    
    $
    9,578Net Yield on Earning Assets
    
    
    
    
    
    
    
    
    
    
    3.44
    %
    
    
    
    
    
    
    
    
    
    
    3.25
    %
 21




---



##### Table of Contents



Results of Operations
 Three Months Ended September 30, 2010 versus Three Months Ended September 30, 2009 Net Interest Income Comparison
      22




---



##### Table of Contents



Table 2: Rate/Volume Analysis of Net Interest Income (FTE)
 Three Months Ended September 30,Increase (Decrease) in Interest Income/Expensein 2010 over 2009Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)U.S. Govt agencies and corporations
    
    $
    (266
    )
    
    $
    (981
    )
    
    $
    (1,247
    )State and political subdivisions
    
    
    (31
    )
    
    
    8
    
    
    
    (23
    )Federal funds sold and short-term investments
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )Restricted stock
    
    
    10
    
    
    
    (3
    )
    
    
    7Commercial loans
    
    
    (155
    )
    
    
    (268
    )
    
    
    (423
    )Real estate mortgage loans
    
    
    (184
    )
    
    
    (28
    )
    
    
    (212
    )Home equity lines of credit
    
    
    27
    
    
    
    (23
    )
    
    
    4Installment loans
    
    
    91
    
    
    
    (258
    )
    
    
    (167
    )Total Interest Income
    
    
    (517
    )
    
    
    (1,553
    )
    
    
    (2,070
    )Consumer time deposits
    
    
    (182
    )
    
    
    (1,194
    )
    
    
    (1,376
    )Public time deposits
    
    
    (4
    )
    
    
    (246
    )
    
    
    (250
    )Brokered time deposits
    
    
    (55
    )
    
    
    
    
    
    
    (55
    )Money market accounts
    
    
    (44
    )
    
    
    (26
    )
    
    
    (70
    )Savings deposits
    
    
    3
    
    
    
    (6
    )
    
    
    (3
    )Interest bearing demand
    
    
    8
    
    
    
    (27
    )
    
    
    (19
    )Short-term borrowings
    
    
    (20
    )
    
    
    (22
    )
    
    
    (42
    )FHLB advances
    
    
    (2
    )
    
    
    (30
    )
    
    
    (32
    )Trust preferred securities
    
    
    (16
    )
    
    
    9
    
    
    
    (7
    )Total Interest Expense
    
    
    (312
    )
    
    
    (1,542
    )
    
    
    (1,854
    )Net Interest Income (FTE)
    
    $
    (205
    )
    
    $
    (11
    )
    
    $
    (216
    )
  23




---



##### Table of Contents



Table 3: Condensed Consolidated Average Balance Sheets
 Interest, Rate, and Rate/ Volume differentials are stated on a Fully-Tax Equivalent (FTE) Basis.
  Nine Months Ended September 30,2010
    
    2009Average
    
    
    
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Assets:U.S. Govt agencies and corporations
    
    $
    225,330
    
    
    $
    5,650
    
    
    
    3.35
    %
    
    $
    244,124
    
    
    $
    7,900
    
    
    
    4.49
    %State and political subdivisions
    
    
    23,390
    
    
    
    1,063
    
    
    
    6.08
    
    
    
    24,460
    
    
    
    1,096
    
    
    
    5.99Federal funds sold and short-term
investments
    
    
    33,407
    
    
    
    30
    
    
    
    0.12
    
    
    
    49,013
    
    
    
    52
    
    
    
    0.14Restricted stock
    
    
    5,461
    
    
    
    202
    
    
    
    4.95
    
    
    
    4,953
    
    
    
    183
    
    
    
    4.99Commercial loans
    
    
    443,787
    
    
    
    17,789
    
    
    
    5.36
    
    
    
    448,766
    
    
    
    19,001
    
    
    
    5.66Real estate mortgage loans
    
    
    73,422
    
    
    
    2,977
    
    
    
    5.42
    
    
    
    89,245
    
    
    
    3,921
    
    
    
    5.87Home equity lines of credit
    
    
    109,391
    
    
    
    3,233
    
    
    
    3.95
    
    
    
    105,087
    
    
    
    3,151
    
    
    
    4.01Installment loans
    
    
    172,268
    
    
    
    8,165
    
    
    
    6.34
    
    
    
    168,610
    
    
    
    8,494
    
    
    
    6.74Total Earning Assets
    
    $
    1,086,456
    
    
    $
    39,109
    
    
    
    4.81
    %
    
    $
    1,134,258
    
    
    $
    43,798
    
    
    
    5.16
    %Allowance for loan loss
    
    
    (19,195
    )
    
    
    
    
    
    
    
    
    
    
    (12,252
    )Cash and due from banks
    
    
    17,820
    
    
    
    
    
    
    
    
    
    
    
    17,804Bank owned life insurance
    
    
    16,669
    
    
    
    
    
    
    
    
    
    
    
    15,964Other assets
    
    
    53,952
    
    
    
    
    
    
    
    
    
    
    
    47,184Total Assets
    
    $
    1,155,702
    
    
    
    
    
    
    
    
    
    
    $
    1,202,958Liabilities and Shareholders EquityConsumer time deposits
    
    $
    467,143
    
    
    $
    7,262
    
    
    
    2.08
    %
    
    $
    482,112
    
    
    $
    11,157
    
    
    
    3.09
    %Public time deposits
    
    
    84,771
    
    
    
    440
    
    
    
    0.69
    
    
    
    86,188
    
    
    
    1,445
    
    
    
    2.24Brokered time deposits
    
    
    
    
    
    
    -
    
    
    
    -
    
    
    
    10,203
    
    
    
    320
    
    
    
    4.19Money market accounts
    
    
    90,497
    
    
    
    272
    
    
    
    0.40
    
    
    
    115,823
    
    
    
    500
    
    
    
    0.58Savings deposits
    
    
    86,104
    
    
    
    119
    
    
    
    0.19
    
    
    
    79,752
    
    
    
    137
    
    
    
    0.23Interest-bearing demand
    
    
    136,050
    
    
    
    186
    
    
    
    0.18
    
    
    
    121,783
    
    
    
    270
    
    
    
    0.30Short-term borrowings
    
    
    1,694
    
    
    
    3
    
    
    
    0.24
    
    
    
    28,513
    
    
    
    111
    
    
    
    0.52FHLB advances
    
    
    43,089
    
    
    
    953
    
    
    
    2.96
    
    
    
    46,246
    
    
    
    1,131
    
    
    
    3.27Trust preferred securities
    
    
    20,236
    
    
    
    648
    
    
    
    4.28
    
    
    
    20,741
    
    
    
    721
    
    
    
    4.65Total Interest-Bearing Liabilities
    
    $
    929,584
    
    
    $
    9,883
    
    
    
    1.42
    %
    
    $
    991,361
    
    
    $
    15,792
    
    
    
    2.13
    %Noninterest-bearing deposits
    
    
    112,779
    
    
    
    
    
    
    
    
    
    
    
    92,582Other liabilities
    
    
    6,503
    
    
    
    
    
    
    
    
    
    
    
    10,924Shareholders Equity
    
    
    106,836
    
    
    
    
    
    
    
    
    
    
    
    108,091Total Liabilities and
Shareholders Equity
    
    $
    1,155,702
    
    
    
    
    
    
    
    
    
    
    $
    1,202,958Net interest Income (FTE)
    
    
    
    
    
    $
    29,226
    
    
    
    3.60
    %
    
    
    
    
    
    $
    28,006
    
    
    
    3.30
    %Taxable Equivalent Adjustment
    
    
    
    
    
    
    (378
    )
    
    
    (0.05
    )
    
    
    
    
    
    
    (396
    )
    
    
    (0.05
    )Net Interest Income Per 
     Financial Statements
    
    
    
    
    
    $
    28,848
    
    
    
    
    
    
    
    
    
    
    $
    27,610Net Yield on Earning Assets
    
    
    
    
    
    
    
    
    
    
    3.55
    %
    
    
    
    
    
    
    
    
    
    
    3.25
    %
 24




---



##### Table of Contents



Nine Months Ended September 30, 2010 versus Nine Months Ended September 30, 2009 Net Interest
Income Comparison
      25




---



##### Table of Contents



Table 4: Rate/Volume Analysis of Net Interest Income (FTE)
 Nine Months Ended September 30,Increase (Decrease) in Interest Income/Expensein 2010 over 2009Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)U.S. Govt agencies and corporations
    
    $
    (471
    )
    
    $
    (1,779
    )
    
    $
    (2,250
    )State and political subdivisions
    
    
    (49
    )
    
    
    16
    
    
    
    (33
    )Federal funds sold and short-term investments
    
    
    (14
    )
    
    
    (8
    )
    
    
    (22
    )Restricted stock
    
    
    19
    
    
    
    
    
    
    
    19Commercial loans
    
    
    (200
    )
    
    
    (1,012
    )
    
    
    (1,212
    )Real estate mortgage loans
    
    
    (642
    )
    
    
    (302
    )
    
    
    (944
    )Home equity lines of credit
    
    
    127
    
    
    
    (45
    )
    
    
    82Installment loans
    
    
    173
    
    
    
    (502
    )
    
    
    (329
    )Total Interest Income
    
    
    (1,057
    )
    
    
    (3,632
    )
    
    
    (4,689
    )Consumer time deposits
    
    
    (233
    )
    
    
    (3,662
    )
    
    
    (3,895
    )Public time deposits
    
    
    (7
    )
    
    
    (998
    )
    
    
    (1,005
    )Brokered time deposits
    
    
    (320
    )
    
    
    
    
    
    
    (320
    )Money market accounts
    
    
    (76
    )
    
    
    (152
    )
    
    
    (228
    )Savings deposits
    
    
    9
    
    
    
    (27
    )
    
    
    (18
    )Interest bearing demand
    
    
    20
    
    
    
    (104
    )
    
    
    (84
    )Short-term borrowings
    
    
    (49
    )
    
    
    (59
    )
    
    
    (108
    )FHLB advances
    
    
    (70
    )
    
    
    (108
    )
    
    
    (178
    )Trust preferred securities
    
    
    (16
    )
    
    
    (57
    )
    
    
    (73
    )Total Interest Expense
    
    
    (742
    )
    
    
    (5,167
    )
    
    
    (5,909
    )Net Interest Income (FTE)
    
    $
    (315
    )
    
    $
    1,535
    
    
    $
    1,220
  26




---



##### Table of Contents



Noninterest Income
 Table 5: Details on Noninterest Income
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Investment and trust services
    
    $
    403
    
    
    $
    496
    
    
    $
    1,411
    
    
    $
    1,405Deposit service charges
    
    
    1,146
    
    
    
    1,211
    
    
    
    3,179
    
    
    
    3,332Electronic banking fees
    
    
    792
    
    
    
    766
    
    
    
    2,412
    
    
    
    2,108Income from bank owned life
insurance
    
    
    171
    
    
    
    213
    
    
    
    515
    
    
    
    540Other income
    
    
    86
    
    
    
    52
    
    
    
    248
    
    
    
    216Total fees and other income
    
    
    2,598
    
    
    
    2,738
    
    
    
    7,765
    
    
    
    7,601Gain on sale of securities
    
    
    
    
    
    
    88
    
    
    
    38
    
    
    
    674Gain on sale of loans
    
    
    264
    
    
    
    341
    
    
    
    651
    
    
    
    963Loss on sale of other assets, net
    
    
    (28
    )
    
    
    (43
    )
    
    
    (73
    )
    
    
    (13
    )Gain on extinguishment of debt
    
    
    2,210
    
    
    
    
    
    
    
    2,210
    
    
    
    Total noninterest income
    
    $
    5,044
    
    
    $
    3,124
    
    
    $
    10,591
    
    
    $
    9,225
 Three Months Ended September 30, 2010 versus Three Months Ended September 30, 2009 Noninterest
Income Comparison
   Nine Months Ended September 30, 2010 versus Nine Months Ended September 30, 2009 Noninterest Income Comparison
   27




---



##### Table of Contents



Noninterest Expense
 Table 6: Details on Noninterest Expense
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Salaries and employee benefits
    
    $
    3,898
    
    
    $
    3,610
    
    
    $
    11,727
    
    
    $
    11,130Furniture and equipment
    
    
    866
    
    
    
    1,039
    
    
    
    2,716
    
    
    
    3,370Net occupancy
    
    
    579
    
    
    
    571
    
    
    
    1,775
    
    
    
    1,785Outside services
    
    
    538
    
    
    
    657
    
    
    
    1,686
    
    
    
    2,001Marketing and public relations
    
    
    256
    
    
    
    228
    
    
    
    828
    
    
    
    767Supplies, postage and freight
    
    
    292
    
    
    
    311
    
    
    
    936
    
    
    
    951Telecommunications
    
    
    200
    
    
    
    208
    
    
    
    623
    
    
    
    596Ohio Franchise tax
    
    
    274
    
    
    
    232
    
    
    
    836
    
    
    
    689FDIC Assessments
    
    
    568
    
    
    
    743
    
    
    
    1,653
    
    
    
    2,032Other real estate owned
    
    
    95
    
    
    
    89
    
    
    
    247
    
    
    
    263Electronic banking expenses
    
    
    237
    
    
    
    209
    
    
    
    659
    
    
    
    598Loan and Collection Expense
    
    
    433
    
    
    
    385
    
    
    
    1,206
    
    
    
    963Other expense
    
    
    532
    
    
    
    455
    
    
    
    1,527
    
    
    
    1,432Total noninterest expense
    
    $
    8,768
    
    
    $
    8,737
    
    
    $
    26,419
    
    
    $
    26,577
 Three Months Ended September 30, 2010 versus Three Months Ended September 30, 2009 Noninterest
Expense Comparison
  Nine Months Ended September 30, 2010 versus Nine Months Ended September 30, 2009 Noninterest Expense Comparison
  Income taxes
 Three Months Ended September 30, 2010 versus Three Months Ended September 30, 2009 Income Taxes Comparison
  28




---



##### Table of Contents



Nine Months Ended September 30, 2010 versus Nine Months Ended September 30, 2009 Income Taxes Comparison
  Financial Condition
 Overview
  Securities
  Loans
  Table 7: Details on Loan Balances
 September 30, 2010
    
    
    December 31, 2009(Dollars in thousands)Commercial
    
    $
    438,252
    
    
    $
    452,341Real estate mortgage
    
    
    67,551
    
    
    
    77,204Home equity lines of credit
    
    
    110,484
    
    
    
    108,921Installment
    
    
    179,622
    
    
    
    164,731Total Loans
    
    
    795,909
    
    
    
    803,197Allowance for loan losses
    
    
    (17,197
    )
    
    
    (18,792
    )Net Loans
    
    $
    778,712
    
    
    $
    784,405
   29




---



##### Table of Contents



Provision and Allowance for Loan Losses
  Table 8: Analysis of Allowance for Loan Losses
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Balance at beginning of
period
    
    $
    19,435
    
    
    $
    12,978
    
    
    $
    18,792
    
    
    $
    11,652Charge-offs:Commercial
    
    
    (3,501
    )
    
    
    (366
    )
    
    
    (6,094
    )
    
    
    (1,810
    )Real estate mortgage
    
    
    (630
    )
    
    
    
    
    
    
    (769
    )
    
    
    (143
    )Home equity lines of credit
    
    
    (100
    )
    
    
    (632
    )
    
    
    (858
    )
    
    
    (1,337
    )Installment
    
    
    (160
    )
    
    
    (472
    )
    
    
    (617
    )
    
    
    (1,423
    )DDA Overdrafts
    
    
    (69
    )
    
    
    (63
    )
    
    
    (161
    )
    
    
    (162
    )Total charge-offs
    
    
    (4,460
    )
    
    
    (1,533
    )
    
    
    (8,499
    )
    
    
    (4,875
    )Recoveries:Commercial
    
    
    8
    
    
    
    3
    
    
    
    213
    
    
    
    171Real estate mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12Home equity lines of credit
    
    
    31
    
    
    
    
    
    
    
    31
    
    
    
    24Installment
    
    
    91
    
    
    
    32
    
    
    
    319
    
    
    
    175DDA Overdrafts
    
    
    16
    
    
    
    9
    
    
    
    47
    
    
    
    37Total Recoveries
    
    
    146
    
    
    
    44
    
    
    
    610
    
    
    
    419Net Charge-offs
    
    
    (4,314
    )
    
    
    (1,489
    )
    
    
    (7,889
    )
    
    
    (4,456
    )Provision for loan losses
    
    
    2,076
    
    
    
    11,067
    
    
    
    6,294
    
    
    
    15,360Balance at end of period
    
    $
    17,197
    
    
    $
    22,556
    
    
    $
    17,197
    
    
    $
    22,556
   30




---



##### Table of Contents



Deposits
 Table 9: Deposits and Borrowings
 Average Balances Outstanding
    
    Average Rates PaidFor the Three Months EndedSeptember 30, 2010
    
    December 31, 2009
    
    September 30, 2010
    
    December 31, 2009(Dollars in thousands)Demand deposits
    
    $
    114,826
    
    
    $
    105,074
    
    
    
    0.00
    %
    
    
    0.00
    %Interest checking
    
    
    139,598
    
    
    
    137,682
    
    
    
    0.17
    
    
    
    0.22Money market
    
    
    93,486
    
    
    
    90,158
    
    
    
    0.41
    
    
    
    0.35Savings deposits
    
    
    87,961
    
    
    
    80,984
    
    
    
    0.17
    
    
    
    0.19Consumer time deposits
    
    
    457,669
    
    
    
    483,577
    
    
    
    1.94
    
    
    
    2.55Public time deposits
    
    
    78,022
    
    
    
    80,528
    
    
    
    0.61
    
    
    
    1.17Total Deposits
    
    
    971,562
    
    
    
    978,003
    
    
    
    1.04
    
    
    
    1.44Short-term borrowings
    
    
    1,708
    
    
    
    10,961
    
    
    
    0.25
    
    
    
    0.46FHLB borrowings
    
    
    42,589
    
    
    
    42,988
    
    
    
    2.97
    
    
    
    3.23Junior subordinated
debentures
    
    
    19,269
    
    
    
    20,727
    
    
    
    4.48
    
    
    
    4.21Total borrowings
    
    
    63,566
    
    
    
    74,676
    
    
    
    3.36
    
    
    
    3.10Total funding
    
    $
    1,035,128
    
    
    $
    1,052,679
    
    
    
    1.18
    %
    
    
    1.56
    %
   31




---



##### Table of Contents



Borrowings
  Regulatory Capital
    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;
 32




---



##### Table of Contents




    
    changes in political conditions or the legislative or regulatory environment, including new or
heightened legal standards and regulatory requirements, practices or expectations, which may
impede profitability or affect the Corporations financial condition (such as, for example, the
Dodd-Frank Wall Street reform and Consumer Protection Act and rules and regulations that may be
promulgated under the Act);
    
    persisting volatility and limited credit availability in the financial markets, particularly if
limitations on the Corporations ability to raise funding to the extent required by banking
regulators or otherwise; initiatives undertaken by the U.S. government do not have the intended
effect on the financial markets;
    
    limitations on the Corporations ability to return capital to shareholders and dilution of the
Corporations common shares that may result from the terms of the Capital Purchase Program
(CPP), pursuant to which the Corporation issued securities to the United States Department of
the Treasury (the U.S. Treasury);
    
    limitations on the Corporations ability to pay dividends;
    
    increases in interest rates or further weakening economic conditions that could constrain
borrowers ability to repay outstanding loans or diminish the value of the collateral securing
those loans;
    
    adverse effects on the Corporations ability to engage in routine funding transactions as a
result of the actions and commercial soundness of other financial institutions;
    
    asset price deterioration, which has had and may continue to have a negative effect on the
valuation of certain asset categories represented on the Corporations balance sheet;
    
    general economic conditions, either nationally or regionally (especially in northeastern Ohio),
becoming less favorable than expected resulting in, among other things, further deterioration
in credit quality of assets;
    
    increases in deposit insurance premiums or assessments imposed on the Corporation by the FDIC;
    
    difficulty attracting and/or retaining key executives and/or relationship managers at
compensation levels necessary to maintain a competitive market position;
    
    changes occurring in business conditions and inflation;
    
    changes in technology;
    
    changes in trade, monetary, fiscal and tax policies;
    
    changes in the securities markets, in particular, continued disruption in the fixed income
markets and adverse capital market conditions;
    
    continued disruption in the housing markets and related conditions in the financial markets; and
    
    changes in general economic conditions and competition in the geographic and business areas in
which the Corporation conducts its operations, particularly in light of the recent
consolidation of competing financial institutions; 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
    Allowance for Loan Losses
  33




---



##### Table of Contents



Income Taxes
  34




---



##### Table of Contents



Goodwill
  New Accounting Pronouncements
  35




---



##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
 RISK ELEMENTS
  Credit Risk Management
  Nonperforming Assets
    36




---



##### Table of Contents



Table 10: Nonperforming Assets
 September 30, 2010
    
    
    December 31, 2009(Dollars in thousands)Commercial loans
    
    $
    29,482
    
    
    $
    26,846Real estate mortgage
    
    
    9,374
    
    
    
    9,139Home equity lines of credit
    
    
    2,615
    
    
    
    1,417Installment loans
    
    
    2,103
    
    
    
    1,435Total nonperforming loans
    
    
    43,574
    
    
    
    38,837Other foreclosed assets
    
    
    2,206
    
    
    
    1,264Total nonperforming assets
    
    $
    45,780
    
    
    $
    40,101Loans 90 days past due accruing interest
    
    $
    
    
    
    $
    Total nonperforming loans to total loans
    
    
    5.47
    %
    
    
    4.84
    %Allowance for loan losses to nonperforming assets
    
    
    37.56
    %
    
    
    46.86
    %
 Market Risk Management
     Liquidity Risk Management
  37




---



##### Table of Contents



ITEM 4. Controls and Procedures
   
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  38




---



##### Table of Contents



Item 1A. Risk Factors
  The impact of financial reform legislation on the Corporation is uncertain
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 Issuer Purchases of Equity Securities
  
 Item 6. Exhibits.
 (a)
    
    The exhibits to this Form 10-Q are referenced in the Exhibit Index attached hereto.
 39




---



##### Table of Contents



SIGNATURES
  LNB BANCORP, INC.
(Registrant)Date: November 4, 2010
    /s/ Gary J. ElekGary J. ElekChief Financial Officer
(Duly Authorized Officer, and Principal
Financial and Accounting Officer) 40




---



##### Table of Contents



Exhibit31.1
    
    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.
 41