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Article by DailyStocks_admin    (01-05-09 05:50 AM)

Filed with the SEC from Dec 26 to Dec 31:

LNB Bancorp (LNBB)
The Richard M. Osborne Trust demanded a shareholder list for the purpose of communicating with other shareholders. The trust argues that all Ohio corporations are required to maintain a list showing all shareholders' names, addresses and the number and class of shares issued or transferred to or by them. The trust has 200,100 shares (2.7%).

BUSINESS OVERVIEW

Overview

General. LNB Bancorp, Inc., (the “Corporation”), is a diversified financial services company headquartered in Lorain, Ohio. It is organized as a financial holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). Its predecessor, the Lorain Banking Company was a state chartered bank founded in 1905. It merged with the National Bank of Lorain in 1961, and in 1984 became a wholly-owned subsidiary of LNB Bancorp, Inc. The Corporation received its financial holding company status on March 13, 2000.

The Corporation engages in banking, mortgage, and brokerage services. These services are generally offered through its wholly-owned subsidiary — The Lorain National Bank (the “Bank”). For brokerage services the Bank operates under an agreement with Investment Centers of America, Inc. Investment Centers of America, Inc. is a member of NASD/SIPC and offers mutual funds, variable annuity investments, variable annuity and life insurance products, along with investments in stocks and bonds.

The primary business of the Bank is providing personal, mortgage and commercial banking products along with investment management and trust services. The Lorain National Bank operates through 21 retail-banking locations and 29 automated teller machines (“ATM’s”) in Lorain, eastern Erie, western Cuyahoga and Summit counties in the Ohio communities of Lorain, Elyria, Amherst, Avon, Avon Lake, LaGrange, North Ridgeville, Oberlin, Olmsted Township, Vermilion, Westlake, and Hudson, as well as a business development office in Cuyahoga County.

The Bank’s commercial lending activities consist of commercial real estate loans, construction and equipment loans, letters of credit, revolving lines of credit, Small Business Administration loans and government guaranteed loans. The Bank’s wholly-owned subsidiary, North Coast Community Development Corporation, offers commercial loans with preferred interest rates on projects that meet the standards for the federal government’s New Markets Tax Credit Program.

The Bank’s residential mortgage lending activities consist of loans originated for portfolio, for the purchase of personal residences. The Bank’s installment lending activities consist of traditional forms of financing for automobile and personal loans, indirect automobile loans, second mortgages, and home equity lines of credit.

The Bank’s deposit services include traditional transaction and time deposit accounts as well as cash management services for corporate and municipal customers. The Bank supplements local deposit generation with time deposits generated through a broker relationship. Deposits of the Bank are insured by the Bank Insurance Fund administered by the Federal Deposit Insurance Corporation (the “FDIC”).

Other bank services offered include safe deposit boxes, night depository, U.S. savings bonds, travelers’ checks, money orders, cashiers checks, ATM’s, debit cards, wire transfer, electronic funds transfers (“ACH”), foreign drafts, foreign currency, electronic banking by phone or through the internet, lockbox and other services tailored for both individuals and businesses.

Competition. The Corporation competes with sixteen other financial institutions in Lorain County, in Ohio, which range in size from approximately $100,000 to over $970 million in Lorain County deposits. These competitors, as well as credit unions and financial intermediaries compete for Lorain County deposits of approximately of $3.5 billion.

The Bank’s market share of total deposits in Lorain County was 19.49% in 2007 and 18.96% in 2006, and the Bank ranked number two in market share in Lorain County in 2007 and 2006.

The Bank has a limited presence in Cuyahoga County, competing with twenty-nine other financial institutions. Cuyahoga County deposits as of 2007 totaled $49.1 billion. The Bank’s market share of deposits in Cuyahoga County was 0.06% in 2007 and 0.07% in 2006 based on the FDIC Summary of Deposits for specific market areas dated June 30, 2007.

Business Strategy. The Bank competes with larger financial institutions by providing exceptional local service that emphasizes direct customer access to the Bank’s officers. It competes against smaller local banks by providing distribution channels that are more convenient and by providing a wider array of products. The Bank endeavors to provide informed and courteous personal services. The Corporation’s management team (“Management”) believes that the Bank is well positioned to compete successfully in its market area. Competition among financial institutions is based largely upon interest rates offered on deposit accounts, interest rates charged on loans, the relative level of service charges, the quality and scope of the services rendered, the convenience of the banking centers and, in the case of loans to commercial borrowers, relative lending limits. Management believes that the commitment of the Bank to provide quality personal service and its local community involvement give the Bank a competitive advantage over other financial institutions operating in its markets.

On May 10, 2007, LNB Bancorp, Inc. acquired Morgan Bancorp, Inc. and its wholly-owned subsidiary, Morgan Bank, N.A., in a stock and cash merger transaction valued at approximately $26.5 million. The Corporation’s Morgan Bank division operates from one location in Hudson, Ohio, which ranks as the fourth wealthiest city in Ohio as measured by median household income statistics, making it one of the most demographically appealing markets in Ohio for banking institutions and financial services providers. Morgan Bank enjoys the number one deposit market share position in Hudson with approximately 20.74% of this $515 million deposit market. This merger is consistent with The Corporation’s strategy to create shareholder value by expanding into attractive markets in contiguous counties.

Supervision and Regulation. The Corporation is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The BHC Act requires prior approval of the Federal Reserve Board before acquiring or holding more than a 5% voting interest in any bank. It also restricts interstate banking activities.

The Bank is subject to extensive regulation, supervision and examination by applicable federal banking agencies, including the FDIC, the Office of the Comptroller of the Currency (the “OCC”) and the Federal Reserve Board. Brokerage and Trust management are subject to supervision by the National Association of Securities Dealers (the “NASD”) and the Securities Investor Protection Corporation (“SPIC”).

Employees. As of December 31, 2007, the Corporation employed 270 full-time equivalent employees. The Corporation is not a party to any collective bargaining agreement. Management considers its relationship with its employees to be good. Employee benefits programs are considered by the Corporation to be competitive with benefits programs provided by other financial institutions and major employers within the current market area.

Industry Segments

The Corporation and its subsidiary, The Lorain National Bank, are engaged in one line of business, which is banking services.

Available Information

LNB Bancorp, Inc.’s internet website is www.4LNB.com . Copies of the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are made available through this website, or directly through the Securities and Exchange Commission (“SEC”) website which is www.sec.gov .

Forward-Looking Statements

This Form 10-K contains forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Terms such as “will,” “should,” “plan,” “intend,” “expect,” “continue,” “believe,” “anticipate” and “seek,” as well as similar comments, are forward-looking in nature. Actual results and events may differ materially from those expressed or anticipated as a result of risks and uncertainties which include but are not limited to:

* significant increases in competitive pressure in the banking and financial services industries;

* changes in the interest rate environment which could reduce anticipated or actual margins;

* changes in political conditions or the legislative or regulatory environment;

* general economic conditions, either nationally or regionally (especially in northeastern Ohio), becoming less favorable than expected resulting in, among other things, a deterioration in credit quality of assets;

* changes occurring in business conditions and inflation;

* changes in technology;

* changes in monetary and tax policies;

* changes in the securities markets;

* changes in economic conditions and competition in the geographic and business areas in which the Corporation conducts its operations; as well as the risks and uncertainties described from time to time in the Corporation’s reports as filed with the Securities and Exchange Commission;

* customer reaction to and unforeseen complications with respect to the Corporation’s integration of acquisitions;


CEO BACKGROUND

Class I

Terry D. Goode 53 Vice President, LandAmerica Financial Group, Inc. and Lorain County Title Company Director 1997
James R. Herrick 56 President, Liberty Auto Group, Inc.Director and Chairman 1999 Kevin C. Martin 51 President, EMH Regional Healthcare System, Elyria, Ohio Director 2005 Benjamin G. Norton 68 LTI Power Systems, Consultant Director 1983


MANAGEMENT DISCUSSION FROM LATEST 10K

Introduction

The Corporation competes in the Cleveland, Ohio market as defined by the Federal Reserve Bank. This market includes most of northeast Ohio. Prior to 2006, the Corporation’s presence was historically limited to Lorain County. The Corporation’s strategy has been to strengthen its commitment for better customer service and visibility by expanding its market presence in northeast Ohio. Over the past two years, the Corporation has been successful in broadening its footprint into Cuyahoga and Summit Counties. During 2007, the Corporation completed the successful acquisition of Hudson-based Morgan Bank, located in one of the most affluent demographic markets in Ohio. Full service offices were opened at Chestnut Commons in Elyria, Ohio in January 2007 as well as North Ridgeville during 2006. In addition, during this period, the Corporation opened a business development office in Independence in Cuyahoga County and a commercial real estate office in Avon Pointe in Avon resulting in strong commercial banking growth. Both the Cuyahoga County and Avon offices are staffed with commercial banking and treasury management professionals.

While making these significant investments for the future, the Corporation continued to address the economic realities in its historical market. 2007 proved to be a challenging competitive environment and a difficult banking environment with a flat yield curve for much of the year, followed by a rapidly changing yield curve in the fourth quarter. While the Corporation does not expect the local and national economic conditions to improve substantially for at least the next several months, the Corporation continues to work on strategies to further increase net interest margin and reduce nonperforming loans. The Corporation experienced solid growth in commercial loans during the year. Due to a strong focus on credit quality, the Corporation has managed to avoid the subprime mortgage issues facing other banks. The Company’s progress in improving its credit quality in the commercial real estate development sector is reflected in a lower level of nonperforming loans at December 31, 2007 as compared to December 31, 2006. While the expansion strategy is an important investment in the future, it added to the overall expense structure of the Corporation.

Key Indicators and Material Trends (Dollars in thousands)

Net interest income growth continues to be a challenge in the banking industry. The Corporation, like many Midwestern banks, continues to deal with a rapidly changing Treasury yield curve, tougher competition and challenging local economic conditions. Since the Corporation is highly dependent on net interest income for its revenue, minimizing net interest margin compression is a very important factor in the Corporation’s financial performance. The net interest margin for 2007 was 3.39 percent versus 3.78 percent for 2006. During the second quarter of 2007, the Company completed two private offerings of trust preferred securities which reduced the net interest margin 10 basis points for 2007. The Corporation experienced solid growth in its commercial loan portfolio during 2007, which, in combination with a strong low-cost retail deposit base, has historically strengthened net interest margin. Noninterest-bearing deposits, while weak in 2006, increased just slightly in 2007; however, interest- bearing demand deposits grew 35.6%. A major highlight of the second quarter this year was the successful completion of the acquisition of Morgan Bank, N.A. of Hudson, Ohio and its wholly-owned subsidiary, Morgan Bank, N.A. The acquisition expanded the Corporation’s market area to include Summit County.

Generation of noninterest income is important to the long-term success of the Corporation. Fee income from deposit service charges and electronic banking continued to increase during 2007 in part due to the Corporation’s continued aggressive sales and marketing efforts, which focus on strengthening recurring sources of noninterest income. During 2007, the Corporation established a secondary market mortgage sales program. This, in combination with the sale of high quality indirect loans to the secondary market, produced additional noninterest income in the form of gains and servicing fees.

Asset quality generally is a key indicator of financial strength, and the Corporation continues to manage credit risk aggressively. The Corporation’s progress in improving its credit quality is reflected in a lower level of nonperforming loans at December 31, 2007, as compared to December 31, 2006. During 2006, it became evident that the slowing housing market and general local economic weakness was impacting the Corporation’s commercial and residential real estate portfolios. While net charge-offs in 2007 were at the lowest level since 2002, they continued to be above the levels experienced by banks of comparable size, and, thus, are an area in which the Corporation intends to focus on improvement. In 2007, the level of nonperforming loans decreased over the prior year from $12,812 at December 31, 2006 to $10,831 at December 31, 2007. While the Corporation intends to continue to work on decreasing nonperforming loans, total delinquency has declined from 2.9% at year-end 2006 to 2.3% at December 31, 2007. Total nonperforming loans as a percentage of total loans is improving, totaling 1.4% at December 31, 2007 as compared to 2.0% at December 31, 2006.

Since the ability to generate deposits is a key indication of the Corporation’s ability to meet its liquidity needs and fund profitable asset growth, it is a significant measure of the success of the Corporation’s business plan. As measured by the FDIC at June 30, 2007, the Corporation’s market share of deposits grew to 19.5% from 19.0% in 2006. This compared to 17.8% five years ago. The Corporation continues to do well in its historically strong city markets of Lorain, Elyria and Amherst, and is pleased with the performance of its newer offices in the eastern parts of Lorain county, as well as Summit and Cuyahoga counties.

Results of Operations (Dollars in thousands except per share data)

Summary of Earnings

Net income in 2007 was $5,512 or $.79 per diluted share, up from $5,424 or $.84 per diluted share in 2006, and down from $6,413 or $.97 per diluted share in 2005. Earnings per diluted share in 2007 were affected by the issuance of 851,990 shares in May, 2007 as part of the acquisition of Morgan Bancorp. During the fourth quarter of 2006 and continuing into the first quarter of 2007, asset quality issues negatively impacted the Corporation’s overall performance. While credit quality remains a negative factor in earnings on an annual basis, nonperforming loans decreased during the remainder of 2007, which is a reflection of additional controls implemented over the credit administration process. The majority of this improvement was due to loans becoming current or paid-off. Much of the growth in net income came in the second half of the year which increased 54% over the first half of 2007.

In 2007, net interest income increased 3.7% to $29,670 from $28,607 in 2006. While some of this increase was attributable to assets acquired in the acquisition of Morgan Bank, the Company also experienced solid growth in commercial loans and an increase in interest income from securities. The net interest margin at December 31, 2007 was 3.4% versus 3.8% for 2006. During the second quarter of 2007, the Company completed two private offerings of trust preferred securities which reduced the net interest margin 10 basis points for 2007. During 2006 and throughout 2007, the flattening of the Treasury yield curve and the impact of competition on loan and deposit pricing, resulted in prolonged compression in the net interest margin.

Noninterest income in 2007 was $11,499, an increase of $1,748 over 2006. Included in 2007 were gains of $766 from the sale of mortgage and installment loans to the secondary market. During the first quarter of 2007, the Corporation established a secondary market mortgage sales program, through which the Corporation sold mortgage loans to Freddie Mac. The sale of high quality indirect loans was a primary activity of Morgan Bank prior to the acquisition, and is being continued by the Corporation. Other types of noninterest income grew as well in 2007 in comparison to 2006, including an increase of $598 in service charges on deposit accounts and ATM charges reflecting continued momentum in fee-based services. Investment and trust services increased $91, or 4.4%, over 2006.

The Morgan Bank acquisition was a continuation of the Corporation’s strategy to strengthen its commitment for better customer service and visibility by expanding its market presence in Lorain County, Cuyahoga County and, with the completion of the acquisition, Summit County. Full service offices were opened at North Ridgeville during 2006 as well as Chestnut Commons in Elyria, Ohio in January 2007. In addition, in June 2006, a Cuyahoga County loan production office was opened. During the first quarter of 2007, the Westlake, Ohio loan production office was relocated to Avon Pointe plaza in the Avon, Ohio area. Both the Cuyahoga County and Avon offices are staffed with commercial banking and treasury management professionals. While making these significant investments for the future, the Corporation has had success in limiting related increases in overhead expense. The $2,766 increase in noninterest expense during 2007 includes operating costs associated with these new service and facility additions, as well as increases in legal and other carrying costs associated with non-performing assets.

As a percent of average assets, net income in 2007 represents a return of .58%. This compares to .66% and .81% in 2006 and 2005, respectively. Return on assets is one measurement of operating efficiency. As a percent of average shareholders’ equity this represents a return of 7.1% as compared to 7.9% and 9.1% in 2006 and 2005, respectively. Return on shareholders’ equity is a measure of how well the Corporation employs leverage to maximize the return on the capital it employs.

2007 versus 2006 Net Interest Income Comparison

Net interest income is the difference between interest income earned on interest-earning assets and the interest expense incurred on interest-bearing liabilities. The Corporation reviews net interest income on a fully taxable equivalent basis, which presents interest income with an adjustment for tax-exempt interest income on an equivalent pre-tax basis assuming a 34% statutory Federal tax rate. These rates may differ from the Corporation’s actual effective tax rate. Net interest income is affected by changes in the volumes, rates and the composition of interest-earning assets and interest-bearing liabilities. The net interest margin is net interest income as a percentage of average earning assets.
Yields

Table 2 reflects the detailed components of the Corporation’s net interest income for each of the three years ended December 31, 2007. Rates are computed on a tax equivalent basis and nonaccrual loans are included in the average loan balances.

The Corporation’s net interest income on a fully tax equivalent basis was $30,052 in 2007, which compares to $28,876 in 2006. This follows a decrease of $1,355, or 4.5% between 2006 and 2005. The net interest margin, which is determined by dividing tax equivalent net interest income by average earning assets, was 3.4% in 2007, or a decrease of 39 basis points from 2006. This follows a decrease of 31 basis points in 2006 as compared to 2005. The decline in net interest income in 2007 was the result of a continued flat Treasury yield curve and competitive pressures.

Average Balances

Average earning assets increased $122,933, or 16.1%, to $886,832 in 2007 as compared to $763,899 for the same period of 2006. Average loans increased $97,282, or 16.2%, to $698,401 in 2007 as compared to $601,119 in 2006. The Morgan Bank acquisition, which was completed on May 10, 2007, contributed approximately $92,042 in portfolio loans, primarily indirect auto loans of $52,305, and commercial loans of $26,146. Loan growth in all areas of the portfolio contributed to the average increase of $97,282 with an increase in the commercial loan portfolio of $30,533, an increase in installment loans of $41,851, an increase in home equity loans of $8,527 and an increase of $16,371 in mortgage loans. The increase in average loans was primarily funded with $113,945 of deposit growth. During 2007, average consumer time deposits increased $77,327, and public time deposits increased $15,556 as compared to 2006. Noninterest-bearing deposits, while weak in 2006, increased just slightly in 2007 by 0.69%; however interest-bearing demand deposits grew $43,518, or 23.0%. The Bank began to use brokered time deposits in 2004 as an alternative wholesale funding source. Brokered time deposits have become an important and comparably priced substitute for FHLB advances, and they require no collateralization as compared to FHLB advances which require collateral in the form of real estate mortgage loans and securities. The Bank was less reliant on alternative funding which, including brokered time deposits, decreased $18,504, or 15.6%, from 2006.

Rate/Volume

Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. Table 3 presents an analysis of increases and decreases in interest income and expense in terms of changes in volume and interest rates during the two years ended December 31, 2007. Changes that are not due solely to either a change in volume or a change in rate have been allocated proportionally to both changes due to volume and rate. The table is presented on a tax-equivalent basis. The impact of balance sheet growth and changing rates can be seen in Table 3, which segments the change in net interest income into volume and rate components. Total interest income on a fully tax equivalent basis was $59,144 in 2007 as compared to $49,511 in 2006. This is an increase of $9,633 or 19.5%. Of this increase, $7,753 was due to volume and $1,879 to rate. When comparing 2007 to 2006, the contribution from balance sheet growth improved, and rates provided a positive contribution as well. Total interest expense was $29,092 in 2007 as compared to $20,635 in 2006. This is an increase of $8,457, or 41.0%. Of this increase, $5,365 was due to volume and $3,092 to rate.

Although difficult to isolate, changing customer preferences and competition impact the rate and volume factors. Competitive margin pressure and stiff competition in our markets resulted in a $1,213 reduction in net interest income due to rising rates. This was offset by an increase in net interest income of $2,388 due to increases in the volume of loans and deposits, for a resulting increase in net interest income (FTE) of $1,175.

2006 versus 2005 Net Interest Income Comparison

The Corporation’s net interest income on a fully tax equivalent basis was $28,876 in 2006, which compares to $30,231 in 2005, and is a decrease of $1,355, or 4.5%, from 2005. The net interest margin, which is determined by dividing tax equivalent net interest income by average earning assets, was 3.78% in 2006, or a decrease of 31 basis points from 2005. This follows an increase of 8 basis points in 2005 as compared to 2004. The decline in net interest income in 2006 was the result of a flat Treasury yield curve, competitive pressures and a change in deposit mix from low-cost to higher-cost sources.

Average earning assets increased $24,379, or 3.3%, to $763,899 in 2006 as compared to $739,520 for the same period of 2005. Average loans increased $16,357, or 2.8%, to $601,119 in 2006 as compared to $584,762 in 2005. The average increase of $16,357 was due primarily to an increase in the commercial loan portfolio of $10,807, an increase in installment loans of $2,111, an increase in home equity loans of $2,199 and an increase of $4,872 in purchased installment loans. Partially offsetting this growth was runoff of real estate mortgages of $3,632. Loan growth in all areas, except installment loans, was slower in 2006 than what had been experienced in 2005 and 2004. The increase in average loans was primarily funded with $44,033 of deposit growth. Noninterest-bearing deposits were weak in 2006 declining $8,953, or 9.7%, however interest- bearing deposits grew $52,986, or 9.8%. The interest-bearing deposit growth experienced in consumer time deposits was $32,754, or 18.2%, interest-bearing demand growth was $15,838, or 9.1%, brokered time deposit growth was $12,774, or 31.2% and public time deposit growth was $7,103, or 15.1% . Offsetting a portion of this growth was a $15,483 decline in savings deposits. The Bank began to use brokered time deposits in 2004 as an alternative wholesale funding source. Brokered time deposits have become an important and comparably priced substitute for FHLB advances, and they require no collateralization as compared to FHLB advances which require collateral in the form of real estate mortgage loans and securities.

Total interest income was $49,511 in 2006 as compared to $43,633 in 2005, an increase of $5,878, or 13.5% . Of this increase, $1,756 was due to volume and $4,123 to rate. When comparing 2006 to 2005, the contribution from balance sheet growth improved, and rates provided a positive contribution as well. Total interest expense was $20,635 in 2006 as compared to $13,402 in 2005. This is an increase of $7,233, or 54.0% . Of this increase, $1,991 was due to volume and $5,242 to rate.

While rising rates generally benefit the Corporation, competitive margin pressure and stiff competition in our markets in 2006 resulted in a $1,119 reduction in net interest income due to rising rates. Also impacting the net interest margin was a continuing shift of savings accounts to higher cost money market accounts and retail time deposits. The deposit mix changes during 2006 resulted in a $235 reduction in net interest income due to volume decreases. Additionally, the Corporation continued to increase its use of brokered time deposits during this period, which were more expensive than deposits generated through our retail branch system.

2007 vs 2006 Noninterest Income Comparison

Total noninterest income was $11,499 in 2007 as compared to $9,751 in 2006. This was an increase of $1,748, or 17.9%. Core noninterest income, which consists of noninterest income before other income and gains and losses, was $9,966 in 2007 as compared to $9,299 in 2006. This was an increase of $667, or 7.2%.

Trust and investment management fees increased $91, or 4.4%, during 2007 in comparison to 2006. Net trust commission decreased $10, or 3.0%, in 2007 from the same period in 2006. This was offset by an increase in net brokerage fee income, through Investment Centers of America, Inc., which was $136 in 2007, in comparison to $35 in 2006, due to increased marketing efforts in this area.

Overall, deposit service charges and electronic banking fees increased 9.0% to $7,064 in 2007, as compared to $6,481 in 2006. Deposit service charges consist largely of overdraft, stop payment and return item fees amounting to $4,052 during 2007. Electronic banking fees include debit, ATM and merchant services. Management attributes this continued momentum in overall growth to continued aggressive sales and marketing efforts.

Other income was $396 in 2007 as compared to $215 in 2006. This was an increase of $181, or 84.2%. Other income consists of miscellaneous fees such as safe deposit box rentals and fees, gift card income and Other Real Estate Owned rental income. Also included in other income are servicing fees from sold loans. During 2007, the Corporation established a secondary market mortgage sales program, through which the Corporation sold mortgage loans to Freddie Mac. The Corporation also sold high quality indirect loans, generated primarily through Morgan Bank. The Corporation retains the servicing rights for both sold mortgages and indirect loans. Income produced from servicing fees for 2007 increased $160 over 2006. Gains on the sale of mortgage and indirect loans during 2007 were $362 and $404, respectively.

Gains on the sale of Other Real Estate Owned were $87 in 2007; in addition $10 was recorded on the sale and/or disposal of miscellaneous assets. During the fourth quarter of 2006, the land and buildings formerly housing the Westlake Loan Production Office, were sold resulting in a gain of $231. Gains on the sale and mark-to-market adjustments of trading securities were $274 during 2007.

2006 vs 2005 Noninterest Income Comparison

Total noninterest income was $9,751 in 2006 as compared to $10,377 in 2005. This was a decrease of $626, or 6.0%. Core noninterest income, which consists of noninterest income before other income and gains and losses, was $9,299 in 2006 as compared to $9,613 in 2005. This was a decrease of $314, or 3.3%.

Trust and investment management fees increased $139, or 7.2%, during 2006 in comparison to 2005. Net trust commission increased $112, or 5.8%, in 2006 over the same period in 2005. Net brokerage fee income, through Investment Centers of America, Inc., was $35 in 2006, in comparison to $8 in 2005. Trust and investment management fee revenue was positively impacted by the performance of the S&P 500 index and pricing adjustments, which more than offset competitive pressures.

Deposit service charges were $4,533 in 2006 as compared to $4,219 in 2005. This was an increase of $314, or 7.4%. Charges and fees, consisting primarily of overdraft fees, increased $471, or 14.1%, in 2006 over the same period 2005. Management attributes this overall growth to aggressive sales and marketing efforts this year. The Corporation, however, experienced weaker business account growth during 2006 compared in 2005.

Electronic banking fees were $1,948 in 2006 as compared to $1,895 in 2005. This is an increase of $53, or 2.8%. Electronic banking fees include debit, ATM and merchant services. Merchant service income, which is outsourced and a fee is received, increased $58, or 7.2%, over 2005. ATM fees increased $13, or 1.8%, over 2005.

During the fourth quarter 2005, the operations of LNB Mortgage, LLC were closed. This eliminated the mortgage banking revenue as well as the expenses related to its generation.

Income from bank owned life insurance increased $139, or 23.2%, in 2006 as compared to 2005. This increase is attributed to improvement in market performance which is reflected in the credit rates.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

Introduction
The Corporation is a financial holding company headquartered in Lorain, Ohio, deriving substantially all of its revenue from the Bank. The Corporation provides a range of products and services to commercial customers and the community, and currently operates 21 banking centers throughout Lorain, eastern Erie, western Cuyahoga and Summit counties in Ohio.
This Management’s Discussion and Analysis (“MD&A”) section discusses the financial condition and results of operations of the Corporation for the three months and nine months ended September 30, 2008. This MD&A should be read in conjunction with the financial information contained in the Corporation’s Form 10-K for the fiscal year ended December 31, 2007 and in the accompanying consolidated financial statements and notes contained in this Form 10-Q.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Terms such as “will,” “should,” “plan,” “intend,” “expect,” “continue,” “believe,” “anticipate” and “seek,” as well as similar comments, are forward-looking in nature. Actual results and events may differ materially from those expressed or anticipated as a result of risks and uncertainties which include but are not limited to:
• significant increases in competitive pressure in the banking and financial services industries;

• changes in the interest rate environment which could reduce anticipated or actual margins;

• changes in political conditions or the legislative or regulatory environment;

• general economic conditions, either nationally or regionally (especially in northeastern Ohio), becoming less favorable than expected resulting in, among other things, a deterioration in credit quality of assets;

• changes occurring in business conditions and inflation;

• changes in technology;

• changes in 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;

• changes in general economic conditions and competition in the geographic and business areas in which the Corporation conducts its operations, particularly in light of the recent consolidation of competing financial institutions; as well as the risks and uncertainties described from time to time in the Corporation’s reports as filed with the Securities and Exchange Commission.

Critical Accounting Policies and Estimates
The Corporation’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The Corporation follows general practices within the banking industry and application of these principles requires Management to make assumptions, estimates and judgments that affect the financial statements and accompanying notes. These assumptions, estimates and judgments are based on information available as of the date of the financial statements.
The most significant accounting policies followed by the Corporation are presented in Note 1 to the Consolidated Financial Statements contained within this Form 10-Q. These policies are fundamental to the understanding of results of operation and financial conditions.
The accounting policies considered to be critical by Management are as follows:
Allowance for loan losses
The allowance for loan losses is an amount that Management believes will be adequate to absorb probable credit losses inherent in the loan portfolio taking into consideration such factors as past loss experience, changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, and current economic conditions that affect the borrower’s ability to pay. Determination of the allowance is subjective in nature. Loan losses are charged off against the allowance when Management believes that the full collectibility of the loan is unlikely. Recoveries of amounts previously charged-off are credited to the allowance.
A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract. Residential mortgage, installment and other consumer loans are evaluated collectively for impairment. Individual commercial loans exceeding size thresholds established by Management are evaluated for impairment. Impaired loans are written down by the establishment of a specific allowance where necessary. The fair value of all loans currently evaluated for impairment is collateral-dependent and therefore the fair value is determined by the fair value of the underlying collateral.
The Corporation maintains the allowance for loan losses at a level adequate to absorb Management’s estimate of probable credit losses inherent in the loan portfolio. The allowance is comprised of a general allowance, a specific allowance for identified problem loans and an unallocated allowance representing estimations pursuant to either SFAS No. 5 “Accounting for Contingencies”, or SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.”
The general allowance is determined by applying estimated loss factors to the credit exposures from outstanding loans. For commercial and commercial real estate loans, loss factors are applied based on internal risk grades of these loans. Many factors are considered when these grades are assigned to individual loans such as current and past delinquency, financial statements of the borrower, current net realizable value of collateral and the general economic environment and specific economic trends affecting the portfolio. For residential real estate, installment and other loans, loss factors are applied on a portfolio basis. Loss factors are based on the Corporation’s historical loss experience and are reviewed for appropriateness on a quarterly basis, along with other factors affecting the collectability of the loan portfolio.
Specific allowances are established for all classified loans when Management has determined that, due to identified significant conditions, it is probable that a loss has been incurred that exceeds the general allowance loss factor from these loans. The unallocated allowance recognizes the estimation risk associated with the allocated general and specific allowances and incorporates Management’s evaluation of existing conditions that are not included in the allocated allowance determinations. These conditions are reviewed quarterly by Management and include general economic conditions, credit quality trends and internal loan review and regulatory examination findings. Management believes that it uses the best information available to determine the adequacy of the allowance for loan losses. However, future adjustments to the allowance may be necessary and the results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations.
Income Taxes
The Corporation’s income tax expense and related current and deferred tax assets and liabilities are presented as prescribed in SFAS No. 109 “Accounting for Income Taxes”. SFAS No. 109 requires the periodic review and adjustment of tax assets and liabilities based on many assumptions. These assumptions include predictions as to the Corporation’s future profitability, as well as potential changes in tax laws that could impact the deductibility of certain income and expense items. Since financial results could be significantly different than these estimates, future adjustments may be necessary to tax expense and related balance sheet accounts.
New Accounting Pronouncements
Management is not aware of any proposed regulations or current recommendations by the Financial Accounting Standards Board or by regulatory authorities, which, if they were implemented, would have a material effect on the liquidity, capital resources, or operations of the Corporation. Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements contained within this Form 10-Q.
Summary of Earnings (Dollars in thousands except per share data)
The Corporation reported net income of $1,823, or $.25 per diluted share, for the third quarter of 2008 and net income of $2,135, or $.29 per diluted share, for the nine months ended September 30, 2008. This compares to net income of $1,673 or $0.23 per diluted share, for the third quarter of 2007 and net income of $3,844, or $0.56 per diluted share, for the nine months ended September 30, 2007.
The unstable interest rate environment and ever-weakening economy, which began in 2007, has evolved into the worst financial crisis since the Great Depression during the third quarter of 2008. During the third quarter of 2008, the financial crisis brought financial markets under extreme strain, liquidity shortages among our nation’s largest banks, and rumors of bank failures. While the Corporation has avoided sub-prime mortgages and risky equity investments, the unstable interest rate environment and asset quality issues each continue to pose a challenge. Despite these extreme financial challenges, the Corporation has increased net interest income on a linked-quarter basis for the past two quarters, as well as increased net interest income in comparison to the same quarter last year. Net interest income for the third quarter of 2008 was $8,229, compared to $7,828 for the third quarter of 2007. On a linked-quarter basis, net interest income during the third quarter of 2008 was $90 above the prior quarter. This has been accomplished by balancing the ability to provide fair and equitable interest rates to customers, both on loans and deposits, and at the same time continuing to maintain a healthy balance sheet for shareholders.

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Table of Contents

Deposit service charges and other fees also continued to remain strong during the third quarter of 2008 and increased in comparison to the third quarter of 2007. Service charges and fees for the third quarter of 2008 were $1,962 compared to $1,844 for the third quarter of 2007.
Noninterest expense continues to be monitored and managed closely by the Corporation. As with net interest income, the uncertainty of the economy has affected noninterest expense in the form of increased utility expense, operating expense and expense associated with the reduction of other real estate owned values. The Corporation continues to see improvement, through careful planning and streamlining of efficiencies, primarily in the reduction of salary and employee benefit expense.
Results of Operations
Net Interest Income
Net interest income is the difference between interest income earned on interest-earning assets and the interest expense paid on interest-bearing liabilities. Net interest income is the Corporation’s principal source of revenue, accounting for 72.27% of the revenues for the three months ended September 30, 2008. The amount of net interest income is affected by changes in the volume and mix of earning assets and interest-bearing liabilities, the level of rates earned or paid on those assets and liabilities and the amount of loan fees earned. The Corporation reviews net interest income on a fully taxable equivalent basis, which presents interest income with an adjustment for tax-exempt interest income on an equivalent pre-tax basis assuming a 34% statutory Federal tax rate. These rates may differ from the Corporation’s actual effective tax rate. The net interest margin is net interest income as a percentage of average earning assets.
Three Months Ended September 30, 2008 versus Three Months Ended September 30, 2007
Net interest income, before provision for loan losses, was $8,229 for the third quarter 2008 as compared to $7,828 during the same quarter 2007. Adjusting for tax-exempt income, consolidated net interest income, before provision for loan losses, for the third quarter 2008 and 2007 was $8,342 and $7,927, respectively. The net interest margin, determined by dividing tax equivalent net interest income by average earning assets, was 3.24% for the three months ended September 30, 2008 compared to 3.31% for the three months ended September 30, 2007.
Average earning assets for the third quarter of 2008 were $1,010,388. This was an increase of $72,451, or 7.72%, over the same quarter last year. The effect of the unstable interest rate environment, especially in the third quarter of 2008, has greatly impacted the yield generated by earning assets throughout the entire banking industry. The Corporation has worked diligently to increase the level of earning assets and minimize the impact of the unstable interest rate environment. Interest income on earning assets was $14,498 for the third quarter of 2008, compared to $15,970 for the third quarter of 2007. The yield on average earning assets was 5.71% in the third quarter of 2008 as compared to 6.76% for the same period last year.
Interest income from loans was $11,997 for the third quarter of 2008, and $13,466 for the third quarter of 2007. Average portfolio loans during these periods were $790,746 and $737,853, respectively. The yield on average loans during the third quarter of 2008 was 6.04%. This was 128 basis points lower than that of the third quarter of 2007 at 7.32%. Interest income from securities was $2,501 (FTE) for the three months ended September 30, 2008. This compares to $2,504 during the third quarter of 2007. The yield on average securities was 4.53% and 5.02% for these periods, respectively. Interest expense on interest-bearing liabilities was $6,156 for the quarter ending September 30, 2008 and $8,043 for the quarter ending September 30, 2007. Total average interest-bearing liabilities during the third quarter of 2008 were $907,753, compared to $841,952 during the same period in 2007. The cost of interest-bearing liabilities was 2.70% during the third quarter as compared to 3.79% during the same period of 2007.
Interest expense from deposits for the third quarter was $5,135 in 2008 and $6,706 in 2007. Average interest-bearing deposits during the third quarter of 2008 increased $49,079 over the third quarter 2007. The cost of average deposits was 2.61% for the third quarter of 2008 as compared to 3.66% for the third quarter of 2007. The Corporation was much less reliant on brokered time deposits during the third quarter of 2008. Average brokered time deposits were $8,477 as compared to $23,725 during the third quarter of 2007. During these same time periods, average consumer time deposits increased $90,091, while average money market accounts decreased $27,342.
Nine Months Ended September 30, 2008 versus Nine Months Ended September 30, 2007
Net interest income, before provision for loan losses, for the first nine months of 2008 was $23,888 as compared to $21,855 for the same period in 2007. Adjusting for tax-exempt income, consolidated net interest income, before provision for loan losses, for the first nine months of 2008 and 2007 was $24,202 and $22,137, respectively. The net interest margin was 3.20% for the nine months ended September 30, 2008 compared to 3.39% for the nine months ended September 30, 2007.
Interest income produced by earning assets during the first nine months of 2008 was $44,256. This compares to interest income from earning assets of $43,187 during the first nine months of 2007. Average earning assets increased $133,773, or 15.51%, to $996,256 for the first nine months of 2008 as compared to $862,483 for the first nine months of 2007. The yield on average earning assets was 5.93% for the first nine months of 2008 as compared to 6.69% for the same period last year, or a decrease of 76 basis points.
Interest income from loans was $36,583 for the first nine months of 2008, and $36,695 for the first nine months of 2007. The yield on loans for the first nine months of 2008 and 2007 was 6.32% and 7.19%, respectively. Average loans increased $89,978, or 13.18%, over the same period 2007. The Morgan Bancorp, Inc. acquisition, which was completed on May 10, 2007, contributed approximately $92,042 in loans, primarily indirect auto loans of $52,305, and commercial loans of $26,146. Average installment loans (primarily indirect auto loans) increased $36,063 and average commercial loans increased $41,564 when comparing the first nine months of 2008 to the first nine months of 2007.
Interest expense was $20,054 for the first nine months of 2008 compared to $21,050 for the first nine months of 2007. Average interest-bearing liabilities increased $128,895, or 16.88%, to $892,640 for the first nine months of 2008 as compared to $763,745 for the first nine months of 2007. Interest expense from deposits for the first nine months of the year was $17,041 in 2008 and $18,436 in 2007. Average interest-bearing deposits for the first nine months of 2008 increased $91,134 over the same period in 2007. The cost of deposits for the first nine months of 2008 decreased 68 basis points in comparison to the first nine months of 2007. During the nine month period ending September 30, 2008, average brokered time deposits decreased $25,122 while average consumer time deposits increased $108,959 in comparison to the same period in 2007. The Corporation believes that this was primarily due to consumer apprehension relative to economic conditions and concerns regarding potential large bank failures in the area.

Three Months Ended September 30, 2008 as compared to the Three Months Ended September 30, 2007
Noninterest income for the three months ended September 30, 2008 was $3,158 or an increase of $154, or 5.13%, from the same period 2007. The two biggest components of noninterest income are deposit service charges and trust and investment management services. Deposit service charges and electronic banking fee income continued to grow in the third quarter of 2008 to $1,962 with an increase of $118, or 6.40%, over the same period last year. Income from trust and investment management services was $441 for the third quarter of 2008, compared to $547 for the same period in 2007.
The gain of $223 on securities during the third quarter of 2008 was a combination of a gain of $214 on the sale of available-for-sale securities, and an unrealized gain on trading securities of $9. The gain on sale of loans during the third quarter of 2008 was $298 and consisted of a $132 gain on the sale of mortgage loans to Freddie Mac, a $7 gain on the sale of loans to FHA and a gain on the sale of indirect consumer loans to investor banks of $159. Net gains of $52 were recorded on the sale of loans to Freddie Mac, and $225 on the sale of indirect loans during the third quarter of 2007.
Nine Months Ended September 30, 2008 as compared to the Nine Months Ended September 30, 2007
Noninterest income for the nine months ended September 30, 2008 was $9,646 or an increase of $1,220, or 14.48%, from the same period 2007. Deposit service charges and fees from electronic banking increased $426, or 8.25%, over the same period last year.
The first nine months of 2008 included $460 received in a partial redemption of stock issued by VISA to membership institutions as a result of the completion of an initial public offering. During the first nine months of 2008, $216 was received from the redemption of a bank-owned life insurance policy.
The gain of $506 on securities during the first nine months of 2008 was a combination of a gain on sale of available-for-sale securities of $536, offset by an unrealized loss on trading securities of $30. During the first nine months of 2008, available-for-sale securities which were due to be called or mature during 2008 were assessed and, in some cases, sold and replaced with purchases of primarily mortgage-backed securities and some agency securities. Because of the falling interest rate environment, the interest rates available on mortgage-backed securities have made these securities more attractive to holders than agency securities. Prior to the decline in interest rates, agency securities had been producing a similar yield to mortgage-backed securities, but without the prepayment option and the longer term to maturity. The Corporation sold its available-for-sale securities prior to call or maturity in order to reinvest the proceeds in other securities before any further interest rate cuts reduced the yield on securities available for purchase. The yield on the mortgage-backed securities purchased was comparable to those sold. During the first nine months of 2007, $261 was recorded to gain on securities following the early election of SFAS 159.

Three Months Ended September 30, 2008 as compared to the Three Months Ended September 30, 2007
Noninterest expense increased $164, or 1.97%, for the third quarter of 2008 over the same period 2007. Other real estate owned expense of $285 during the third quarter of 2008, increased $227 over the third quarter of 2007. Due to the uncertain economic conditions and declining real estate values, the Corporation reduced the value of other real estate owned by $196 during the third quarter. Salaries and employee benefits for the third quarter of 2008 decreased $276, or 6.73%, compared to the same period in 2007. Electronic banking expense for the third quarter of 2008 increased $87 in comparison to the third quarter 2007. During the second quarter of 2008, and continuing into the third quarter of 2008, debit card services were switched to another vendor as a cost savings measure on a per transaction basis. The third quarter 2008 included conversion expense related to this conversion.
Nine Months Ended September 30, 2008 as compared to the Nine Months Ended September 30, 2007
Noninterest expense was $25,860 for the nine months ended September 30, 2008. This as an increase of $2,159, or 9.11%, as compared to $23,701 recorded for the nine months ended September 30, 2007. Included in noninterest expense was $572 related to the special shareholders meeting requested by a shareholder of the Corporation during the first quarter of 2008. This affected third party services, marketing and public relations, and postage expenses. The Corporation acquired Morgan Bancorp, Inc. during the second quarter of 2007. Salaries and benefits during the first nine months of 2008 decreased $395 in comparison to the first nine months of 2007. This decrease is particularly significant given that the salary and benefit expenses relating to the acquired Morgan Bank business had not yet been assumed by the Corporation during the first quarter of 2007. The Corporation continues to make significant investments for the future in upgrading software processes and equipment including upgrades to electronic banking.
Other real estate owned expense increased $587 on a year-to-year comparison. This expense was primarily the result of the revaluation of certain properties as a result of the decline in real estate market values during the first nine months of 2008. Any valuation adjustments that are required are expensed directly to the income statement.


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