##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended 
December 31, 2008
    
    Commission file number
0-13203
 LNB Bancorp, Inc.
 (Exact name of the registrant as specified in its charter)
 Ohio(State of Incorporation)457 Broadway, Lorain, Ohio(Address of principal executive offices)
    
    34-1406303(I.R.S. Employer Identification No.)44052-1769(Zip Code)
 (440) 244-6000  (Registrants telephone number, including area
code)   Securities Registered Pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Shares
Par Value $1.00 Per Share
Preferred Share Purchase Rights
    
    The NASDAQ Stock Market
 Securities Registered Pursuant to Section 12(g) of the Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredNone
    
    None
 o þ
 o þ
 þ o
 o
  Large
accelerated
filer oAccelerated
filer þNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o o þ




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##### 



TABLE OF CONTENTS
 PagePART IItem 1.
    
    Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    6Item 1B.
    
    Unresolved Staff Comments
    
    
    10Item 2.
    
    Properties
    
    
    11Item 3.
    
    Legal Proceedings
    
    
    11Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    12Supplemental Item: Executive Officers of the Registrant
    
    
    13PART IIItem 5.
    
    Market for the Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    14Item 6.
    
    Selected Financial Data
    
    
    17Item 7.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    18Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 8.
    
    Financial Statements and Supplementary Data
    
    
    41Item 9.
    
    Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
    
    
    75Item 9A.
    
    Controls and Procedures
    
    
    75Item 9B.
    
    Other Information
    
    
    76PART IIIItem 10.
    
    Directors, Executive Officers, Promoters and Control Persons
of the Registrant
    
    
    77Item 11.
    
    Executive Compensation
    
    
    77Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    77Item 13.
    
    Certain Relationships and Related Transactions
    
    
    78Item 14.
    
    Principal Accounting Fees and Services
    
    
    78PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    78Exhibit Index
    
    
    
    
    79Signatures
    
    
    
    
    84CertificationsEX-10(B)EX-10(F)EX-10(U)EX-10(EE)EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2
  2




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PART I
 
 Item 1. Business
 Overview
 General.
       Competition.
 3




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Business Strategy.
 Supervision and Regulation.
  Employees.
 Industry Segments
  4




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Available Information
 www.4LNB.com www.sec.gov
 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, including new or
heightened legal standards and regulatory requirements, practices or expectations, which may
impede profitability or affect the Corporations financial condition;
    
    persisting volatility and limited credit availability in the financial markets, particularly
if The Emergency Economic Stabilization Act of 2008 (EESA), the American Recovery and
Reinvestment Act of 2009, the Financial Stability Plan announced on February 10, 2009, by the
Secretary of the U.S. Treasury, in coordination with other financial institution regulators,
and other 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);
    
    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;
    
    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;
    
    increases in deposit insurance premiums or assessments imposed on the Corporation by the FDIC;
 5




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
    
    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.
 
 Item 1A. Risk Factors
   Current market developments may adversely affect the Corporations industry, business and results
of operations.
  6




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There can be no assurance that the EESA, the American Recovery and Reinvestment Act of 2009, and
other initiatives undertaken by the United States government to restore liquidity and stability to
the U.S. financial system will help stabilize the U.S. financial system .
  Current levels of market volatility are unprecedented.
  The soundness of other financial institutions could adversely affect the Corporation.
  7




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Strong competition may reduce the Corporations ability to generate loans and deposits in its
market.
  Changes in interest rates could adversely affect the Corporations earnings and financial
condition.
  Corporations business may be adversely affected by changes in government policies. The
Corporation competes in a highly regulated environment.
   8




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The Corporation may be adversely impacted by weakness in the local economies it serves.
  The Corporations earnings and reputation may be adversely affected if credit risk is not properly
managed. Originating and underwriting loans is critical to the success of the Corporation.
   The Corporation is subject to liquidity risk .
  If the Corporations technology and systems are damaged, its ability to service customers, comply
with regulation and grow asset and liabilities may be adversely impacted.
  The Corporation may not be able to attract and retain skilled people .
  9




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The Corporations issuance of securities to the U.S. Treasury may limit the Corporations ability
to return capital to its shareholders and is dilutive to the Corporations common shares. If the
Corporation is unable to redeem such preferred shares, the dividend rate increases substantially
after five years.
   
 Item 1B. Unresolved Staff Comments
  10




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Item 2. Properties
  Main Banking Center & Corporate Offices
    
    457 Broadway, LorainVermilion
    
    4455 East Liberty Avenue, VermilionAmherst
    
    1175 Cleveland Avenue, AmherstLake Avenue
    
    42935 North Ridge Road, Elyria
TownshipAvon
    
    2100 Center Road, AvonAvon Lake
    
    32960 Walker Road, Avon LakePearl Avenue
    
    2850 Pearl Avenue, LorainOberlin
    
    40 East College Street, OberlinEly Square
    
    124 Middle Avenue, ElyriaCleveland Street
    
    801 Cleveland Street, ElyriaOberlin Avenue
    
    3660 Oberlin Avenue, LorainOlmsted Township
    
    27095 Bagley Road, Olmsted TownshipKendal at Oberlin
    
    600 Kendal Drive, OberlinThe Renaissance
    
    26376 John Road, Olmsted TownshipChestnut Commons
    
    105 Chestnut Commons Drive, ElyriaNorth Ridgeville
    
    34085 Center Ridge Road, North
RidgevilleVillage of LaGrange
    
    546 North Center Street, LaGrangeWestlake Village
    
    28550 Westlake Village Drive,
WestlakeElyria United Methodist Village
    
    807 West Avenue, ElyriaMorgan Bank
    
    178 West Streetsboro Street, HudsonAvon Pointe Loan Center
    
    36711 American Way, AvonCuyahoga Loan Center
    
    2 Summit Park Drive, IndependenceOperations
    
    2130 West Park Drive, LorainMaintenance
    
    2140 West Park Drive, LorainPurchasing
    
    2150 West Park Drive, LorainTraining Center
    
    521 Broadway, Lorain
  
 Item 3. Legal Proceedings
 11




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Item 4. Submission of Matters to a Vote of Security Holders
  12




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SUPPLEMENTAL ITEM  EXECUTIVE OFFICERS OF THE REGISTRANT
  Positions andOffices Held withLNB
    
    Executive OfficerName
    
    Age
    
    Principal Occupation For
Past Five Years
    
    Bancorp, Inc.
    
    SinceDaniel E. Klimas
    
    
    50
    
    
    President and Chief
Executive Officer,
LNB Bancorp, Inc.,
February 2005 to
present. President,
Northern Ohio
Region, Huntington
Bank from 2001 to
February 2005.
    
    President and Chief
Executive Officer
    
    
    2005Mary E. Miles
    
    
    50
    
    
    Senior Vice
President, LNB
Bancorp, Inc. April
2005 to present.
President, Miles
Consulting, Inc.
from 2001 to 2005.
    
    Senior Vice
President
    
    
    2005Frank A. Soltis
    
    
    56
    
    
    Senior Vice
President, LNB
Bancorp, Inc. July
2005 to present.
Senior Vice
President, Lakeland
Financial
Corporation, 1997
to 2005.
    
    Senior Vice
President
    
    
    2005David S. Harnett
    
    
    57
    
    
    Senior Vice
President and Chief
Credit Officer, LNB
Bancorp, Inc.
August 7, 2007 to
present. Senior
Lender and Chief
Credit Officer
January 2006 to
August 2007 and
Senior Vice
President and Chief
Credit Officer
January 2002 to
January 2006 of the
Cleveland, Ohio
affiliate of Fifth
Third Bank.
    
    Senior Vice
President and Chief
Credit Officer
    
    
    2007Sharon L. Churchill
    
    
    54
    
    
    Chief Financial
Officer and
Principal
Accounting Officer,
LNB Bancorp, Inc.,
March 5, 2007 to
present. Principal
Accounting Officer
and Controller, LNB
Bancorp, Inc. April
25, 2006 to March
5, 2007,
Controller, LNB
Bancorp, Inc.
November 2005 to
March 5, 2007.
Assistant Vice
President,
Controller and
Corporation
Secretary,
Tele-Communications,
Inc., 1988 to
2005. Certified
Public Accountant.
    
    Chief Financial
Officer and
Principal
Accounting Officer
    
    
    2007
 13




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PART II
 
 Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
 Market Information; Equity Holders; Dividends. ® ®
    Common Stock Trading Ranges and Cash Dividends Declared
 Common Stock Trading Ranges and Cash Dividends Declared2008Cash DividendsDeclared perHigh
    
    Low
    
    shareFirst Quarter
    
    $
    15.44
    
    
    $
    11.88
    
    
    $
    0.18Second Quarter
    
    
    12.90
    
    
    
    9.65
    
    
    
    0.18Third Quarter
    
    
    11.00
    
    
    
    6.50
    
    
    
    0.09Fourth Quarter
    
    
    9.00
    
    
    
    4.67
    
    
    
    0.09
 2007Cash DividendsDeclared perHigh
    
    Low
    
    shareFirst Quarter
    
    $
    16.50
    
    
    $
    14.12
    
    
    $
    0.18Second Quarter
    
    
    16.12
    
    
    
    13.60
    
    
    
    0.18Third Quarter
    
    
    15.49
    
    
    
    14.22
    
    
    
    0.18Fourth Quarter
    
    
    15.00
    
    
    
    13.00
    
    
    
    0.18
 14




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12/03
    
    12/04
    
    12/05
    
    12/06
    
    12/07
    
    12/08LNB Bancorp, Inc.
    
    
    100.00
    
    
    
    102.70
    
    
    
    95.41
    
    
    
    88.80
    
    
    
    85.06
    
    
    
    32.32S&P 500
    
    
    100.00
    
    
    
    110.88
    
    
    
    116.33
    
    
    
    134.70
    
    
    
    142.10
    
    
    
    89.53NASDAQ Bank
    
    
    100.00
    
    
    
    111.11
    
    
    
    108.64
    
    
    
    123.74
    
    
    
    97.71
    
    
    
    74.73
 15




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Issuer Purchases of Equity Securities
  (c)
    
    
    (d)Total number of
    
    
    Maximum number ofshares (or units)
    
    
    shares (or units)(a)
    
    
    
    
    
    
    purchased as
    
    
    that may yet beTotal number of
    
    
    (b)
    
    
    part of publicly
    
    
    purchased under theshares (or units)
    
    
    Average price paid
    
    
    announced plans
    
    
    plansPeriod
    
    purchased
    
    
    per share (or unit)
    
    
    or programs
    
    
    or programsOctober 1, 2008-October 31, 2008
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    129,500November 1, 2008 - November 30, 2008
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    129,500December 1, 2008 - December 31, 2008
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    129,500Total
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    129,500
  16




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Item 6. Selected Financial Data
 Five Year Consolidated Financial Summary
 Year Ended December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(Dollars in thousands except share and per share amounts and ratios)Total interest income
    
    $
    58,328
    
    
    $
    58,762
    
    
    $
    49,242
    
    
    $
    43,432
    
    
    $
    37,224Total interest expense
    
    
    26,189
    
    
    
    29,092
    
    
    
    20,635
    
    
    
    13,402
    
    
    
    9,102Net interest income
    
    
    32,139
    
    
    
    29,670
    
    
    
    28,607
    
    
    
    30,030
    
    
    
    28,122Provision for Loan Losses
    
    
    6,809
    
    
    
    2,255
    
    
    
    2,280
    
    
    
    1,248
    
    
    
    1,748Other income
    
    
    11,213
    
    
    
    10,362
    
    
    
    9,514
    
    
    
    10,092
    
    
    
    10,660Net gain (loss) on sale of assets
    
    
    1,246
    
    
    
    1,137
    
    
    
    237
    
    
    
    285
    
    
    
    (218
    )Other expenses
    
    
    34,281
    
    
    
    31,751
    
    
    
    28,985
    
    
    
    30,267
    
    
    
    26,290Income before income taxes
    
    
    3,508
    
    
    
    7,163
    
    
    
    7,093
    
    
    
    8,892
    
    
    
    10,526Income taxes
    
    
    112
    
    
    
    1,651
    
    
    
    1,669
    
    
    
    2,479
    
    
    
    3,051Net income
    
    
    3,396
    
    
    
    5,512
    
    
    
    5,424
    
    
    
    6,413
    
    
    
    7,475Preferred
stock dividend and amortization
    
    
    91
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income available to common shareholders
    
    $
    3,305
    
    
    $
    5,512
    
    
    $
    5,424
    
    
    $
    6,413
    
    
    $
    7,475Cash dividend declared
    
    $
    3,940
    
    
    $
    5,097
    
    
    $
    4,641
    
    
    $
    4,760
    
    
    $
    4,777Per Common Share(1)Basic earnings
    
    $
    0.45
    
    
    $
    0.79
    
    
    $
    0.84
    
    
    $
    0.97
    
    
    $
    1.13Diluted earnings
    
    
    0.45
    
    
    
    0.79
    
    
    
    0.84
    
    
    
    0.97
    
    
    
    1.13Cash dividend declared
    
    
    0.54
    
    
    
    0.72
    
    
    
    0.72
    
    
    
    0.72
    
    
    
    0.72Book value per share
    
    $
    11.22
    
    
    $
    11.33
    
    
    $
    10.66
    
    
    $
    10.45
    
    
    $
    10.64Financial RatiosReturn on average assets
    
    
    0.31
    %
    
    
    0.58
    %
    
    
    0.66
    %
    
    
    0.81
    %
    
    
    0.98
    %Return on average common equity
    
    
    4.09
    
    
    
    7.06
    
    
    
    7.89
    
    
    
    9.11
    
    
    
    10.75Net interest margin (FTE) (2)
    
    
    3.23
    
    
    
    3.39
    
    
    
    3.78
    
    
    
    4.09
    
    
    
    4.01Efficiency ratio
    
    
    76.12
    
    
    
    76.41
    
    
    
    76.03
    
    
    
    75.44
    
    
    
    67.82Period end loans to period end deposits
    
    
    87.23
    
    
    
    87.94
    
    
    
    87.60
    
    
    
    91.91
    
    
    
    94.49Dividend payout
    
    
    120.00
    
    
    
    91.14
    
    
    
    85.78
    
    
    
    74.23
    
    
    
    63.72Average shareholders equity to average assets
    
    
    7.67
    
    
    
    8.15
    
    
    
    8.39
    
    
    
    8.88
    
    
    
    9.15Net charge-offs to average loans
    
    
    0.38
    
    
    
    0.41
    
    
    
    0.27
    
    
    
    0.34
    
    
    
    0.38Allowance for loan losses to period end total
loans
    
    
    1.45
    
    
    
    1.04
    
    
    
    1.16
    
    
    
    1.13
    
    
    
    1.29Nonperforming loans to period end total loans
    
    
    2.44
    
    
    
    1.44
    
    
    
    2.04
    
    
    
    1.10
    
    
    
    0.86Allowance for loan losses to nonperforming loans
    
    
    59.47
    
    
    
    72.20
    
    
    
    56.98
    
    
    
    101.97
    
    
    
    138.29At Year EndCash and cash equivalents
    
    $
    36,923
    
    
    $
    23,523
    
    
    $
    29,122
    
    
    $
    23,923
    
    
    $
    26,818Securities and interest-bearing deposits
    
    
    234,665
    
    
    
    212,694
    
    
    
    155,688
    
    
    
    151,509
    
    
    
    145,526Restricted stock
    
    
    4,884
    
    
    
    4,704
    
    
    
    3,293
    
    
    
    3,690
    
    
    
    4,111Loans held for sale
    
    
    3,580
    
    
    
    4,724
    
    
    
    
    
    
    
    2,586
    
    
    
    3,067Gross loans
    
    
    803,551
    
    
    
    753,598
    
    
    
    628,333
    
    
    
    588,425
    
    
    
    572,157Allowance for loan losses
    
    
    11,652
    
    
    
    7,820
    
    
    
    7,300
    
    
    
    6,622
    
    
    
    7,386Net loans
    
    
    791,899
    
    
    
    745,778
    
    
    
    621,033
    
    
    
    581,803
    
    
    
    564,771Other assets
    
    
    64,184
    
    
    
    65,222
    
    
    
    41,962
    
    
    
    37,610
    
    
    
    37,356Total assets
    
    
    1,136,135
    
    
    
    1,056,645
    
    
    
    851,098
    
    
    
    801,121
    
    
    
    781,649Total deposits
    
    
    921,175
    
    
    
    856,941
    
    
    
    717,261
    
    
    
    640,216
    
    
    
    605,543Other borrowings
    
    
    96,905
    
    
    
    106,932
    
    
    
    57,249
    
    
    
    86,512
    
    
    
    100,915Other liabilities
    
    
    10,996
    
    
    
    10,119
    
    
    
    7,891
    
    
    
    5,987
    
    
    
    4,617Total liabilities
    
    
    1,029,076
    
    
    
    973,992
    
    
    
    782,401
    
    
    
    732,715
    
    
    
    711,075Total shareholders equity
    
    
    107,059
    
    
    
    82,653
    
    
    
    68,697
    
    
    
    68,406
    
    
    
    70,574Total liabilities and shareholders equity
    
    $
    1,136,135
    
    
    $
    1,056,645
    
    
    $
    851,098
    
    
    $
    801,121
    
    
    $
    781,649
 
 (1)
    
    Basic and diluted earnings per share are computed using the weighted-average number of shares
outstanding during each year.(2)
    
    Tax exempt income was converted to a fully taxable equivalent basis at a 35% statutory
Federal income tax rate in 2004, and a 34% statutory Federal income tax rate in 2005, 2006,
2007 and 2008. 17




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Introduction
     18




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Key Indicators and Material Trends (Dollars in thousands)
     Results of Operations (Dollars in thousands except per share data)
 Summary of Earnings
  19




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20




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2008 versus 2007 Net Interest Income Comparison
   Table 1: Net Interest Income
 Year ended December 31,2008
    
    2007
    
    2006(Dollars in thousands)Net interest income
    
    $
    32,139
    
    
    $
    29,670
    
    
    $
    28,607Tax equivalent adjustments
    
    
    439
    
    
    
    382
    
    
    
    269Net interest income (FTE)
    
    $
    32,578
    
    
    $
    30,052
    
    
    $
    28,876Net interest margin
    
    
    3.19
    %
    
    
    3.35
    %
    
    
    3.74
    %Tax equivalent adjustments
    
    
    0.04
    %
    
    
    0.04
    %
    
    
    0.04
    %Net interest margin (FTE)
    
    
    3.23
    %
    
    
    3.39
    %
    
    
    3.78
    %
 Yields
   21




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Table 2: Condensed Consolidated Average Balance Sheets  Interest, Rate, and Rate/ Volume differentials are stated on a Fully-Tax Equivalent (FTE) Basis.
 Year ended December 31,2008
    
    
    2007
    
    
    2006Average Balance
    
    
    Interest
    
    
    Rate
    
    
    Average Balance
    
    
    Interest
    
    
    Rate
    
    
    Average Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Assets:U.S. Govt agencies and corporations,
Federal Home Loan Bank stock and
Federal Reserve Bank stock
    
    $
    194,633
    
    
    $
    8,786
    
    
    
    4.51
    %
    
    $
    164,876
    
    
    $
    7,873
    
    
    
    4.78
    %
    
    $
    150,444
    
    
    $
    5,901
    
    
    
    3.92
    %State and political subdivisions
    
    
    18,697
    
    
    
    1,121
    
    
    
    6.00
    
    
    
    14,277
    
    
    
    875
    
    
    
    6.13
    
    
    
    10,599
    
    
    
    671
    
    
    
    6.33Federal funds sold and short-term
investments
    
    
    15,667
    
    
    
    451
    
    
    
    2.88
    
    
    
    9,278
    
    
    
    394
    
    
    
    4.25
    
    
    
    1,737
    
    
    
    77
    
    
    
    4.43Commercial loans
    
    
    437,844
    
    
    
    28,082
    
    
    
    6.41
    
    
    
    400,045
    
    
    
    29,805
    
    
    
    7.45
    
    
    
    369,512
    
    
    
    27,851
    
    
    
    7.54Real estate mortgage loans
    
    
    98,397
    
    
    
    5,884
    
    
    
    5.98
    
    
    
    100,161
    
    
    
    6,143
    
    
    
    6.13
    
    
    
    83,790
    
    
    
    5,175
    
    
    
    6.18Home equity lines of credit
    
    
    89,847
    
    
    
    4,243
    
    
    
    4.72
    
    
    
    75,453
    
    
    
    5,727
    
    
    
    7.59
    
    
    
    66,926
    
    
    
    5,058
    
    
    
    7.56Purchased installment loans
    
    
    
    
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    
    
    
    
    n/a
    
    
    
    40,658
    
    
    
    1,901
    
    
    
    4.68Installment loans
    
    
    153,481
    
    
    
    10,200
    
    
    
    6.65
    
    
    
    122,742
    
    
    
    8,327
    
    
    
    6.78
    
    
    
    40,233
    
    
    
    2,877
    
    
    
    7.15Total Earning Assets
    
    $
    1,008,566
    
    
    $
    58,767
    
    
    
    5.83
    %
    
    $
    886,832
    
    
    $
    59,144
    
    
    
    6.67
    %
    
    $
    763,899
    
    
    $
    49,511
    
    
    
    6.48
    %Allowance for loan loss
    
    
    (9,732
    )
    
    
    
    
    
    
    
    
    
    
    (7,764
    )
    
    
    
    
    
    
    
    
    
    
    (6,478
    )Cash and due from banks
    
    
    20,520
    
    
    
    
    
    
    
    
    
    
    
    20,855
    
    
    
    
    
    
    
    
    
    
    
    22,266Bank owned life insurance
    
    
    15,560
    
    
    
    
    
    
    
    
    
    
    
    15,112
    
    
    
    
    
    
    
    
    
    
    
    14,316Other assets
    
    
    47,585
    
    
    
    
    
    
    
    
    
    
    
    42,748
    
    
    
    
    
    
    
    
    
    
    
    25,632Total Assets
    
    $
    1,082,499
    
    
    
    
    
    
    
    
    
    
    $
    957,783
    
    
    
    
    
    
    
    
    
    
    $
    819,635Liabilities and Shareholders EquityConsumer time deposits
    
    $
    395,686
    
    
    $
    15,392
    
    
    
    3.89
    %
    
    $
    289,906
    
    
    $
    13,633
    
    
    
    4.70
    %
    
    $
    212,579
    
    
    $
    8,665
    
    
    
    4.08
    %Public time deposits
    
    
    63,652
    
    
    
    2,554
    
    
    
    4.01
    
    
    
    69,804
    
    
    
    3,635
    
    
    
    5.21
    
    
    
    54,248
    
    
    
    2,756
    
    
    
    5.08Brokered time deposits
    
    
    13,890
    
    
    
    696
    
    
    
    5.01
    
    
    
    36,497
    
    
    
    1,905
    
    
    
    5.22
    
    
    
    53,716
    
    
    
    2,411
    
    
    
    4.49Savings deposits
    
    
    82,276
    
    
    
    504
    
    
    
    0.60
    
    
    
    80,513
    
    
    
    486
    
    
    
    0.60
    
    
    
    86,325
    
    
    
    294
    
    
    
    0.34Interest-bearing demand
    
    
    236,495
    
    
    
    3,160
    
    
    
    1.34
    
    
    
    232,691
    
    
    
    5,876
    
    
    
    2.53
    
    
    
    189,173
    
    
    
    4,028
    
    
    
    2.13Short-term borrowings
    
    
    27,700
    
    
    
    387
    
    
    
    1.40
    
    
    
    26,334
    
    
    
    1,088
    
    
    
    4.13
    
    
    
    20,759
    
    
    
    896
    
    
    
    4.32FHLB advances
    
    
    62,341
    
    
    
    2,322
    
    
    
    3.72
    
    
    
    37,088
    
    
    
    1,555
    
    
    
    4.19
    
    
    
    43,948
    
    
    
    1,585
    
    
    
    3.61Trust preferred securities
    
    
    20,778
    
    
    
    1,174
    
    
    
    5.65
    
    
    
    13,466
    
    
    
    914
    
    
    
    6.79
    
    
    
    
    
    
    
    
    
    
    
    n/aTotal Interest-Bearing Liabilities
    
    $
    902,818
    
    
    $
    26,189
    
    
    
    2.90
    %
    
    $
    786,299
    
    
    $
    29,092
    
    
    
    3.70
    %
    
    $
    660,748
    
    
    $
    20,635
    
    
    
    3.12
    %Noninterest-bearing deposits
    
    
    87,302
    
    
    
    
    
    
    
    
    
    
    
    84,352
    
    
    
    
    
    
    
    
    
    
    
    83,777Other liabilities
    
    
    9,359
    
    
    
    
    
    
    
    
    
    
    
    9,090
    
    
    
    
    
    
    
    
    
    
    
    6,375Shareholders Equity
    
    
    83,020
    
    
    
    
    
    
    
    
    
    
    
    78,042
    
    
    
    
    
    
    
    
    
    
    
    68,735Total Liabilities and
Shareholders Equity
    
    $
    1,082,499
    
    
    
    
    
    
    
    
    
    
    $
    957,783
    
    
    
    
    
    
    
    
    
    
    $
    819,635Net interest Income (FTE)
    
    
    
    
    
    $
    32,578
    
    
    
    3.23
    %
    
    
    
    
    
    $
    30,052
    
    
    
    3.39
    %
    
    
    
    
    
    $
    28,876
    
    
    
    3.78
    %Taxable Equivalent Adjustment
    
    
    
    
    
    
    (439
    )
    
    
    (0.04
    )
    
    
    
    
    
    
    (382
    )
    
    
    (0.04
    )
    
    
    
    
    
    
    (269
    )
    
    
    (0.04
    )Net Interest Income Per
Financial Statements
    
    
    
    
    
    $
    32,139
    
    
    
    
    
    
    
    
    
    
    $
    29,670
    
    
    
    
    
    
    
    
    
    
    $
    28,607Net Yield on Earning Assets
    
    
    
    
    
    
    
    
    
    
    3.19
    %
    
    
    
    
    
    
    
    
    
    
    3.35
    %
    
    
    
    
    
    
    
    
    
    
    3.74
    %
 Average Balances
  22




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##### Table of Contents



Rate/Volume
  Table 3: Rate/Volume Analysis of Net Interest Income (FTE)
 Year Ended December 31,Increase (Decrease) in Interest Income/Expense
    
    
    Increase (Decrease) in Interest Income/Expensein 2008 over 2007
    
    
    in 2007 over 2006Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)U.S. Govt agencies and corporations
    
    $
    1,468
    
    
    $
    (555
    )
    
    $
    913
    
    
    $
    649
    
    
    $
    1,323
    
    
    $
    1,972State and political subdivisions
    
    
    271
    
    
    
    (25
    )
    
    
    246
    
    
    
    234
    
    
    
    (30
    )
    
    
    204Federal funds sold and short-term investments
    
    
    (335
    )
    
    
    392
    
    
    
    57
    
    
    
    335
    
    
    
    (18
    )
    
    
    317Commercial loans
    
    
    1,975
    
    
    
    (3,698
    )
    
    
    (1,723
    )
    
    
    2,306
    
    
    
    (352
    )
    
    
    1,954Real estate mortgage loans
    
    
    (106
    )
    
    
    (153
    )
    
    
    (259
    )
    
    
    1,011
    
    
    
    (43
    )
    
    
    968Home equity lines of credit
    
    
    532
    
    
    
    (2,016
    )
    
    
    (1,484
    )
    
    
    645
    
    
    
    24
    
    
    
    669Installment loans
    
    
    2,090
    
    
    
    (217
    )
    
    
    1,873
    
    
    
    2,573
    
    
    
    976
    
    
    
    3,549Total Interest Income
    
    
    5,895
    
    
    
    (6,272
    )
    
    
    (377
    )
    
    
    7,753
    
    
    
    1,880
    
    
    
    9,633Consumer time deposits
    
    
    8,049
    
    
    
    (6,290
    )
    
    
    1,759
    
    
    
    3,313
    
    
    
    1,655
    
    
    
    4,968Public time deposits
    
    
    (265
    )
    
    
    (816
    )
    
    
    (1,081
    )
    
    
    792
    
    
    
    87
    
    
    
    879Brokered time deposits
    
    
    (1,178
    )
    
    
    (31
    )
    
    
    (1,209
    )
    
    
    (720
    )
    
    
    214
    
    
    
    (506
    )Savings deposits
    
    
    11
    
    
    
    7
    
    
    
    18
    
    
    
    (38
    )
    
    
    230
    
    
    
    192Interest bearing demand
    
    
    (164
    )
    
    
    (2,552
    )
    
    
    (2,716
    )
    
    
    979
    
    
    
    869
    
    
    
    1,848Short-term borrowings
    
    
    18
    
    
    
    (719
    )
    
    
    (701
    )
    
    
    243
    
    
    
    (51
    )
    
    
    192FHLB advances
    
    
    1,112
    
    
    
    (345
    )
    
    
    767
    
    
    
    (123
    )
    
    
    93
    
    
    
    (30
    )Trust preferred securities
    
    
    608
    
    
    
    (348
    )
    
    
    260
    
    
    
    914
    
    
    
    
    
    
    
    914Total Interest Expense
    
    
    8,191
    
    
    
    (11,094
    )
    
    
    (2,903
    )
    
    
    5,360
    
    
    
    3,097
    
    
    
    8,457Net Interest Income (FTE)
    
    $
    (2,296
    )
    
    $
    4,822
    
    
    $
    2,526
    
    
    $
    2,393
    
    
    $
    (1,217
    )
    
    $
    1,176
   2007 versus 2006 Net Interest Income Comparison
  23




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##### Table of Contents



Noninterest Income
 Table 4: Details of Noninterest Income
 Year ended December 31,2008 versus
    
    
    2007 versus2008
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Investment and trust services
    
    $
    1,908
    
    
    $
    2,170
    
    
    $
    2,079
    
    
    
    -12.07
    %
    
    
    4.38
    %Deposit service charges
    
    
    4,760
    
    
    
    4,725
    
    
    
    4,533
    
    
    
    0.74
    %
    
    
    4.24
    %Electronic banking fees
    
    
    2,710
    
    
    
    2,339
    
    
    
    1,948
    
    
    
    15.86
    %
    
    
    20.07
    %Income from bank owned life
insurance
    
    
    979
    
    
    
    732
    
    
    
    739
    
    
    
    33.74
    %
    
    
    -0.95
    %Other income
    
    
    856
    
    
    
    396
    
    
    
    215
    
    
    
    116.16
    %
    
    
    84.19
    %Total fees and other income
    
    
    11,213
    
    
    
    10,362
    
    
    
    9,514
    
    
    
    8.21
    %
    
    
    8.91
    %Gain on sale of securities
    
    
    538
    
    
    
    274
    
    
    
    
    
    
    
    96.35
    %
    
    nmGain on sale of loans
    
    
    797
    
    
    
    766
    
    
    
    
    
    
    
    4.05
    %
    
    nmGains (loss) on sale of other assets
    
    
    (89
    )
    
    
    97
    
    
    
    237
    
    
    
    -191.75
    %
    
    
    -59.07
    %Total noninterest income
    
    $
    12,459
    
    
    $
    11,499
    
    
    $
    9,751
    
    
    
    8.35
    %
    
    
    17.93
    %
 2008 vs 2007 Noninterest Income Comparison
  24




---



##### Table of Contents



2007 vs 2006 Noninterest Income Comparison
    25




---



##### Table of Contents



Noninterest Expense
 Table 5: Details on Noninterest Expense
 Year ended December 31,2008 versus
    
    2007 versus2008
    
    2007
    
    2006
    
    2007
    
    2006(Dollars in thousands)Salaries and employee benefits
    
    
    15,255
    
    
    
    15,708
    
    
    
    14,894
    
    
    
    -2.88
    %
    
    
    5.47
    %Furniture and equipment
    
    
    3,950
    
    
    
    3,515
    
    
    
    2,984
    
    
    
    12.38
    %
    
    
    17.79
    %Net occupancy
    
    
    2,386
    
    
    
    2,256
    
    
    
    1,905
    
    
    
    5.76
    %
    
    
    18.43
    %Outside services
    
    
    2,490
    
    
    
    1,815
    
    
    
    1,609
    
    
    
    37.19
    %
    
    
    12.80
    %Marketing and public relations
    
    
    987
    
    
    
    1,116
    
    
    
    1,279
    
    
    
    -11.56
    %
    
    
    -12.74
    %Supplies, postage and freight
    
    
    1,468
    
    
    
    1,357
    
    
    
    1,236
    
    
    
    8.18
    %
    
    
    9.79
    %Telecommunications
    
    
    850
    
    
    
    849
    
    
    
    751
    
    
    
    0.12
    %
    
    
    13.05
    %Ohio Franchise tax
    
    
    895
    
    
    
    788
    
    
    
    817
    
    
    
    13.58
    %
    
    
    -3.55
    %FDIC Assessments
    
    
    722
    
    
    
    89
    
    
    
    82
    
    
    
    711.24
    %
    
    
    8.54
    %Other real estate owned
    
    
    1,070
    
    
    
    585
    
    
    
    131
    
    
    
    82.91
    %
    
    
    346.56
    %Electronic banking expenses
    
    
    932
    
    
    
    809
    
    
    
    618
    
    
    
    15.20
    %
    
    
    30.91
    %Other charge-offs and losses
    
    
    389
    
    
    
    576
    
    
    
    410
    
    
    
    -32.47
    %
    
    
    40.49
    %Loan and Collection Expense
    
    
    908
    
    
    
    758
    
    
    
    768
    
    
    
    19.79
    %
    
    
    -1.30
    %Other expense
    
    
    1,979
    
    
    
    1,530
    
    
    
    1,501
    
    
    
    29.35
    %
    
    
    1.93
    %Total noninterest expense
    
    
    34,281
    
    
    
    31,751
    
    
    
    28,985
    
    
    
    7.97
    %
    
    
    9.54
    %
 2008 versus 2007 Noninterest Expense Comparison
  2007 versus 2006 Noninterest Expense Comparison
  26




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##### Table of Contents



2008 versus 2007 Income taxes
  2007 versus 2006 Income taxes
  Balance Sheet Analysis
 Overview
  Securities
  27




---



##### Table of Contents



Table 6: Maturity Distribution of Available for Sale Securities at Amortized Cost
 From 1 to 5
    
    
    From 5 to 10
    
    
    After
    
    
    At December 31,Years
    
    
    Years
    
    
    10 Years
    
    
    2008
    
    
    2007
    
    
    2006(Dollars in thousands)Securities available for sale:U.S. Government agencies and
corporations
    
    $
    34,210
    
    
    $
    12,208
    
    
    $
    
    
    
    $
    46,418
    
    
    $
    90,046
    
    
    $
    75,193Mortgage backed securities
    
    
    9,993
    
    
    
    12,643
    
    
    
    128,082
    
    
    
    150,718
    
    
    
    72,534
    
    
    
    71,439State and political subdivisions
    
    
    4,279
    
    
    
    7,731
    
    
    
    9,959
    
    
    
    21,969
    
    
    
    14,961
    
    
    
    11,494Total securities available for sale
    
    $
    48,482
    
    
    $
    32,582
    
    
    $
    138,041
    
    
    $
    219,105
    
    
    $
    177,541
    
    
    $
    158,126
 Table 7: The Weighted Average Yield for Each Range of Maturities of Securities
 From 1 to
    
    From 5 to
    
    After
    
    At December 31,5 Years
    
    10 Years
    
    10 Years
    
    2008
    
    2007
    
    2006Securities available for sale:U.S. Government agencies and
corporations
    
    
    4.63
    %
    
    
    4.32
    %
    
    
    0.00
    %
    
    
    4.55
    %
    
    
    4.62
    %
    
    
    4.09
    %Mortgage backed securities
    
    
    4.80
    
    
    
    4.81
    
    
    
    5.33
    %
    
    
    5.25
    
    
    
    5.28
    
    
    
    4.25State and political subdivisions
    
    
    6.00
    
    
    
    6.28
    
    
    
    6.30
    
    
    
    6.24
    
    
    
    6.38
    
    
    
    6.57Total securities available for sale
    
    
    4.78
    %
    
    
    4.98
    %
    
    
    5.41
    %
    
    
    5.20
    %
    
    
    5.05
    %
    
    
    4.28
    %
 
 (1)
    
    Yields on tax-exempt obligations are computed on a tax equivalent basis based upon a 34%
statutory Federal income tax rate. Loans
     28




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##### Table of Contents



Table 8: Loan Portfolio Distribution
 At December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(Dollars in thousands)Commercial
    
    $
    450,081
    
    
    $
    433,081
    
    
    $
    374,055
    
    
    $
    363,144
    
    
    $
    339,439Real estate mortgage
    
    
    96,241
    
    
    
    100,419
    
    
    
    99,182
    
    
    
    81,367
    
    
    
    112,787Home equity lines of credit
    
    
    100,873
    
    
    
    80,049
    
    
    
    70,028
    
    
    
    66,134
    
    
    
    62,143Purchased installment
    
    
    
    
    
    
    
    
    
    
    43,019
    
    
    
    42,023
    
    
    
    27,833Installment
    
    
    156,356
    
    
    
    140,049
    
    
    
    42,049
    
    
    
    38,343
    
    
    
    33,022Total Loans
    
    
    803,551
    
    
    
    753,598
    
    
    
    628,333
    
    
    
    591,011
    
    
    
    575,224Allowance for loan losses
    
    
    (11,652
    )
    
    
    (7,820
    )
    
    
    (7,300
    )
    
    
    (6,622
    )
    
    
    (7,386
    )Net Loans
    
    $
    791,899
    
    
    $
    745,778
    
    
    $
    621,033
    
    
    $
    584,389
    
    
    $
    567,838
 At December 31,2008
    
    2007
    
    2006
    
    2005
    
    2004Loan Mix PercentCommercial
    
    
    56.01
    %
    
    
    57.47
    %
    
    
    59.53
    %
    
    
    61.44
    %
    
    
    59.11
    %Real Estate Mortgage
    
    
    11.98
    %
    
    
    13.33
    %
    
    
    15.78
    %
    
    
    13.77
    %
    
    
    19.61
    %Home Equity lines of credit
    
    
    12.55
    %
    
    
    10.62
    %
    
    
    11.15
    %
    
    
    11.19
    %
    
    
    10.80
    %Purchased installment
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    6.85
    %
    
    
    7.11
    %
    
    
    4.84
    %Installment
    
    
    19.46
    %
    
    
    18.58
    %
    
    
    6.69
    %
    
    
    6.49
    %
    
    
    5.74
    %Total Loans
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
  29




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##### Table of Contents



Table 9: Commercial Loan Maturity and Repricing Analysis
 December 31, 2008(Dollars in thousands)Maturing and repricing in one year or less
    
    $
    83,879Maturing and repricing after one year but within five years
    
    
    253,388Maturing and repricing beyond five years
    
    
    112,814Total Commercial Loans
    
    $
    450,081
 Funding Sources
  Table 10: Funding Sources
 Average Balances Outstanding
    
    Average Rates Paid2008
    
    2007
    
    2006
    
    2008
    
    2007
    
    2006(Dollars in thousands)Demand deposits
    
    $
    87,302
    
    
    $
    84,352
    
    
    $
    83,777
    
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Interest checking
    
    
    236,495
    
    
    
    232,691
    
    
    
    189,173
    
    
    
    1.34
    %
    
    
    2.53
    %
    
    
    2.13
    %Savings deposits
    
    
    82,276
    
    
    
    80,513
    
    
    
    86,325
    
    
    
    0.60
    %
    
    
    0.60
    %
    
    
    0.34
    %Consumer time deposits
    
    
    395,686
    
    
    
    289,906
    
    
    
    212,579
    
    
    
    3.89
    %
    
    
    4.70
    %
    
    
    4.08
    %Public time deposits
    
    
    63,652
    
    
    
    69,804
    
    
    
    54,248
    
    
    
    4.01
    %
    
    
    5.21
    %
    
    
    5.08
    %Brokered time deposits
    
    
    13,890
    
    
    
    36,497
    
    
    
    53,716
    
    
    
    5.01
    %
    
    
    5.22
    %
    
    
    4.49
    %Total Deposits
    
    
    879,301
    
    
    
    793,763
    
    
    
    679,818
    
    
    
    2.54
    %
    
    
    3.22
    %
    
    
    2.67
    %Short-term borrowings
    
    
    27,700
    
    
    
    26,334
    
    
    
    20,759
    
    
    
    1.40
    %
    
    
    4.13
    %
    
    
    4.32
    %FHLB borrowings
    
    
    62,341
    
    
    
    37,088
    
    
    
    43,948
    
    
    
    3.72
    %
    
    
    4.19
    %
    
    
    3.61
    %Junior
subordinated debentures
    
    
    20,778
    
    
    
    13,466
    
    
    
    
    
    
    
    5.65
    %
    
    
    6.79
    %
    
    
    n/aTotal borrowings
    
    
    110,819
    
    
    
    76,888
    
    
    
    64,707
    
    
    
    3.50
    %
    
    
    4.63
    %
    
    
    3.83
    %Total funding
    
    $
    990,120
    
    
    $
    870,651
    
    
    $
    744,525
    
    
    
    2.65
    %
    
    
    3.34
    %
    
    
    2.77
    %
   30




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##### Table of Contents



Borrowings
  Liquidity
    31




---



##### Table of Contents



Table 11: Liquidity
 Borrowing Capacity
    
    

Unused Capacity(Dollars in thousands)FHLB Cincinnati
    
    $
    130,238
    
    
    $
    76,825FRB Cleveland
    
    
    3,770
    
    
    
    3,770Federal Funds Lines
    
    
    30,000
    
    
    
    30,000Total
    
    $
    164,008
    
    
    $
    110,595
  Capital Resources
   32




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##### Table of Contents



Contractual Obligations and Commitments
  Table 12: Contractual Obligations
 One Year or
    
    
    Two and Three
    
    
    Four and Five
    
    
    Over FiveLess
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    Total(Dollars in thousands)Short-term borrowings
    
    $
    22,928
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    22,928FHLB advances
    
    
    25,850
    
    
    
    25,000
    
    
    
    7
    
    
    
    2,500
    
    
    
    53,357Operating leases
    
    
    862
    
    
    
    1,376
    
    
    
    649
    
    
    
    909
    
    
    
    3,796Trust preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,620
    
    
    
    20,620Benefit payments
    
    
    297
    
    
    
    607
    
    
    
    723
    
    
    
    1,997
    
    
    
    3,624Severance payments
    
    
    296
    
    
    
    260
    
    
    
    67
    
    
    
    
    
    
    
    623Total
    
    $
    50,233
    
    
    $
    27,243
    
    
    $
    1,446
    
    
    $
    26,026
    
    
    $
    104,948
 Critical Accounting Policies and Estimates
  33




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
    
    Allowance for loan losses
      34




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##### Table of Contents




    
    Income Taxes
  New Accounting Pronouncements
  
 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
 RISK ELEMENTS
  Credit Risk Management
  35




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##### Table of Contents



Nonperforming Assets
      Table 13: Nonperforming Assets
 36




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##### Table of Contents



At December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(Dollars in thousands)Commercial loans
    
    $
    14,209
    
    
    $
    7,927
    
    
    $
    10,322
    
    
    $
    5,129
    
    
    $
    3,255Real estate mortgage
    
    
    3,465
    
    
    
    2,097
    
    
    
    2,165
    
    
    
    1,182
    
    
    
    1,116Home equity lines of credit
    
    
    989
    
    
    
    429
    
    
    
    168
    
    
    
    25
    
    
    
    400Installment loans
    
    
    929
    
    
    
    378
    
    
    
    157
    
    
    
    158
    
    
    
    150Total nonperforming loans
    
    
    19,592
    
    
    
    10,831
    
    
    
    12,812
    
    
    
    6,494
    
    
    
    4,921Other foreclosed assets
    
    
    1,108
    
    
    
    2,478
    
    
    
    1,289
    
    
    
    432
    
    
    
    420Total nonperforming assets
    
    $
    20,700
    
    
    $
    13,309
    
    
    $
    14,101
    
    
    $
    6,926
    
    
    $
    5,341Loans 90 days past due accruing interest
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Allowance for loan losses to nonperforming loans
    
    
    56.29
    %
    
    
    72.20
    %
    
    
    57.00
    %
    
    
    102.00
    %
    
    
    150.10
    %
 Provision and Allowance for Loan Losses
  37




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##### Table of Contents



Table 14: Analysis of Allowance for Loan Losses
 Year Ended December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(Dollars in thousands)Balance at beginning of year
    
    $
    7,820
    
    
    $
    7,300
    
    
    $
    6,622
    
    
    $
    7,386
    
    
    $
    7,730Charge-offs:Commercial
    
    
    (2,305
    )
    
    
    (2,179
    )
    
    
    (1,120
    )
    
    
    (1,582
    )
    
    
    (1,619
    )Real estate mortgage
    
    
    (275
    )
    
    
    (304
    )
    
    
    (171
    )
    
    
    (28
    )
    
    
    (21
    )Home equity lines of credit
    
    
    (467
    )
    
    
    (61
    )
    
    
    (81
    )
    
    
    (146
    )
    
    
    (109
    )Purchased installment
    
    
    
    
    
    
    (37
    )
    
    
    (69
    )
    
    
    (65
    )
    
    
    Installment
    
    
    (856
    )
    
    
    (495
    )
    
    
    (347
    )
    
    
    (435
    )
    
    
    (591
    )DDA Overdrafts
    
    
    (265
    )
    
    
    (256
    )
    
    
    (240
    )
    
    
    
    
    
    
    Total charge-offs
    
    
    (4,168
    )
    
    
    (3,332
    )
    
    
    (2,028
    )
    
    
    (2,256
    )
    
    
    (2,340
    )Recoveries:Commercial
    
    
    920
    
    
    
    150
    
    
    
    153
    
    
    
    75
    
    
    
    71Real estate mortgage
    
    
    21
    
    
    
    21
    
    
    
    9
    
    
    
    
    
    
    
    Home equity lines of credit
    
    
    10
    
    
    
    25
    
    
    
    
    
    
    
    1
    
    
    
    1Purchased installment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    Installment
    
    
    186
    
    
    
    249
    
    
    
    150
    
    
    
    165
    
    
    
    176DDA Overdrafts
    
    
    54
    
    
    
    54
    
    
    
    114
    
    
    
    
    
    
    
    Total Recoveries
    
    
    1,191
    
    
    
    499
    
    
    
    426
    
    
    
    244
    
    
    
    248Net Charge-offs
    
    
    (2,977
    )
    
    
    (2,833
    )
    
    
    (1,602
    )
    
    
    (2,012
    )
    
    
    (2,092
    )Provision for loan losses
    
    
    6,809
    
    
    
    2,255
    
    
    
    2,280
    
    
    
    1,248
    
    
    
    1,748Allowance from merger
    
    
    
    
    
    
    1,098
    
    
    
    
    
    
    
    
    
    
    
    Balance at end of year
    
    $
    11,652
    
    
    $
    7,820
    
    
    $
    7,300
    
    
    $
    6,622
    
    
    $
    7,386
     38




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Market Risk Management
     39




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##### Table of Contents



Table 15: GAP Analysis:
 At December 31, 2008Under 3 Months
    
    
    3 to 12 Months
    
    
    1 to 3 Years
    
    
    3-5 Years
    
    
    5-15 Years
    
    
    After 15 Years
    
    
    Total(Dollars in thousands)Earning Assets:Securities and short-term investments
    
    $
    25,574
    
    
    $
    24,508
    
    
    $
    59,187
    
    
    $
    40,362
    
    
    $
    91,552
    
    
    $
    
    
    
    $
    241,183Trading securities
    
    
    11,261
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,261Loans
    
    
    173,540
    
    
    
    141,097
    
    
    
    243,721
    
    
    
    137,498
    
    
    
    101,897
    
    
    
    9,377
    
    
    
    807,130Total earning assets
    
    $
    210,375
    
    
    $
    165,605
    
    
    $
    302,908
    
    
    $
    177,860
    
    
    $
    193,449
    
    
    $
    9,377
    
    
    $
    1,059,574Interest-bearing liabilities:Consumer time deposits
    
    $
    132,284
    
    
    $
    323,032
    
    
    $
    71,019
    
    
    $
    7,731
    
    
    $
    437
    
    
    $
    
    
    
    $
    534,503Money Market deposits
    
    
    99,051
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99,051Savings deposits
    
    
    
    
    
    
    
    
    
    
    104,226
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104,226Interest-bearing demand deposits
    
    
    
    
    
    
    
    
    
    
    115,102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,102Short-term borrowings
    
    
    6,459
    
    
    
    19,377
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,836Long-term debt
    
    
    
    
    
    
    
    
    
    
    27,989
    
    
    
    3,000
    
    
    
    2,532
    
    
    
    20,620
    
    
    
    54,141Fed Funds, Repos, Other
    
    
    22,928
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,928Total interest-bearing liabilities
    
    $
    260,722
    
    
    $
    342,409
    
    
    $
    318,336
    
    
    $
    10,731
    
    
    $
    2,969
    
    
    $
    20,620
    
    
    $
    955,787Cumulative interest rate gap
    
    $
    (50,347
    )
    
    $
    (227,151
    )
    
    $
    (242,579
    )
    
    $
    (75,450
    )
    
    $
    115,030
    
    
    $
    103,787RSA/RSL
    
    
    81
    %
    
    
    62
    %
    
    
    74
    %
    
    
    92
    %
    
    
    112
    %
    
    
    111
    %
 At December 31, 2007Under 3 Months
    
    
    3 to 12 Months
    
    
    1 to 3 Years
    
    
    3-5 Years
    
    
    5-15 Years
    
    
    After 15 Years
    
    
    Total(Dollars in thousands)Earning Assets:Securities and short-term investments
    
    $
    20,131
    
    
    $
    31,190
    
    
    $
    35,612
    
    
    $
    47,593
    
    
    $
    48,082
    
    
    $
    
    
    
    $
    182,608Trading securities
    
    
    33,402
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,402Loans
    
    
    364,051
    
    
    
    52,028
    
    
    
    100,539
    
    
    
    129,804
    
    
    
    111,242
    
    
    
    658
    
    
    
    758,322Total earning assets
    
    $
    417,584
    
    
    $
    83,218
    
    
    $
    136,151
    
    
    $
    177,397
    
    
    $
    159,324
    
    
    $
    658
    
    
    $
    974,332Interest-bearing liabilities:Consumer time deposits
    
    $
    146,731
    
    
    $
    247,198
    
    
    $
    39,028
    
    
    $
    3,866
    
    
    $
    
    
    
    $
    
    
    
    $
    436,823Money Market deposits
    
    
    129,961
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129,961Savings deposits
    
    
    
    
    
    
    
    
    
    
    81,293
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,293Interest-bearing demand deposits
    
    
    
    
    
    
    
    
    
    
    120,052
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,052Short-term borrowings
    
    
    7,701
    
    
    
    23,102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,803Long-term debt
    
    
    
    
    
    
    
    
    
    
    10,830
    
    
    
    
    
    
    
    2,574
    
    
    
    20,620
    
    
    
    34,024Fed Funds, Repos, Other
    
    
    42,105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,105Total interest-bearing liabilities
    
    $
    326,498
    
    
    $
    270,300
    
    
    $
    251,203
    
    
    $
    3,866
    
    
    $
    2,574
    
    
    $
    20,620
    
    
    $
    875,061Cumulative interest rate gap
    
    $
    91,086
    
    
    $
    (95,996
    )
    
    $
    (211,048
    )
    
    $
    (37,518
    )
    
    $
    119,233
    
    
    $
    99,271RSA/RSL
    
    
    128
    %
    
    
    84
    %
    
    
    75
    %
    
    
    96
    %
    
    
    114
    %
    
    
    111
    %
 40




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data.
 Table of Contents
 Report of Independent Registered Public Accounting Firm
    
    
    42Consolidated Balance Sheets as of December 31, 2008 and 2007
    
    
    43Consolidated Statements of Income for the Years Ended December 31, 2008, 2007 and 2006
    
    
    44Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2008, 2007 and 2006
    
    
    45Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006
    
    
    46Notes to Consolidated Financial Statements December 31, 2008, 2007 and 2006
    
    
    47
 41




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
      
 
 42




---



##### Table of Contents



CONSOLIDATED BALANCE SHEETS
 At December 31,2008
    
    
    2007(Dollars in thousands except share amounts)ASSETSCash and due from banks (Note 3)
    
    $
    21,723
    
    
    $
    23,523Federal funds sold and short-term investments
    
    
    15,200
    
    
    
    Cash and cash equivalents
    
    
    36,923
    
    
    
    23,523Interest-bearing deposits in other banks
    
    
    352
    
    
    
    100Securities: (Note 5)Trading securities, at fair value
    
    
    11,261
    
    
    
    33,402Available for sale, at fair value
    
    
    223,052
    
    
    
    179,192Total securities
    
    
    234,313
    
    
    
    212,594Restricted stock
    
    
    4,884
    
    
    
    4,704Loans held for sale
    
    
    3,580
    
    
    
    4,724Loans: (Note 7)Portfolio loans
    
    
    803,551
    
    
    
    753,598Allowance for loan losses
    
    
    (11,652
    )
    
    
    (7,820
    )Net loans
    
    
    791,899
    
    
    
    745,778Bank premises and equipment, net (Note 8)
    
    
    11,504
    
    
    
    13,328Other real estate owned
    
    
    1,108
    
    
    
    2,478Bank owned life insurance
    
    
    15,742
    
    
    
    15,487Goodwill, net (Note 4)
    
    
    21,582
    
    
    
    21,570Intangible assets, net (Note 4)
    
    
    1,142
    
    
    
    1,280Accrued interest receivable
    
    
    4,290
    
    
    
    4,074Other assets (Note 13)
    
    
    8,816
    
    
    
    7,005Total Assets
    
    $
    1,136,135
    
    
    $
    1,056,645LIABILITIES AND SHAREHOLDERS EQUITYDeposits (Note 9)Demand and other noninterest-bearing
    
    $
    93,994
    
    
    $
    88,812Savings, money market and interest-bearing demand
    
    
    292,679
    
    
    
    331,306Certificates of deposit
    
    
    534,502
    
    
    
    436,823Total deposits
    
    
    921,175
    
    
    
    856,941Short-term borrowings (Note 10)
    
    
    22,928
    
    
    
    42,105Federal Home Loan Bank advances (Note 11)
    
    
    53,357
    
    
    
    44,207Junior subordinated debentures (Note 12)
    
    
    20,620
    
    
    
    20,620Accrued interest payable
    
    
    3,813
    
    
    
    4,620Accrued taxes, expenses and other liabilities (Note 13)
    
    
    7,183
    
    
    
    5,499Total Liabilities
    
    
    1,029,076
    
    
    
    973,992Shareholders Equity (Notes 14 and 15)Preferred stock, Series A Voting, no par value, authorized 750,000
shares, none issued at December 31, 2008 and 2007.
    
    
    
    
    
    
    Preferred
stock, Series B, no par value, 25,223
shares authorized and issued at December 31, 2008, none issued at December 31, 2007.
    
    
    25,223
    
    
    
    Discount on Series B preferred stock
    
    
    (146
    )
    
    
    Warrant to purchase common stock
    
    
    146
    
    
    
    Common stock, par value $1 per share, authorized 15,000,000 shares,
issued 7,295,663 shares at December 31, 2008 and 6,931,325 at
December 31, 2007.
    
    
    7,624
    
    
    
    7,624Additional paid-in capital
    
    
    37,783
    
    
    
    37,712Retained earnings
    
    
    41,682
    
    
    
    42,951Accumulated other comprehensive income
    
    
    839
    
    
    
    458Treasury shares at cost, 328,194 shares at December 31, 2008
and at December 31, 2007
    
    
    (6,092
    )
    
    
    (6,092
    )Total Shareholders Equity
    
    
    107,059
    
    
    
    82,653Total Liabilities and Shareholders Equity
    
    $
    1,136,135
    
    
    $
    1,056,645
 See accompanying notes to consolidated financial statements.
 43




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##### Table of Contents



CONSOLIDATED STATEMENTS OF INCOME
 Year Ended December 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands except share and per share amounts)Interest and Dividend IncomeLoans
    
    $
    48,314
    
    
    $
    49,889
    
    
    $
    42,800Securities:U.S. Government agencies and corporations
    
    
    8,786
    
    
    
    7,588
    
    
    
    5,699State and political subdivisions
    
    
    777
    
    
    
    606
    
    
    
    464Other debt and equity securities
    
    
    304
    
    
    
    285
    
    
    
    202Federal funds sold and short-term investments
    
    
    147
    
    
    
    394
    
    
    
    77Total interest income
    
    
    58,328
    
    
    
    58,762
    
    
    
    49,242Interest ExpenseDeposits
    
    
    22,306
    
    
    
    25,535
    
    
    
    18,145Federal Home Loan Bank advances
    
    
    2,322
    
    
    
    1,555
    
    
    
    1,585Short-term borrowings
    
    
    387
    
    
    
    1,088
    
    
    
    905Junior subordinated debentures
    
    
    1,174
    
    
    
    914
    
    
    
    Total interest expense
    
    
    26,189
    
    
    
    29,092
    
    
    
    20,635Net Interest Income
    
    
    32,139
    
    
    
    29,670
    
    
    
    28,607Provision for Loan Losses (Note 7)
    
    
    6,809
    
    
    
    2,255
    
    
    
    2,280Net interest income after provision for loan losses
    
    
    25,330
    
    
    
    27,415
    
    
    
    26,327Noninterest IncomeInvestment and trust services
    
    
    1,908
    
    
    
    2,170
    
    
    
    2,079Deposit service charges
    
    
    4,760
    
    
    
    4,725
    
    
    
    4,533Other service charges and fees
    
    
    2,710
    
    
    
    2,339
    
    
    
    1,948Income from bank owned life insurance
    
    
    979
    
    
    
    732
    
    
    
    739Other income
    
    
    856
    
    
    
    396
    
    
    
    215Total fees and other income
    
    
    11,213
    
    
    
    10,362
    
    
    
    9,514Securities gains, net
    
    
    538
    
    
    
    274
    
    
    
    Gains on sale of loans
    
    
    797
    
    
    
    766
    
    
    
    Gains (loss) on sale of other assets, net
    
    
    (89
    )
    
    
    97
    
    
    
    237Total noninterest income
    
    
    12,459
    
    
    
    11,499
    
    
    
    9,751Noninterest ExpenseSalaries and employee benefits (Notes 18 & 19)
    
    
    15,255
    
    
    
    15,708
    
    
    
    14,894Furniture and equipment
    
    
    3,950
    
    
    
    3,515
    
    
    
    2,984Net occupancy (Note 8)
    
    
    2,386
    
    
    
    2,256
    
    
    
    1,905Outside services
    
    
    2,490
    
    
    
    1,815
    
    
    
    1,609Marketing and public relations
    
    
    987
    
    
    
    1,116
    
    
    
    1,279Supplies, postage and freight
    
    
    1,468
    
    
    
    1,357
    
    
    
    1,236Telecommunications
    
    
    850
    
    
    
    849
    
    
    
    751Ohio franchise tax
    
    
    895
    
    
    
    788
    
    
    
    817FDIC assessments
    
    
    722
    
    
    
    89
    
    
    
    82Other real estate owned
    
    
    1,070
    
    
    
    585
    
    
    
    131Electronic banking expenses
    
    
    932
    
    
    
    809
    
    
    
    618Loan and collection expense
    
    
    908
    
    
    
    758
    
    
    
    768Other expense
    
    
    2,368
    
    
    
    2,106
    
    
    
    1,911Total noninterest expense
    
    
    34,281
    
    
    
    31,751
    
    
    
    28,985Income before income tax expense
    
    
    3,508
    
    
    
    7,163
    
    
    
    7,093Income tax expense (Note 13)
    
    
    112
    
    
    
    1,651
    
    
    
    1,669Net Income
    
    $
    3,396
    
    
    $
    5,512
    
    
    $
    5,424Dividends on preferred stock
    
    
    70
    
    
    
    
    
    
    
    Amortization of discount on preferred stock
    
    
    21
    
    
    
    
    
    
    
    Net Income Available to Common Shareholders
    
    $
    3,305
    
    
    $
    5,512
    
    
    $
    5,424Net Income Per Common Share (Note 2)Basic
    
    $
    0.45
    
    
    $
    0.79
    
    
    $
    0.84Diluted
    
    
    0.45
    
    
    
    0.79
    
    
    
    0.84Dividends declared
    
    
    0.54
    
    
    
    0.72
    
    
    
    0.72Average Common Shares OutstandingBasic
    
    
    7,295,663
    
    
    
    6,992,215
    
    
    
    6,461,892Diluted
    
    
    7,295,663
    
    
    
    6,992,215
    
    
    
    6,462,094
 See accompanying notes to consolidated financial statements
 44




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##### Table of Contents



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 AccumulatedAdditional
    
    
    
    
    
    
    OtherPreferred
    
    
    Common
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    TreasuryStock
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Stock
    
    
    Total(Dollars in thousands except share and per share amounts)Balance, January 1, 2006
    
    $
    
    
    
    $
    6,772
    
    
    $
    26,334
    
    
    $
    42,945
    
    
    $
    (2,996
    )
    
    $
    (4,649
    )
    
    $
    68,406Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,424
    
    
    
    
    
    
    
    
    
    
    
    5,424Other comprehensive loss, net of tax:Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    47Change in unrealized gains and losses on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    856
    
    
    
    
    
    
    
    856Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,327Share-based comprehensive income
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48Purchase of 77,500 shares of Treasury Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,443
    )
    
    
    (1,443
    )Common dividends declared, $.72 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,641
    )
    
    
    
    
    
    
    
    
    
    
    (4,641
    )Balance, December 31, 2006
    
    $
    
    
    
    $
    6,772
    
    
    $
    26,382
    
    
    $
    43,728
    
    
    $
    (2,093
    )
    
    $
    (6,092
    )
    
    $
    68,697Cumulative affect of adoption of SFAS 159
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,192
    )
    
    
    1,192
    
    
    
    
    
    
    
    Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,512
    
    
    
    
    
    
    
    
    
    
    
    5,512Other comprehensive income, net of tax:Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (155
    )
    
    
    
    
    
    
    (155
    )Change in unrealized gains and losses on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,514
    
    
    
    
    
    
    
    1,514Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,871Share-based compensation income
    
    
    
    
    
    
    
    
    
    
    58
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58Issuance of 851,990 shares of common stock
    
    
    
    
    
    
    852
    
    
    
    11,272
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,124Common dividends declared, $.72 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,097
    )
    
    
    
    
    
    
    
    
    
    
    (5,097
    )Balance, December 31, 2007
    
    $
    
    
    
    $
    7,624
    
    
    $
    37,712
    
    
    $
    42,951
    
    
    $
    458
    
    
    $
    (6,092
    )
    
    $
    82,653Cumulative effect of change in accounting
principle for
split-dollar life insurance coverage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (725
    )
    
    
    
    
    
    
    
    
    
    
    (725
    )Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,396
    
    
    
    
    
    
    
    
    
    
    
    3,396Other comprehensive income, net of tax:Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,083
    )
    
    
    
    
    
    
    (1,083
    )Change in unrealized gains and losses on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,464
    
    
    
    
    
    
    
    1,464Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,777Share-based compensation income
    
    
    
    
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71Issuance of 25,223 shares of preferred stock, Series B
    
    
    25,223
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,223Common dividends declared, $.54 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,940
    )
    
    
    
    
    
    
    
    
    
    
    (3,940
    )Balance, December 31, 2008
    
    $
    25,223
    
    
    $
    7,624
    
    
    $
    37,783
    
    
    $
    41,682
    
    
    $
    839
    
    
    $
    (6,092
    )
    
    $
    107,059
 See accompanying notes to consolidated financial statements
 45




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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Operating ActivitiesNet income
    
    $
    3,396
    
    
    $
    5,512
    
    
    $
    5,424Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses
    
    
    6,809
    
    
    
    2,255
    
    
    
    2,280Depreciation and amortization
    
    
    1,749
    
    
    
    1,730
    
    
    
    1,631Amortization (accretion) of premiums and discounts
    
    
    (431
    )
    
    
    (16
    )
    
    
    305Amortization of intangibles
    
    
    138
    
    
    
    167
    
    
    
    113Amortization of loan servicing rights
    
    
    219
    
    
    
    153
    
    
    
    51Amortization of deferred loan fees
    
    
    294
    
    
    
    264
    
    
    
    73Federal deferred income tax expense (benefit)
    
    
    (1,241
    )
    
    
    182
    
    
    
    (558
    )Securities gains, net
    
    
    (538
    )
    
    
    (274
    )
    
    
    Share-based compensation expense, net of tax
    
    
    71
    
    
    
    58
    
    
    
    48Loans originated for sale
    
    
    (85,164
    )
    
    
    (90,129
    )
    
    
    Proceeds from sales of loan originations
    
    
    87,103
    
    
    
    86,171
    
    
    
    Net gain from loan sales
    
    
    (795
    )
    
    
    (766
    )
    
    
    Federal Home Loan Bank stock dividends
    
    
    (143
    )
    
    
    
    
    
    
    Net (gain) loss on sale of other assets
    
    
    89
    
    
    
    (97
    )
    
    
    (237
    )Net decrease in accrued interest receivable and other assets
    
    
    (2,345
    )
    
    
    (4,257
    )
    
    
    (2,881
    )Net decrease in accrued interest payable, taxes and other liabilities
    
    
    725
    
    
    
    2,152
    
    
    
    1,846Net cash provided by operating activities
    
    
    9,936
    
    
    
    3,105
    
    
    
    8,095Investing ActivitiesProceeds from sales of available-for-sale securities
    
    
    77,069
    
    
    
    
    
    
    
    Proceeds from maturities of available-for-sale securities
    
    
    37,728
    
    
    
    40,042
    
    
    
    33,753Purchase of available-for-sale securities
    
    
    (155,946
    )
    
    
    (109,044
    )
    
    
    (36,963
    )Purchase of trading securities
    
    
    (81,738
    )
    
    
    (65,082
    )
    
    
    Change in interest-bearing deposits in other banks
    
    
    (252
    )
    
    
    
    
    
    
    Proceeds from sale of trading securities
    
    
    104,433
    
    
    
    79,632
    
    
    
    Purchase of Federal Reserve Bank Stock
    
    
    
    
    
    
    (836
    )
    
    
    Purchase of Federal Home Loan Bank Stock
    
    
    (117
    )
    
    
    (495
    )
    
    
    (173
    )Acquisition, net of cash and cash equivalents acquired
    
    
    
    
    
    
    7,212
    
    
    
    Redemption of Federal Home Loan Bank Stock
    
    
    
    
    
    
    
    
    
    
    570Net increase in loans made to customers
    
    
    (53,912
    )
    
    
    (34,951
    )
    
    
    (41,519
    )Proceeds from the sale of other real estate owned
    
    
    1,203
    
    
    
    1,139
    
    
    
    1,487Purchase of bank premises and equipment
    
    
    (500
    )
    
    
    (2,889
    )
    
    
    (2,417
    )Proceeds from sale of bank premises and equipment
    
    
    6
    
    
    
    15
    
    
    
    668Net cash used in investing activities
    
    
    (72,026
    )
    
    
    (85,257
    )
    
    
    (44,594
    )Financing ActivitiesNet increase (decrease) in demand and other noninterest-bearing
    
    
    5,182
    
    
    
    (11,751
    )
    
    
    3,619Net increase (decrease) in savings, money market and interest-bearing demand
    
    
    (2,445
    )
    
    
    (2,358
    )
    
    
    12,570Net increase in certificates of deposit
    
    
    61,497
    
    
    
    51,920
    
    
    
    60,856Net increase (decrease) in short-term borrowings
    
    
    (19,177
    )
    
    
    18,222
    
    
    
    (10,453
    )Proceeds from Federal Home Loan Bank advances
    
    
    65,000
    
    
    
    233,450
    
    
    
    287,000Payment of Federal Home Loan Bank advances
    
    
    (55,850
    )
    
    
    (228,453
    )
    
    
    (305,810
    )Issuance of preferred stock
    
    
    25,223
    
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (1,443
    )Proceeds from issuance of junior subordinated debentures
    
    
    
    
    
    
    20,620
    
    
    
    Dividends paid
    
    
    (3,940
    )
    
    
    (5,097
    )
    
    
    (4,641
    )Net cash provided by financing activities
    
    
    75,490
    
    
    
    76,553
    
    
    
    41,698Net increase (decrease) in cash and cash equivalents
    
    
    13,400
    
    
    
    (5,599
    )
    
    
    5,199Cash and cash equivalents, January 1
    
    
    23,523
    
    
    
    29,122
    
    
    
    23,923Cash and cash equivalents, December 31
    
    $
    36,923
    
    
    $
    23,523
    
    
    $
    29,122Supplemental cash flow informationInterest paid
    
    $
    25,937
    
    
    $
    28,170
    
    
    $
    19,335Income taxes paid
    
    
    2,555
    
    
    
    1,968
    
    
    
    2,768Transfer of loans to other real estate owned
    
    
    688
    
    
    
    2,667
    
    
    
    2,548
  46




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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
  47




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##### Table of Contents



Restricted Stock
  Loans Held For Sale
  Loans
    48




---



##### Table of Contents



Allowance for Loan Losses
   Servicing
  Bank Premises and Equipment
  Goodwill and Core Deposit Intangibles
   Other Real Estate Owned
  49




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##### Table of Contents



Split-Dollar Life Insurance
 Accounting for Deferred Compensation and
Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements,
 Investment and Trust Services Assets and Income
  Income Taxes
  Comprehensive Income
  New Accounting Pronouncements
   50




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##### Table of Contents



(2) Earnings Per Common Share
  Year Ended December 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands except per share amounts)Weighted average shares outstanding used in Basic
Earnings per Common Share
    
    
    7,295,663
    
    
    
    6,992,215
    
    
    
    6,461,892Dilutive effect of incentive stock options
    
    
    
    
    
    
    
    
    
    
    202Weighted average shares outstanding used in
Diluted Earnings Per Common Share
    
    $
    7,295,663
    
    
    $
    6,992,215
    
    
    $
    6,462,094Net Income
    
    
    3,396
    
    
    
    5,512
    
    
    
    5,424Preferred stock dividend and amortization
    
    
    91
    
    
    
    
    
    
    
    Income Available to Common Shareholders
    
    $
    3,305
    
    
    $
    5,512
    
    
    $
    5,424Basic Earnings Per Common Share
    
    $
    0.45
    
    
    $
    0.79
    
    
    $
    0.84Diluted Earnings Per Common Share
    
    $
    0.45
    
    
    $
    0.79
    
    
    $
    0.84
  (3) Cash and Due from Banks
  51




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##### Table of Contents



(4) Goodwill and Intangible Assets
   (Dollars in Thousands)Cash
    
    $
    20,652Loans, net of reserve for loan losses
    
    
    92,019Bank premises and equipment, net
    
    
    731Acquisition intangibles
    
    
    20,122Deposits
    
    
    101,870Short term borrowings
    
    
    1,720FHLB borrowings
    
    
    4,124
   At December 31,2008
    
    
    2007(Dollars in thousands)Core deposit intangibles
    
    $
    2,643
    
    
    $
    2,655Less: accumulated amortization
    
    
    1,501
    
    
    
    1,375Carrying value of core deposit intangibles
    
    $
    1,142
    
    
    $
    1,280
  52




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##### Table of Contents



Core Deposits Intangibles(Dollars in thousands)2009
    
    $
    1372010
    
    
    1372011
    
    
    1372012
    
    
    1372013
    
    
    1372014 and beyond
    
    
    457
 (5) Securities
  At December 31, 2008Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities available for sale:U.S. Government agencies and corporations
    
    $
    46,418
    
    
    $
    1,134
    
    
    $
    
    
    
    $
    47,552Mortgage backed securities
    
    
    150,718
    
    
    
    2,886
    
    
    
    (196
    )
    
    
    153,408State and political subdivisions
    
    
    21,969
    
    
    
    438
    
    
    
    (315
    )
    
    
    22,092Total Securities
    
    $
    219,105
    
    
    $
    4,458
    
    
    $
    (511
    )
    
    $
    223,052
 At December 31, 2007Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities available for sale:U.S. Government agencies and corporations
    
    $
    90,046
    
    
    $
    992
    
    
    $
    (87
    )
    
    $
    90,951Mortgage backed securities
    
    
    72,534
    
    
    
    585
    
    
    
    (100
    )
    
    
    73,019State and political subdivisions
    
    
    14,961
    
    
    
    294
    
    
    
    (33
    )
    
    
    15,222Total Securities
    
    $
    177,541
    
    
    $
    1,871
    
    
    $
    (220
    )
    
    $
    179,192
 53




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##### Table of Contents



Trading Securities held at December 31, 2008Aggregate Unrealized Gains
    
    
    Aggregate Unrealized Losses
    
    
    FairCost
    
    
    recorded to income
    
    
    recorded to income
    
    
    Value(Dollars in thousands)Trading Securities
    
    $
    11,245
    
    
    $
    16
    
    
    $
    
    
    
    $
    11,261
 Trading Securities held at December 31, 2007Aggregate Unrealized Gains
    
    
    Aggregate Unrealized Losses
    
    
    FairCost
    
    
    recorded to income
    
    
    recorded to income
    
    
    Value(Dollars in thousands)Trading Securities
    
    $
    33,388
    
    
    $
    14
    
    
    $
    
    
    
    $
    33,402
  At December 31, 2008FairSecurities available for sale:
    
    Amortized Cost
    
    
    ValueDue in one year or less
    
    $
    2,255
    
    
    $
    2,260Due from one year to five years
    
    
    36,234
    
    
    
    37,151Due from five years to ten years
    
    
    19,939
    
    
    
    20,508Due after ten years
    
    
    9,959
    
    
    
    9,724Mortgage-backed
    
    
    150,718
    
    
    
    153,409$
    219,105
    
    
    $
    223,052
  2008
    
    
    2007
    
    
    2006(Dollars in thousands)Gross realized gains
    
    $
    612
    
    
    $
    
    
    
    $
    Gross realized losses
    
    
    (76
    )
    
    
    
    
    
    
    Net Securities Gains (Losses)
    
    $
    536
    
    
    $
    
    
    
    $
    Proceeds from the sale of available for sale securities
    
    $
    77,069
    
    
    $
    
    
    
    $
    
   54




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##### Table of Contents



At December 31, 2008Less than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses(Dollars in thousands)Mortgage backed securities
    
    $
    22,569
    
    
    $
    (195
    )
    
    $
    1,642
    
    
    $
    (1
    )
    
    $
    24,211
    
    
    $
    (196
    )State and political subdivisions
    
    
    6,017
    
    
    
    (315
    )
    
    
    
    
    
    
    
    
    
    
    6,017
    
    
    
    (315
    )Total
    
    $
    28,586
    
    
    $
    (510
    )
    
    $
    1,642
    
    
    $
    (1
    )
    
    $
    30,228
    
    
    $
    (511
    )
 At December 31, 2007Less than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses(Dollars in thousands)U.S. Government agencies and
corporations
    
    $
    4,998
    
    
    $
    (2
    )
    
    $
    27,008
    
    
    $
    (85
    )
    
    $
    32,006
    
    
    $
    (87
    )Mortgage backed securities
    
    
    11,890
    
    
    
    (9
    )
    
    
    5,534
    
    
    
    (91
    )
    
    
    17,424
    
    
    
    (100
    )State and political subdivisions
    
    
    1,356
    
    
    
    (13
    )
    
    
    1,324
    
    
    
    (20
    )
    
    
    2,680
    
    
    
    (33
    )Total
    
    $
    18,244
    
    
    $
    (24
    )
    
    $
    33,866
    
    
    $
    (196
    )
    
    $
    52,110
    
    
    $
    (220
    )
 (6) Transactions with Related Parties
  55




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##### Table of Contents



At December 31,2008
    
    
    2007(Dollars in thousands)Amount at beginning of year
    
    $
    22,833
    
    
    $
    24,825Additions (deductions)New Loans
    
    
    1,871
    
    
    
    6,107Repayments
    
    
    (5,083
    )
    
    
    (7,465
    )Changes in directors and officers and /or affiliations, net
    
    
    685
    
    
    
    (634
    )Amount at end of year
    
    $
    20,306
    
    
    $
    22,833
  (7) Loans and Allowance for Loan Losses
  At December 31,2008
    
    
    2007(Dollars in thousands)Real estate loans (includes loans secured primarily by real estate only):Construction and land development
    
    $
    60,725
    
    
    $
    74,379One to four family residential
    
    
    231,757
    
    
    
    213,238Multi-family residential
    
    
    26,284
    
    
    
    24,473Non-farm non-residential properties
    
    
    296,393
    
    
    
    275,552Commercial and industrial loans
    
    
    60,846
    
    
    
    56,688Personal loans to individuals:Auto, single payment and installment
    
    
    123,807
    
    
    
    104,360All other loans
    
    
    3,739
    
    
    
    4,908Total loans
    
    
    803,551
    
    
    
    753,598Allowance for loan losses
    
    
    (11,652
    )
    
    
    (7,820
    )Net loans
    
    $
    791,899
    
    
    $
    745,778
  Year Ended December 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Balance at the beginning of year
    
    $
    7,820
    
    
    $
    7,300
    
    
    $
    6,622Provision for loan losses
    
    
    6,809
    
    
    
    2,255
    
    
    
    2,280Allowance from merger
    
    
    
    
    
    
    1,098
    
    
    
    Loans charged-off
    
    
    (4,168
    )
    
    
    (3,332
    )
    
    
    (2,028
    )Recoveries on loans previously charged-off
    
    
    1,191
    
    
    
    499
    
    
    
    426Balance at the end of the year
    
    $
    11,652
    
    
    $
    7,820
    
    
    $
    7,300
 56




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At December 31,2008
    
    2007
    
    2006(Dollars in thousands)Year-end impaired loans with allowance for loan losses specifically allocated
    
    $
    13,213
    
    
    $
    5,456
    
    
    $
    4,890Year-end
impaired loans without allowance for loan losses specifically
allocated
    
    
    2,331
    
    
    
    2,471
    
    
    
    9,887Amount of allowance specifically allocated to impaired loans
    
    
    3,569
    
    
    
    1,549
    
    
    
    1,115Average of impaired loans during the year
    
    
    16,094
    
    
    
    10,929
    
    
    
    14,355Interest income recognized during impairment
    
    
    
    
    
    
    
    
    
    
    134Nonaccrual loans at year end
    
    
    19,592
    
    
    
    10,831
    
    
    
    12,812
 (8) Bank Premises, Equipment and Leases
  At December 312008
    
    
    2007(Dollars in thousands)Land
    
    $
    2,662
    
    
    $
    2,662Buildings
    
    
    12,002
    
    
    
    11,933Equipment
    
    
    14,031
    
    
    
    14,305Purchased software
    
    
    3,967
    
    
    
    4,045Leasehold improvements
    
    
    1,060
    
    
    
    1,044Total cost
    
    $
    33,722
    
    
    $
    33,989Less: accumulated depreciation and amortization
    
    
    22,218
    
    
    
    20,661Net bank premises and equipment
    
    $
    11,504
    
    
    $
    13,328
   Amount(Dollars in thousands)2009
    
    $
    8622010
    
    
    7552011
    
    
    6212012
    
    
    3842013
    
    
    2652014 and thereafter
    
    
    909Total
    
    $
    3,796
  57




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##### Table of Contents



(9) Deposits
  At December 31,2008
    
    
    2007(Dollars in thousands)Demand and other noninterest-bearing
    
    $
    93,994
    
    
    $
    88,812Interest checking
    
    
    115,102
    
    
    
    120,052Savings
    
    
    78,526
    
    
    
    81,293Money market accounts
    
    
    99,051
    
    
    
    129,961Consumer time deposits
    
    
    449,772
    
    
    
    344,279Public time deposits
    
    
    72,247
    
    
    
    64,913Brokered time deposits
    
    
    12,483
    
    
    
    27,631Total deposits
    
    $
    921,175
    
    
    $
    856,941
   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
    
    $
    372,327
    
    
    $
    68,859
    
    
    $
    8,586
    
    
    $
    
    
    
    $
    449,772Public time deposits
    
    
    69,828
    
    
    
    2,419
    
    
    
    
    
    
    
    
    
    
    
    72,247Brokered time deposits
    
    
    12,483
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,483Total time deposits
    
    $
    454,638
    
    
    $
    71,278
    
    
    $
    8,586
    
    
    $
    
    
    
    $
    534,502
 (10) Short-Term Borrowings
   58




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##### Table of Contents



Year ended December 312008
    
    
    2007
    
    
    2006(Dollars in thousands)Securities sold under repurchase agreementsPeriod End:Outstanding
    
    $
    22,928
    
    
    $
    22,105
    
    
    $
    20,663Interest rate
    
    
    0.50
    %
    
    
    3.21
    %
    
    
    4.17
    %Average:Outstanding
    
    $
    25,875
    
    
    $
    23,533
    
    
    $
    16,889Interest rate
    
    
    1.19
    %
    
    
    3.63
    %
    
    
    4.03
    %Maximum month-end balance
    
    $
    30,781
    
    
    $
    28,039
    
    
    $
    21,959Federal funds purchasedPeriod End:Outstanding
    
    $
    
    
    
    $
    20,000
    
    
    $
    1,500Interest rate
    
    
    n/a
    
    
    
    4.25
    %
    
    
    5.50
    %Average:Outstanding
    
    $
    1,989
    
    
    $
    7,947
    
    
    $
    3,870Interest rate
    
    
    3.87
    %
    
    
    5.30
    %
    
    
    5.53
    %Maximum month-end balance
    
    $
    12,900
    
    
    $
    20,000
    
    
    $
    10,800
 (11) Federal Home Loan Bank Advances
  Year Ended December 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Cash management advances (CMA) from
the Federal Home Loan Bank (FHLB)Period End:Outstanding
    
    $
    
    
    
    $
    
    
    
    $
    Interest rate
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Average:Outstanding
    
    $
    10,000
    
    
    $
    13,167
    
    
    $
    14,645Interest rate
    
    
    3.18
    %
    
    
    5.18
    %
    
    
    5.39
    %
  59




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2008
    
    
    2007(Dollars in thousands)Maturities February 2008 through
December 2008, with fixed rates
ranging from 3.33% to 5.07%, averaging
4.21% in 2007
    
    $
    
    
    
    $
    10,781Maturities January 2009 through
December 2009, with fixed rates
ranging from 3.36% to 5.00%, averaging
3.60% in 2008 and 3.48% in 2007
    
    
    25,794
    
    
    
    10,850Maturity January 2010, fixed rate 3.58%
    
    
    10,000
    
    
    
    10,000Maturities January 2011 through
February 2011, with fixed rates
ranging from 3.17% to 3.67%, averaging
3.50% for 2008 and 3.67% for 2007
    
    
    15,000
    
    
    
    10,000Maturity January 2014, fixed rate 3.55%
    
    
    63
    
    
    
    76Maturity July 2015, fixed rate 4.76%
    
    
    2,500
    
    
    
    2,500Total FHLB advances
    
    $
    53,357
    
    
    $
    44,207
 (12) Trust Preferred Securities
    (13) Income Taxes
  Year Ended December 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Income Taxes:Federal current expense
    
    $
    1,353
    
    
    $
    1,469
    
    
    $
    2,233Federal deferred expense (benefit)
    
    
    (1,241
    )
    
    
    182
    
    
    
    (564
    )State and city expense
    
    
    
    
    
    
    
    
    
    
    Total Income Taxes
    
    $
    112
    
    
    $
    1,651
    
    
    $
    1,669
 60




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##### Table of Contents



Year Ended December 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Computed expected tax expense
    
    $
    1,193
    
    
    $
    2,435
    
    
    $
    2,412Increase (reduction) in income taxes resulting from:Tax exempt interest on obligations of state and
political subdivisions
    
    
    (265
    )
    
    
    (277
    )
    
    
    (181
    )Tax exempt interest on bank owned life insurance
    
    
    (332
    )
    
    
    (243
    )
    
    
    (251
    )New markets tax credit
    
    
    (476
    )
    
    
    (476
    )
    
    
    (401
    )Other, net
    
    
    (8
    )
    
    
    212
    
    
    
    90Total Income Taxes
    
    $
    112
    
    
    $
    1,651
    
    
    $
    1,669
  At December 312008
    
    
    2007(Dollars in thousands)Deferred Federal tax assets:Allowance for loan losses
    
    $
    3,922
    
    
    $
    2,608Deferred compensation
    
    
    375
    
    
    
    405Minimum pension liability
    
    
    910
    
    
    
    352Equity based compensation
    
    
    60
    
    
    
    60Accrued loan fees and costs
    
    
    124
    
    
    
    NOL Carryforward
    
    
    
    
    
    
    574Mark-to-market adjustments
    
    
    250
    
    
    
    326Other, net
    
    
    228
    
    
    
    73Total deferred Federal tax assets
    
    $
    5,869
    
    
    $
    4,398Deferred Federal tax liabilities:Bank premises and equipment depreciation
    
    $
    (44
    )
    
    $
    (140
    )Unrealized gain on securities available for sale
    
    
    (1,342
    )
    
    
    (588
    )FHLB stock dividends
    
    
    (254
    )
    
    
    (205
    )Intangible asset amortization
    
    
    (448
    )
    
    
    (310
    )Accrued loan fees and costs
    
    
    
    
    
    
    (42
    )Accretion
    
    
    (119
    )
    
    
    Deferred charges
    
    
    (338
    )
    
    
    (202
    )Prepaid pension
    
    
    (435
    )
    
    
    (417
    )Total deferred Federal tax liabilities
    
    
    (2,980
    )
    
    
    (1,904
    )Net deferred Federal tax assets
    
    $
    2,889
    
    
    $
    2,494
 61




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##### Table of Contents



(14) Shareholders Equity
 Preferred Stock
      62




---



##### Table of Contents



Common Stock
  Common Stock Repurchase Plan and Treasury Stock
  Shareholder Rights Plan
   LNBB Direct Stock Purchase and Dividend Reinvestment Plan
  63




---



##### Table of Contents



Dividend Restrictions
   (15) Regulatory Capital
    64




---



##### Table of Contents



December 31 2008
    
    December 31 2007Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)Total capital (risk weighted)Consolidated
    
    $
    114,750
    
    
    
    13.44
    %
    
    $
    87,765
    
    
    
    10.53
    %Bank
    
    
    87,844
    
    
    
    10.30
    
    
    
    87,443
    
    
    
    10.49Tier 1 capital (risk weighted)Consolidated
    
    
    78,846
    
    
    
    9.24
    
    
    
    79,945
    
    
    
    9.59Bank
    
    
    71,171
    
    
    
    8.35
    
    
    
    71,623
    
    
    
    8.60Tier 1 capital (average assets)Consolidated
    
    
    78,846
    
    
    
    7.20
    
    
    
    79,945
    
    
    
    7.92Bank
    
    
    71,171
    
    
    
    6.44
    
    
    
    71,623
    
    
    
    7.10Well Capitalized:Total capital (risk weighted)Consolidated
    
    $
    85,379
    
    
    
    10.00
    %
    
    $
    83,343
    
    
    
    10.00
    %Bank
    
    
    85,285
    
    
    
    10.00
    
    
    
    83,322
    
    
    
    10.00Tier 1 capital (risk weighted)Consolidated
    
    
    51,199
    
    
    
    6.00
    
    
    
    50,006
    
    
    
    6.00Bank
    
    
    51,141
    
    
    
    6.00
    
    
    
    49,993
    
    
    
    6.00Tier 1 capital (average assets)Consolidated
    
    
    54,754
    
    
    
    5.00
    
    
    
    50,459
    
    
    
    5.00Bank
    
    
    55,257
    
    
    
    5.00
    
    
    
    50,409
    
    
    
    5.00Minimum Required:Total capital (risk weighted)Consolidated
    
    $
    68,304
    
    
    
    8.00
    %
    
    $
    66,675
    
    
    
    8.00
    %Bank
    
    
    68,228
    
    
    
    8.00
    
    
    
    66,657
    
    
    
    8.00Tier 1 capital (risk weighted)Consolidated
    
    
    34,132
    
    
    
    4.00
    
    
    
    33,337
    
    
    
    4.00Bank
    
    
    34,094
    
    
    
    4.00
    
    
    
    33,329
    
    
    
    4.00Tier 1 capital (average assets)Consolidated
    
    
    43,803
    
    
    
    4.00
    
    
    
    40,368
    
    
    
    4.00Bank
    
    
    44,206
    
    
    
    4.00
    
    
    
    40,327
    
    
    
    4.00
 65




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##### Table of Contents



(16) Parent Company Financial Information
  Year ended December 31,Condensed Balance Sheets
    
    2008
    
    
    2007(Dollars in thousands)Assets:Cash
    
    $
    25,925
    
    
    $
    414Investment in The Lorain National Bank
    
    
    94,820
    
    
    
    95,007Other investments
    
    
    7
    
    
    
    7Note receivable  The Lorain National Bank
    
    
    6,000
    
    
    
    8,000Other assets
    
    
    1,010
    
    
    
    247Total Assets
    
    $
    127,762
    
    
    $
    103,675Liabilities and Shareholders EquityJunior subordinated debenture
    
    $
    20,620
    
    
    $
    20,620Other liabilities
    
    
    83
    
    
    
    402Shareholders equity
    
    
    107,059
    
    
    
    82,653Total Liabilities and Shareholders Equity
    
    $
    127,762
    
    
    $
    103,675
 Year ended December 31,Condensed Statements of Income
    
    2008
    
    
    2007
    
    
    2006(Dollars in thousands)IncomeInterest income
    
    $
    390
    
    
    $
    368
    
    
    $
    272Cash dividend from The Lorain National Bank
    
    
    3,900
    
    
    
    5,160
    
    
    
    5,300Other income
    
    
    62
    
    
    
    2
    
    
    
    23Total Income
    
    
    4,352
    
    
    
    5,530
    
    
    
    5,595ExpensesInterest expense
    
    
    1,176
    
    
    
    914
    
    
    
    Other expenses
    
    
    272
    
    
    
    245
    
    
    
    178Total Expense
    
    
    1,448
    
    
    
    1,159
    
    
    
    178Income before income taxes and equity in undistributed net income of subsidiaries
    
    
    2,904
    
    
    
    4,371
    
    
    
    5,417Income tax (benefit) expense
    
    
    (335
    )
    
    
    6
    
    
    
    36Equity in undistributed net income of subsidiaries
    
    
    157
    
    
    
    1,147
    
    
    
    43Net Income
    
    $
    3,396
    
    
    $
    5,512
    
    
    $
    5,424
 66




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##### Table of Contents



Year ended December 31,Condensed Statements of Cash Flows
    
    2008
    
    
    2007
    
    
    2006(Dollars in thousands)Net Income
    
    $
    3,396
    
    
    $
    5,512
    
    
    $
    5,424Adjustments to reconcile net income to net cash provided by operating activities:Equity in undistributed net income of The Lorain National Bank
    
    
    (157
    )
    
    
    (1,147
    )
    
    
    (43
    )Share-based compensation expense, net of tax
    
    
    71
    
    
    
    58
    
    
    
    48Net change in other assets and liabilities
    
    
    (1,082
    )
    
    
    180
    
    
    
    115Net cash provided by operating activities
    
    
    2,228
    
    
    
    4,603
    
    
    
    5,544Cash Flows from Investing Activities:Payments for investments in subsidiaries
    
    
    
    
    
    
    (15,740
    )
    
    
    Payments to The Lorain National Bank for subordinated debt instrument
    
    
    
    
    
    
    (4,000
    )
    
    
    Payments from The Lorain National Bank for subordinated debt instrument
    
    
    2,000
    
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    2,000
    
    
    
    (19,740
    )
    
    
    Cash Flows from Financing Activities:Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (1,443
    )Proceeds from issuance of junior subordinated debentures
    
    
    
    
    
    
    20,620
    
    
    
    Proceeds from issuance of preferred stock
    
    
    25,223
    
    
    
    
    
    
    
    Dividends paid
    
    
    (3,940
    )
    
    
    (5,097
    )
    
    
    (4,641
    )Net cash provided by (used in) financing activities
    
    
    21,283
    
    
    
    15,523
    
    
    
    (6,084
    )Net increase (decrease) in cash equivalents
    
    
    25,511
    
    
    
    386
    
    
    
    (540
    )Cash and cash equivalents at beginning of year
    
    
    414
    
    
    
    28
    
    
    
    568Cash and cash equivalents at end of year
    
    $
    25,925
    
    
    $
    414
    
    
    $
    28
 (17) Retirement Pension Plan
    67




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##### Table of Contents



Year ended December 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Change in projected benefit obligationProjected benefit obligation at the beginning of the year
    
    $
    (5,559
    )
    
    $
    (5,534
    )
    
    $
    (6,341
    )Interest Cost
    
    
    (324
    )
    
    
    (308
    )
    
    
    (329
    )Actuarial gain (loss)
    
    
    (363
    )
    
    
    (284
    )
    
    
    263Settlement loss
    
    
    
    
    
    
    (92
    )
    
    
    (185
    )Benefits paid
    
    
    523
    
    
    
    659
    
    
    
    1,058Projected benefit obligation at the end of the year
    
    $
    (5,723
    )
    
    $
    (5,559
    )
    
    $
    (5,534
    )Change in plan assetsFair value of plan assets at beginning of year
    
    $
    5,430
    
    
    $
    5,374
    
    
    $
    5,868Actual gain on plan assets
    
    
    (968
    )
    
    
    465
    
    
    
    314Employer contributions
    
    
    
    
    
    
    250
    
    
    
    250Gain/(Loss)
    
    
    30
    
    
    
    
    
    
    
    Benefits paid
    
    
    (523
    )
    
    
    (659
    )
    
    
    (1,058
    )Fair value of plan assets at end of year
    
    $
    3,969
    
    
    $
    5,430
    
    
    $
    5,374Funded StatusFunded status
    
    $
    (1,754
    )
    
    $
    (129
    )
    
    $
    (160
    )Unrecognized actuarial loss
    
    
    2,677
    
    
    
    1,037
    
    
    
    802Prepaid Asset (Accrued Liability)
    
    $
    923
    
    
    $
    908
    
    
    $
    642
  Year ended December 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Net Periodic Pension Cost (Benefit)Interest cost on projected benefit obligation
    
    $
    324
    
    
    $
    307
    
    
    $
    329Expected return on plan benefits
    
    
    (388
    )
    
    
    (389
    )
    
    
    (423
    )Net periodic pension cost (benefit)
    
    
    (64
    )
    
    
    (82
    )
    
    
    (94
    )Amortization of Loss
    
    
    48
    
    
    
    19
    
    
    
    18Loss recognized due to settlement
    
    
    
    
    
    
    48
    
    
    
    85Total pension costs
    
    $
    (16
    )
    
    $
    (15
    )
    
    $
    9
  Year ended December 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Actuarial Loss
    
    $
    2,677
    
    
    $
    1,037
    
    
    $
    802Tax Benefit
    
    
    (910
    )
    
    
    (353
    )
    
    
    (273
    )Net amount not recognized
    
    $
    1,767
    
    
    $
    684
    
    
    $
    529
  68




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##### Table of Contents



2008
    
    2007
    
    2006Weighted average discount rate
    
    
    5.75
    %
    
    
    5.75
    %
    
    
    5.50
    %Expected long-term rate of return on plan assets
    
    
    7.50
    %
    
    
    7.50
    %
    
    
    7.50
    %Assumed rate of future compensation increases
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
  Year ended December 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Accrued benefit cost
    
    $
    (1,754
    )
    
    $
    (129
    )
    
    $
    (160
    )Minimum pension liability
    
    
    2,677
    
    
    
    1,037
    
    
    
    802Net amount recognized
    
    $
    923
    
    
    $
    908
    
    
    $
    642
 Year ended December 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Increase in minimum liability included in other comprehensive income
    
    $
    1,083
    
    
    $
    155
    
    
    $
    48
  Plan Assets
  Plan Assets at December 31,2008
    
    2007
    
    2006Asset Category:Equity securities
    
    
    47.53
    %
    
    
    59.90
    %
    
    
    61.30
    %Debt securities
    
    
    52.25
    
    
    
    35.30
    
    
    
    38.60Cash and cash equivalents
    
    
    0.22
    
    
    
    4.80
    
    
    
    0.10Total
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %LNB Bancorp, Inc. common stock to total plan assets
    
    
    4.25
    %
    
    
    8.50
    %
    
    
    9.50
    %
    69




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##### Table of Contents



Amount(Dollars in thousands)2009
    
    $
    2972010
    
    
    2962011
    
    
    3112012
    
    
    3442013
    
    
    3792014-2018
    
    
    1,907
 (18) Stock Options and Stock Appreciation Rights
   Year Issued2005
    
    2005
    
    2006
    
    2007
    
    2007
    
    2008
    
    2008
    
    2006Type
    
    Option
    
    Option
    
    Option
    
    Option
    
    Option
    
    Option
    
    Option
    
    SARsNumber of Options
    
    
    2,500
    
    
    
    30,000
    
    
    
    30,000
    
    
    
    30,000
    
    
    
    20,000
    
    
    
    50,000
    
    
    
    41,000
    
    
    
    14,500Strike Price
    
    $
    16.50
    
    
    $
    19.17
    
    
    $
    19.10
    
    
    $
    16.00
    
    
    $
    15.35
    
    
    $
    14.47
    
    
    $
    14.47
    
    
    $
    19.00Number of Options Vested
    
    
    2,500
    
    
    
    30,000
    
    
    
    20,000
    
    
    
    10,000
    
    
    
    6,667
    
    
    
    
    
    
    
    
    
    
    
    9,666Assumptions:Risk free interest rate
    
    
    4.50
    %
    
    
    3.92
    %
    
    
    3.66
    %
    
    
    4.73
    %
    
    
    4.72
    %
    
    
    2.94
    %
    
    
    2.94
    %
    
    
    1.42
    %Dividend yield
    
    
    4.36
    %
    
    
    3.76
    %
    
    
    3.77
    %
    
    
    4.50
    %
    
    
    4.69
    %
    
    
    4.98
    %
    
    
    4.98
    %
    
    
    6.86
    %Volatility
    
    
    18.48
    %
    
    
    17.30
    %
    
    
    17.66
    %
    
    
    16.52
    %
    
    
    15.33
    %
    
    
    15.68
    %
    
    
    15.68
    %
    
    
    25.19
    %Expected Life  years
    
    
    5
    
    
    
    6
    
    
    
    6
    
    
    
    7
    
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    5
  2008
    
    2007
    
   2006Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage Exercise
    
    
    
    
    
    
    Average Exercise
    
    
    
    
    
    
    Average ExerciseOptions
    
    
    Price per Share
    
    
    Options
    
    
    Price per Share
    
    
    Options
    
    
    Price per ShareOutstanding at beginning
of year
    
    
    112,500
    
    
    $
    17.57
    
    
    
    62,500
    
    
    $
    19.03
    
    
    
    32,500
    
    
    $
    18.96Granted
    
    
    99,500
    
    
    
    14.47
    
    
    
    50,000
    
    
    
    15.74
    
    
    
    30,000
    
    
    
    19.10Forfeited
    
    
    (8,500
    )
    
    
    14.47
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock dividend or split
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    203,500
    
    
    $
    16.18
    
    
    
    112,500
    
    
    $
    17.57
    
    
    
    62,500
    
    
    $
    19.03Exerciseable at end of year
    
    
    69,167
    
    
    $
    18.23
    
    
    
    32,500
    
    
    $
    18.94
    
    
    
    12,500
    
    
    $
    18.64
 70




---



##### Table of Contents



Weighted AverageGrant Date FairNonvested Shares
    
    Value per shareNonvested at January 1, 2008
    
    
    80,000
    
    
    $
    19.13Granted
    
    
    99,500
    
    
    
    14.47Vested
    
    
    36,667
    
    
    
    17.59Forfeited
    
    
    8,500
    
    
    
    14.47Nonvested at December 31, 2008
    
    
    134,333
    
    
    
    15.13
 (19) Benefit Plans
     (20) Commitments, Credit Risk, and Contingencies
  71




---



##### Table of Contents



2008
    
    
    2007(Dollars in thousands)Commitments to extend credit
    
    $
    76,199
    
    
    $
    112,445Home equity lines of credit
    
    
    81,416
    
    
    
    77,942Standby letters of credit
    
    
    9,313
    
    
    
    3,759Total
    
    $
    166,928
    
    
    $
    194,146
   (21) 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.
 72




---



##### Table of Contents




    
    For variable rate loans with interest rates that may be adjusted on a
quarterly, or more frequent basis, the carrying amount is a reasonable
estimate of fair value. The fair value of other types of loans is estimated
by discounting future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.
    
    The 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
December 31, for each year presented. The fair value of fixed-maturity
certificates of deposit is estimated using the rates currently offered for
deposits of similar remaining maturities. For variable rate certificates of
deposit, the carrying amount is a reasonable estimate of fair value.
    
    Securities sold under repurchase agreements, other short-term borrowings,
accrued interest payable and other financial liabilities approximate fair
value due to the short-term nature of the liability.
    
    The fair value of 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 commitments. The
carrying amount and fair value of off-balance sheet instruments is not
significant as of December 31, 2008 and 2007.
 Limitations
   73




---



##### Table of Contents



At December 31,2008
    
    
    2007CarryingValue
    
    
    Estimated Fair Value
    
    
    CarryingValue
    
    
    Estimated Fair Value(Dollars in thousands)Financial assetsCash and due from banks, Federal
funds sold, short-term investments and interest bearing deposits in
other banks
    
    $
    37,275
    
    
    $
    37,275
    
    
    $
    23,623
    
    
    $
    23,623Securities
    
    
    234,313
    
    
    
    234,313
    
    
    
    212,594
    
    
    
    212,594Portfolio loans, net
    
    
    791,899
    
    
    
    836,432
    
    
    
    745,778
    
    
    
    751,578Loans held for sale
    
    
    3,580
    
    
    
    3,580
    
    
    
    4,724
    
    
    
    4,724Accrued interest receivable
    
    
    4,290
    
    
    
    4,290
    
    
    
    4,074
    
    
    
    4,074Financial liabilitiesDeposits:Demand, savings and money market
    
    
    422,855
    
    
    
    422,855
    
    
    
    420,118
    
    
    
    420,118Certificates of deposit
    
    
    498,320
    
    
    
    546,497
    
    
    
    436,823
    
    
    
    441,400Total deposits
    
    
    921,175
    
    
    
    969,352
    
    
    
    856,941
    
    
    
    861,518Short-term borrowings
    
    
    22,928
    
    
    
    22,928
    
    
    
    42,105
    
    
    
    42,105Federal Home Loan Bank advances
    
    
    53,357
    
    
    
    54,647
    
    
    
    44,207
    
    
    
    43,500Junior subordinated debentures
    
    
    20,620
    
    
    
    21,492
    
    
    
    20,620
    
    
    
    21,716Accrued interest payable
    
    
    3,813
    
    
    
    3,813
    
    
    
    4,620
    
    
    
    4,620
     Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantFair Value as of
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsDescription
    
    December 31, 2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Trading Securities
    
    $
    11,261
    
    
    $
    11,261
    
    
    $
    
    
    
    $
    Available for Sale Securities
    
    
    223,052
    
    
    
    200,960
    
    
    
    22,092
    
    
    
    Total
    
    $
    234,313
    
    
    $
    212,221
    
    
    $
    22,092
    
    
    $
    
    (22) Quarterly Financial Data (Unaudited)
  First
    
    Second
    
    Third
    
    Fourth
    
    Full Year(Dollars in thousands, except per share amount)2008Total interest income
    
    $
    15,114
    
    
    $
    14,443
    
    
    $
    14,385
    
    
    $
    14,386
    
    
    $
    58,328Total interest expense
    
    
    7,594
    
    
    
    6,304
    
    
    
    6,156
    
    
    
    6,135
    
    
    
    26,189Net Interest income
    
    
    7,520
    
    
    
    8,139
    
    
    
    8,229
    
    
    
    8,251
    
    
    
    32,139Provision for loan losses
    
    
    474
    
    
    
    4,664
    
    
    
    471
    
    
    
    1,200
    
    
    
    6,809Net interest income after provision for loan losses
    
    
    7,046
    
    
    
    3,475
    
    
    
    7,758
    
    
    
    7,051
    
    
    
    25,330Noninterest income
    
    
    3,334
    
    
    
    3,154
    
    
    
    3,158
    
    
    
    2,813
    
    
    
    12,459Noninterest expense
    
    
    8,522
    
    
    
    8,840
    
    
    
    8,498
    
    
    
    8,421
    
    
    
    34,281Income tax
    
    
    411
    
    
    
    (1,076
    )
    
    
    595
    
    
    
    182
    
    
    
    112Net Income
    
    
    1,447
    
    
    
    (1,135
    )
    
    
    1,823
    
    
    
    1,261
    
    
    
    3,396Preferred Stock Dividend and Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91
    
    
    
    91Net Income Available to Common Shareholders
    
    
    1,447
    
    
    
    (1,135
    )
    
    
    1,823
    
    
    
    1,170
    
    
    
    3,305Basic earnings per common share
    
    
    0.20
    
    
    
    (0.16
    )
    
    
    0.25
    
    
    
    0.16
    
    
    
    0.45Diluted earnings per common share
    
    
    0.20
    
    
    
    (0.16
    )
    
    
    0.25
    
    
    
    0.16
    
    
    
    0.45Dividends declared per common share
    
    
    0.18
    
    
    
    0.18
    
    
    
    0.09
    
    
    
    0.09
    
    
    
    0.54
 First
    
    Second
    
    Third
    
    Fourth
    
    Full Year(Dollars in thousands, except per share amount)2007Total interest income
    
    $
    12,872
    
    
    $
    14,162
    
    
    $
    15,871
    
    
    $
    15,857
    
    
    $
    58,762Total interest expense
    
    
    6,043
    
    
    
    6,964
    
    
    
    8,043
    
    
    
    8,042
    
    
    
    29,092Net Interest income
    
    
    6,829
    
    
    
    7,198
    
    
    
    7,828
    
    
    
    7,815
    
    
    
    29,670Provision for loan losses
    
    
    383
    
    
    
    853
    
    
    
    441
    
    
    
    578
    
    
    
    2,255Net interest income after provision for loan losses
    
    
    6,446
    
    
    
    6,345
    
    
    
    7,387
    
    
    
    7,237
    
    
    
    27,415Noninterest income
    
    
    2,989
    
    
    
    2,433
    
    
    
    3,004
    
    
    
    3,073
    
    
    
    11,499Noninterest expense
    
    
    7,358
    
    
    
    8,009
    
    
    
    8,334
    
    
    
    8,050
    
    
    
    31,751Income tax
    
    
    542
    
    
    
    133
    
    
    
    384
    
    
    
    592
    
    
    
    1,651Net Income
    
    
    1,535
    
    
    
    636
    
    
    
    1,673
    
    
    
    1,668
    
    
    
    5,512Basic earnings per common share
    
    
    0.24
    
    
    
    0.09
    
    
    
    0.23
    
    
    
    0.23
    
    
    
    0.79Diluted earnings per common share
    
    
    0.24
    
    
    
    0.09
    
    
    
    0.23
    
    
    
    0.23
    
    
    
    0.79Dividends declared per common share
    
    
    0.18
    
    
    
    0.18
    
    
    
    0.18
    
    
    
    0.18
    
    
    
    0.72
 74




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##### Table of Contents



Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
 
 Item 9A. Controls and Procedures
 1. Disclosure Controls and Procedures
    2. Internal Control over Financial Reporting
    75




---



##### Table of Contents



3. Changes in Internal Control over Financial Reporting
  
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors, Executive Officers, Promoters and Control Persons of the Registrant
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management
  76




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##### Table of Contents



Equity Compensation Plan TableNumber of securitiesremaining available forNumber of securities to be
    
    Weighted-Average
    
    future issuance underissued upon exercise
    
    exercise price of
    
    equity compensationof outstanding options,
    
    outstanding options,
    
    plans exluding securitiesPlan Category
    
    warrants and rights (1)
    
    warrants and rights
    
    reflected in column (a)(a)
    
    
    
    (b)
    
    
    
    (c)Equity compensation plans
approved by security holders
    
    
    20,000
    
    
    $
    15.35
    
    
    
    580,000
    (2)Equity compensation plans not
approved by security holders
(3)
    
    
    92,500
    
    
    $
    18.05
    
    
    
    Total
    
    
    112,500
    
    
    $
    17.57
    
    
    
    580,000
 
 (1)
    
    Consists of common shares of the Corporation covered by outstanding options.(2)
    
    Represents shares available for grant under the LNB Bancorp, Inc. 2006
Stock Incentive Plan. The LNB Bancorp, Inc. 2006 Stock Incentive Plan
allows for the granting of an aggregate of 600,000 common shares, no more
than 400,000 of which may be granted in the form of stock options and no
more than 200,000 of which may be granted in the form of restricted shares.(3)
    
    All common shares included in equity compensation plans not approved by
shareholders are covered by outstanding options awarded to two current
officers under agreements having the same material terms. Each of these
options is a nonqualified option, meaning a stock option that does not
qualify under Section 422 of the Internal Revenue Code for the special tax
treatment available for qualified, or incentive, stock options. Mr.
Klimas was granted stock options on February 1, 2005, February 1, 2006, and
February 1, 2007 each to purchase 30,000 shares which vest in 10,000 share
increments on the first, second and third anniversaries of the date of
grant. Mr. Soltis has an option to purchase 2,500 shares which vested on
the first year anniversary of the date of grant. Each option may be
exercised for a term of 10 years from the date the option vests, subject to
earlier termination in the event of death, disability or other termination
of the employment of the option holder. The option holder has up to 12
months following termination of employment due to death or disability to
exercise the options. The options terminate three months after termination
of employment for reasons other than death, disability or termination for
cause, and immediately upon termination of employment if for cause. The
exercise price and number of shares covered by the option are to be
adjusted to reflect any share dividend, share split, merger or other
recapitalization of the common shares of the Corporation. The options are
not transferable other than by will or state inheritance laws. Exercise
prices for these options are at fair market value at the date of grant. The
stock option for 30,000 shares awarded to Mr. Klimas on February 1, 2005
has an exercise price of $19.17 per share, the stock option for 30,000
shares awarded to Mr. Klimas on February 1, 2006 has an exercise price of
$19.10 per share, the stock option for 30,000 shares awarded to Mr. Klimas
on February 1, 2007 has an exercise price of $16.00 per share and the 2,500
shares awarded Mr. Soltis have an exercise price of $16.50 per share. The
remaining contractual terms of the options are 10 years from the date of
vesting.
 
 Item 13. Certain Relationships and Related Transactions
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Item 14. Principal Accounting Fees and Services
  
 PART IV
 
 Item 15. Exhibits, Financial Statement Schedules
 (a)
    
    The following Consolidated Financial Statements and related Notes to Consolidated
Financial Statements, together with the report of Independent Registered Public Accounting
Firm dated March 10, 2009 appear on pages 42 through 75 of this annual report on Form
10-K:
 (1)
    
    Financial StatementsConsolidated Balance Sheets
December 31, 2008 and 2007
Consolidated Statements of Income for the Years Ended
December 31, 2008, 2007 and 2006
Consolidated Statements of Shareholders Equity for the Years
Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements for the Years
Ended December 31, 2008, 2007 and 2006
Report of Independent Registered Public Accounting Firm(2)
    
    Financial Statement SchedulesFinancial statement schedules are omitted as
they are not required or are not applicable or
because the required information is included in
the consolidated financial statements or notes
thereto.(3)
    
    Exhibits required by Item 601 Regulation S-K
Reference is made to the Exhibit Index which is found on page 79 of this Form 10-K.
 (b)
    
    the following exhibits required by Item 601 of Regulation S-K are filed as part of this
report: Form 10-K Exhibit Index
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Exhibit Index
 S-KReferenceNumber
    
    Exhibit2(a)
    
    Agreement and Plan of Merger, dated January 15,
2007, by and between LNB Bancorp, Inc. and Morgan
Bancorp, Inc., including the attached Form of Voting
Agreement and Form of Morgan Affiliate Agreement.
Incorporated by reference herein from Exhibit 2.1 of
the Corporations Form 8-K filed January 17, 2007.3(a)
    
    LNB Bancorp, Inc. Second Amended Articles of
Incorporation. Incorporated by reference herein from
Exhibit 3(a) of the Corporations Form 10-K for the
fiscal year ended December 31, 2005.3(b)
    
    Certificate of Amendment to the Amended Articles of
Incorporation, filed with the Ohio Secretary of
State on December 11, 2008. Incorporated by
reference herein from Exhibit 3.1 of the
Corporations Form 8-K filed on December 17, 2008.3(c)
    
    LNB Bancorp, Inc. Amended Code of Regulations.
Incorporated by reference herein from Appendix A to
the Corporations Definitive Proxy Statement on
Schedule 14A filed March 16, 2007.4(a)
    
    Rights Agreement between LNB Bancorp, Inc. and
Registrar and Transfer Corporation dated October 24,
2000. Incorporated by reference to Exhibit 10(r) to
the Corporations Form 10-K for the fiscal year
ended December 31, 2005.4(c)
    
    Indenture, dated as of May 9, 2007, by and between LNB Bancorp, Inc.
and Wells Fargo Bank, National Association, as Trustee, relating to
floating rate Junior Subordinated Debt Securities Due June 15, 2037.
Incorporated by reference herein from Exhibit 4.1 of the
Corporations Form 10-Q for the fiscal quarter ended June 30, 2007.4(d)
    
    Indenture, dated as of May 9, 2007, by and between LNB Bancorp, Inc.
and Wells Fargo Bank, National Association, as Trustee, relating to
fixed rate Junior Subordinated Debt Securities Due June 15, 2037.
Incorporated by reference herein from Exhibit 4.2 of the
Corporations Form 10-Q for the fiscal quarter ended June 30, 2007.4(e)
    
    Amended and Restated Declaration of Trust of LNB Trust I, dated as of
May 9, 2007. Incorporated by reference herein from Exhibit 4.3 of the
Corporations Form 10-Q for the fiscal quarter ended June 30, 2007.
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S-KReferenceNumber
    
    Exhibit4(f)
    
    Amended and Restated Declaration of Trust of LNB Trust II, dated as
of May 9, 2007. Incorporated by reference herein from Exhibit 4.4 of
the Corporations Form 10-Q for the fiscal quarter ended June 30,
2007.4(g)
    
    Form of Warrant for Purchase of Shares of Common Stock. Incorporated
by reference herein from Exhibit 4.1 of the Corporations Form 8-K
filed on December 17, 2008.10(a)*
    
    Form of Stock Appreciation Right Agreement. Incorporated by
reference herein from Exhibit 10.1 to the Corporations Form
8-K filed January 25, 2006.10(b)*
    
    LNB Bancorp, Inc. Stock Appreciation Rights Plan, as restated.10(c)*
    
    Stock Option Agreement, effective as of June 27, 2005,
between the Corporation and Frank A. Soltis. Incorporated by
reference herein from Exhibit 10.2 to the Corporations
quarterly report on Form 10-Q for the quarter ended September
30, 2005.10(d)*
    
    Employment Agreement by and between Daniel E. Klimas and LNB
Bancorp, Inc. dated January 28, 2005. Incorporated by
reference herein from Exhibit 10(a) to the Corporations
annual report Form 10-K for the fiscal year ended December
31, 2004.10(e)
    
    Amendment to Employment Agreement by and between Daniel E.
Klimas and LNB Bancorp, Inc, dated as of July 16, 2008.
Incorporated by reference herein from Exhibit 10.1 of the
Corporations Form 8-K filed on July 18, 2008.10(f)
    
    Amendment to Employment Agreement by and between Daniel E.
Klimas and LNB Bancorp, Inc, dated as of December 12, 2008.10(g)
    
    Asset Purchase Agreement by and between LNB Mortgage, LLC.,
The Lorain National Bank and Mortgage One Services, Inc.
dated July 1, 2004. Incorporated by reference herein from
Exhibit 2 to the Corporations quarterly report on Form 10-Q
for the quarter ended June 30, 2004.10(h)
    
    Amendment to Supplemental Retirement Benefits Agreement by
and between Gary C. Smith and LNB Bancorp, Inc., and The
Lorain National Bank dated October 6, 2003. Incorporated by
reference herein from Exhibit (10a) to the Corporations
annual report on Form 10-K for the year ended December 31,
2003.10(i)*
    
    The Lorain National Bank Retirement Pension Plan amended and
restated effective December 31, 2002, dated November 19,
2002. Incorporated by reference herein from Exhibit 10 to the
Corporations annual report on Form 10-K for the year ended
December 31, 2002.10(j)
    
    Lorain National Bank Group Term Carve Out Plan dated August
7, 2002. Incorporated by reference herein from Exhibit (10a)
to the Corporations quarterly report on Form 10-Q for the
quarter ended September 30, 2002.10(k)
    
    Restated and Amended Employment Agreement by and between Gary
C. Smith and LNB Bancorp, Inc, and The Lorain National Bank
dated December 22, 2000.
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S-KReferenceNumber
    
    ExhibitIncorporated by reference herein
from Exhibit (10a) to the Corporations annual report on Form
10-K for the year ended December 31, 2001.10(l)
    
    Supplemental Retirement Benefits Agreement by and between
Gary C. Smith and LNB Bancorp, Inc, and The Lorain National
Bank dated December 22, 2000. Incorporated by reference
herein from Exhibit 10(n) of the Corporations Form 10-K for
the fiscal year ended December 31, 2005.10(m)
    
    Amended Supplemental Retirement Agreement by and between
Thomas P. Ryan and LNB Bancorp, Inc. and The Lorain National
Bank dated December 23, 2000. Incorporated by reference
herein from Exhibit 10(o) of the Corporations Form 10-K for
the fiscal year ended December 31, 2005.10(n)
    
    Amended Supplemental Retirement Agreement by and between
Gregory D. Friedman and LNB Bancorp, Inc. and The Lorain
National Bank dated December 23, 2000. Incorporated by
reference herein from Exhibit 10(p) of the Corporations Form
10-K for the fiscal year ended December 31, 2005.10(o)*
    
    Amended Supplemental Retirement Agreement by and between
James F. Kidd and The Lorain National Bank dated June 15,
1999. Incorporated by reference herein from Exhibit 10(q) of
the Corporations Form 10-K for the fiscal year ended
December 31, 2005.
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S-KReferenceNumber
    
    Exhibit10(p)
    
    Branch Purchase and Assumption Agreement by and between
KeyBank National Association and the Lorain National Bank
dated April 10, 1997. Incorporated by reference herein from
Exhibit 10(s) of the Corporations Form 10-K for the fiscal
year ended December 31, 2005.10(q)*
    
    Supplemental Retirement Agreement by and between James F.
Kidd and The Lorain National Bank dated July 30, 1996.
Incorporated by reference herein from Exhibit 10(t) of the
Corporations Form 10-K for the fiscal year ended December
31, 2005.10(r)
    
    Supplemental Retirement Agreement by and between Thomas P.
Ryan and The Lorain National Bank dated July 30, 1996.
Incorporated by reference herein from Exhibit 10(u) of the
Corporations Form 10-K for the fiscal year ended December
31, 2005.10(s)
    
    Supplemental Retirement Agreement by and between Gregory D.
Friedman and The Lorain National Bank dated July 30, 1996.
Incorporated by reference herein from Exhibit 10(v) of the
Corporations Form 10-K for the fiscal year ended December
31, 2005.10(t)
    
    Agreement To Join In The Filing of Consolidated Federal
Income Tax Returns between LNB Bancorp, Inc. and The Lorain
National Bank dated February 27, 2004. Incorporated by
reference herein from Exhibit 10(w) of the Corporations
Form 10-K for the fiscal year ended December 31, 2005.10(u)*
    
    LNB Bancorp, Inc. 2006 Stock Incentive Plan, as restated.10(v)*
    
    Employment Agreement, dated January 15, 2007, by and among
LNB Bancorp, Inc., The Lorain National Bank and William A.
Dougherty. Incorporated by reference herein from Exhibit
10.1 of the Corporations Form 8-K filed January 17, 2007.10(w)*
    
    LNB Bancorp, Inc. 2007 Management Incentive Plan for Key
Executives. Incorporated by reference herein from Exhibit
10(z) of the Corporations Form 10-K for the fiscal year
ended December 31, 2006.10(x)*
    
    LNB Bancorp, Inc. 2007 CEO Short-Term Incentive Plan.
Incorporation by reference from Exhibit 10(aa) of the
Corporations Form 10-K for the fiscal year ended December
31, 2006.10(y)
    
    Guarantee Agreement, dated as of May 9, 2007, by and between LNB
Bancorp, Inc. and Wells Fargo Bank, National Association, as
Trustee, relating to securities of LNB Trust I. Incorporated by
reference herein from Exhibit 10.1 of the Corporations Form
10-Q for the fiscal quarter ended June 30, 2007.
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S-KReferenceNumber
    
    Exhibit10(z)
    
    Guarantee Agreement, dated as of May 9, 2007, by and between LNB
Bancorp, Inc. and Wells Fargo Bank, National Association, as
Trustee, relating to securities of LNB Trust II. Incorporated by
reference herein from Exhibit 10.2 of the Corporations Form
10-Q for the fiscal quarter ended June 30, 2007.10(aa)*
    
    Change in Control Supplemental Executive Compensation Agreement
between LNB Bancorp, Inc. and David S. Harnett, dated August 8,
2007. Incorporated by reference herein from Exhibit 10.1 of the
Corporations Form 10-Q for the fiscal quarter ended September
30, 2007.10(bb)*
    
    LNB Bancorp, Inc. 2007 Chief Executive Officer Long Term
Incentive Plan. Incorporated by reference herein from Exhibit
10.1 of the Corporations Form 8-K filed January 15, 2008.10(cc)*
    
    Form of Nonqualified Stock Option Agreement under the LNB
Bancorp, Inc. 2006 Stock Incentive Plan. Incorporated by
reference herein from Exhibit 10.1 of the Corporations Form 8-K
filed February 6, 2008.10(dd)
    
    Letter Agreement, dated December 12, 2008, between the
Corporation and the United States Department of the Treasury,
which includes the Securities Purchase Agreement  Standard
Terms attached thereto, with respect to the issuance and sale of
the Series B Preferred Stock and Warrant. Incorporated by
reference herein from Exhibit 10.1 of the Corporations Form 8-K
filed on December 17, 2008.10(ee)
    
    2008 Management Incentive Plan for Key Executives, as restated.
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S-KReferenceNumber
    
    Exhibit21.1
    
    Subsidiaries of LNB Bancorp, Inc.23.1
    
    Consent of Plante & Moran, PLLC.31.1
    
    Rule 13a-14(a)/15-d-14(a) Certification of Chief Executive Officer,
dated March 13, 2009 for LNB Bancorp, Inc.s annual report on Form
10-K for the year ended December 31, 2008.31.2
    
    Rule 13a-14(a)/15-d-14(a) Certification of Chief Financial Officer,
dated March 13, 2009 for LNB Bancorp, Inc.s annual report on Form
10-K for the year ended December 31, 2008.32.1
    
    Section 1350 Certification of Chief Executive Officer, dated March
13, 2009 for LNB Bancorp, Inc.s annual report on Form 10-K for the
year ended December 31, 2008.32.2
    
    Section 1350 Certification of Chief Financial Officer, dated March
13, 2009 for LNB Bancorp, Inc.s annual report on Form 10-K for the
year ended December 31, 2008.
 
 *
    
    Management contract, compensatory plan or arrangement
 
 SIGNATURES
  LNB Bancorp, Inc.
(Registrant)By:

/s/ Sharon L. ChurchillSharon L. ChurchillChief Financial Officer  /s/ Daniel P. Batista
    
    DirectorDaniel P. Batista/s/ Robert M. Campana
    
    DirectorRobert M. Campana
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##### Table of Contents



/s/ Terry D. Goode
    
    DirectorTerry D. Goode/s/ James F. Kidd
    
    Vice Chairman and DirectorJames F. Kidd/s/ J. Martin Erbaugh
    
    DirectorJ. Martin Erbaugh/s/ Benjamin G. Norton
    
    DirectorBenjamin G. Norton/s/ Jeffrey F. Riddell
    
    DirectorJeffrey F. Riddell/s/ John W. Schaeffer, M.D.
    
    DirectorJohn W. Schaeffer, M.D./s/ Lee C. Howley
    
    DirectorLee C. Howley/s/ Donald F. Zwilling
    
    DirectorDonald F. Zwilling/s/ James R. Herrick
    
    Chairman and DirectorJames R. Herrick/s/ Thomas P. Perciak
    
    DirectorThomas P. Perciak/s/ Daniel G. Merkel
    
    DirectorDaniel G. Merkel/s/ Daniel E. Klimas
    
    Director and Chief Executive Officer (Principal Executive Officer)Daniel E. Klimas
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##### Table of Contents



/s/ Sharon L. Churchill
    
    Chief Financial Officer (Principal Financial and Accounting Officer)Sharon L. Churchill
 86