LNB Bancorp, Inc. 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-13203

LNB Bancorp, Inc.

(Exact name of the registrant as specified on its charter)


Ohio		34-1406303
(State of Incorporation)		(I.R.S. Employer Identification No.)

457 Broadway, Lorain, Ohio		44052 — 1769
(Address of principal executive offices)		(Zip Code)

(440) 244-6000
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
	(Do not check if a smaller reporting company)

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of common shares of the registrant outstanding on May 5, 2008 was 7,295,663.

PART I — Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets


	March 31, 2008			December 31, 2007
	(unaudited)
	(Dollars in thousands except share amounts)
ASSETS
Cash and due from Banks (Note 3)	$	22,178		$	23,523
Federal funds sold and short-term investments		4,300			—
Securities: (Note 5)
Trading securities, at fair value		37,220			33,402
Available for sale, at fair value		180,713			179,424
Federal Home Loan Bank and Federal Reserve Stock		4,741			4,579

Total securities		222,674			217,405

Loans held for sale		7,748			4,724
Loans:
Portfolio loans		752,443			753,598
Allowance for loan losses (Note 6)		(8,000	)		(7,820	)

Net loans		744,443			745,778

Bank premises and equipment, net		12,908			13,328
Other real estate owned		2,680			2,478
Bank owned life insurance		15,670			15,487
Goodwill, net (Note 4)		21,570			21,570
Intangible assets, net (Note 4)		1,245			1,280
Accrued interest receivable		4,183			4,074
Other assets		7,403			6,998

Total Assets	$	1,067,002		$	1,056,645


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits (Note 8)
Demand and other noninterest-bearing	$	88,424		$	88,812
Savings, money market and interest-bearing demand		325,731			331,306
Certificates of deposit		450,910			436,823

Total deposits		865,065			856,941

Short-term borrowings (Note 9)		27,876			42,105
Federal Home Loan Bank advances (Note 10)		59,207			44,207
Junior subordinated debentures (Note 11)		20,620			20,620
Accrued interest payable		4,351			4,620
Accrued taxes, expenses and other liabilities		6,520			5,499

Total Liabilities		983,639			973,992


Shareholders’ Equity
Common stock, par value $1 per share, authorized 15,000,000 shares, issued 7,623,857 shares at March 31, 2008 and December 31, 2007		7,624			7,624
Preferred Shares, Series A Voting, no par value, authorized 750,000 shares, none issued at March 31, 2008 and December 31, 2007		—			—
Additional paid-in capital		37,720			37,712
Retained earnings		42,360			42,951
Accumulated other comprehensive loss		1,751			458
Treasury shares at cost, 328,194 shares at March 31, 2008 and December 31, 2007		(6,092	)		(6,092	)

Total Shareholders’ Equity		83,363			82,653

Total Liabilities and Shareholders’ Equity	$	1,067,002		$	1,056,645

See accompanying notes to consolidated financial statements.

Consolidated Statements of Income (unaudited)


	Three Months Ended March 31,
	2008			2007
	(Dollars in thousands except share and per share amounts)
Interest Income
Loans	$	12,576		$	11,088
Securities:
U.S. Government agencies and corporations		1,970			1,564
State and political subdivisions		162			135
Trading securities		293			—
Other debt and equity securities		65			55
Federal funds sold and short-term investments		48			30

Total interest income		15,114			12,872
Interest Expense
Deposits		6,509			5,481
Federal Home Loan Bank advances		570			326
Short-term borrowings		175			236
Trust Preferred Securities		340			—

Total interest expense		7,594			6,043

Net Interest Income		7,520			6,829
Provision for Loan Losses (Note 6)		474			383


Net interest income after provision for loan losses		7,046			6,446
Noninterest Income
Investment and trust services		532			522
Deposit service charges		1,111			1,082
Other service charges and fees		644			506
Income from bank owned life insurance		183			167
Other income		599			67

Total fees and other income		3,069			2,344
Securities gains (losses), net		214			473
Gains on sale of loans		187			151
Gain(Loss) on sale of other assets, net		(136	)		21

Total noninterest income		3,334			2,989
Noninterest Expense
Salaries and employee benefits (Note 7)		3,778			3,823
Furniture and equipment		996			707
Net occupancy		657			555
Outside services		883			355
Marketing and public relations		308			262
Supplies, postage and freight		349			310
Telecommunications		244			188
Ohio Franchise tax		220			215
Intangible asset amortization		34			28
Electronic banking expenses		210			189
Loan and collection expense		228			94
Other expense		615			632

Total noninterest expense		8,522			7,358


Income before income tax expense		1,858			2,077
Income tax expense		411			542

Net Income	$	1,447		$	1,535

Net Income Per Common Share
Basic	$	0.20		$	0.24
Diluted		0.20			0.24
Dividends declared		0.18			0.18
Average Common Shares Outstanding
Basic		7,295,663			6,443,673
Diluted		7,295,663			6,443,673

See accompanying notes to consolidated financial statements

Consolidated Statements of Shareholders’ Equity (unaudited)

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive

Treasury

Stock

Capital

Earnings

Income (Loss)

Stock

Total

(Dollars in thousands except share and per share amounts)

Balance, January 1, 2007

6,772

26,382

43,728

(2,093

)

(6,092

)

68,697

Cumulative affect of adoption of SFAS 159

(1,192

)

1,192

—

Comprehensive income:

Net Income

1,535

Other comperhensive income, net of tax:

—

Minimum pension liability

—

Change in unrealized gains and losses on securities

Total comprehensive income

1,581

Share-based compensation income

Common dividends declared, $.18 per share

(1,156

)

(1,156

)

Balance, March 31,2007

6,772

26,393

42,915

(855

)

(6,092

)

69,133

Balance, January 1, 2008

7,624

37,712

42,951

458

(6,092

)

82,653

Cumulative effect of change in accounting principle for split-dollar life insurance coverage

(725

)

(725

)

Comprehensive income:

—

Net Income

1,447

Other comprehensive income, net of tax:

Change in unrealized gains and losses on securities

1,293

Total comprehensive income

2,740

Share-based compensation income

Common dividends declared, $.18 per share

(1,313

)

(1,313

)

Balance, March 31, 2008

7,624

37,720

42,360

1,751

(6,092

)

83,363

See accompanying notes to consolidated financial statements

Consolidated Statements of Cash Flows (unaudited)


	Three Months Ended March 31,
	2008			2007
	(Dollars in thousands)
Operating Activities
Net income	$	1,447		$	1,535
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		474			383
Depreciation and amortization		468			408
Amortization of premiums and discounts		(277	)		9
Amortization of intangibles		33			28
Amortization of servicing rights		58			5
Amortization of deferred loan fees		(119	)		(162	)
Federal deferred income tax expense (benefit)		—			(18	)
Securities gains, net		(214	)		(473	)
Share-based compensation expense, net of tax		8			11
Cumulative effect of change in accounting principle for split-dollar life insurance coverage		(725	)		—
Net gain from loan sales		(188	)		(184	)
Net losses from loans held for sale		—			33
Net (gain) loss on sale of other assets		138			(21	)
Net increase in accrued interest receivable and other assets		(1,437	)		98
Net decrease in accrued interest payable, taxes and other liabilities		752			(510	)

Net cash provided by operating activities		418			1,142


Investing Activities
Purchase of available-for-sale securities		(36,607	)		(24,450	)
Proceeds from sales of available-for-sale securities		14,657			—
Proceeds from maturities of available-for-sale securities		22,772			21,684
Purchase of trading securities		(36,979	)		—
Proceeds from maturity of trading securities		33,500			—
Purchase of Federal Home Loan Bank Stock		(117	)		—
Net increase in loans made to customers		(24,222	)		(12,873	)
Proceeds from the sale of other real estate owned		391			198
Purchase of bank premises and equipment		(76	)		(1,274	)

Net cash used in investing activities		(26,681	)		(16,715	)


Financing Activities
Net decrease in demand and other noninterest-bearing		(388	)		(12,855	)
Net increase (decrease) in savings, money market and interest-bearing demand		(5,574	)		11,031
Net increase in certificates of deposit		14,087			7,155
Net decrease in short-term borrowings		(14,229	)		(1,109	)
Proceeds from loan sales		21,635			13,173
Proceeds from Federal Home Loan Bank advances		50,000			97,000
Prepayment of Federal Home Loan Bank advances		(35,000	)		(100,003	)
Dividends paid		(1,313	)		(1,156	)

Net cash provided by financing activities		29,218			13,236


Net increase (decrease) in cash and cash equivalents		2,955			(2,337	)
Cash and cash equivalents, January 1		23,523			29,122

Cash and cash equivalents, March 31	$	26,478		$	26,785


Supplemental cash flow information
Interest paid	$	7,806		$	5,341
Income taxes paid		1,205			—
Transfer of loans to other real estate owned		731			—

See accompanying notes to consolidated financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)

(1) Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of LNB Bancorp, Inc. (the “Corporation”) and its wholly-owned subsidiary, The Lorain National Bank (the “Bank”). The consolidated financial statements also include the accounts of North Coast Community Development Corporation which is a wholly-owned subsidiary of the Bank. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

LNB Bancorp Inc. prepares its financial statements in conformity with U.S. generally accepted accounting principles (GAAP). As such, GAAP requires the Corporation’s management (“Management”) to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas involving the use of Management’s estimates and assumptions include the allowance for loan losses, the realization of deferred tax assets, fair values of certain securities, net periodic pension expense, and accrued pension costs recognized in the Corporation’s consolidated financial statements. Estimates that are more susceptible to change in the near term include the allowance for loan losses and the fair value of certain securities.

Segment Information

The Corporation’s activities are considered to be a single industry segment for financial reporting purposes. LNB Bancorp, Inc. is a financial holding company engaged in the business of commercial and retail banking, investment management and trust services, title insurance, and insurance with operations conducted through its main office and banking centers located throughout Lorain, eastern Erie, western Cuyahoga, and Summit counties of Ohio. This market provides the source for substantially all of the Bank’s deposit, loan and trust activities and title insurance and insurance activities. The majority of the Bank’s income is derived from a diverse base of commercial, mortgage and retail lending activities and investments.

Statement of Cash Flows

For purposes of reporting in the Consolidated Statements of Cash Flows, cash and cash equivalents include currency on hand, amounts due from banks, Federal funds sold, and securities purchased under resale agreements. Generally, Federal funds sold and securities purchased under resale agreements are for one day periods.

Securities

Securities that are bought and held for the sole purpose of being sold in the near term are deemed trading securities with any related unrealized gains and losses reported in earnings. LNB Bancorp, Inc. held trading securities as of March 31, 2008 and December 31, 2007. Securities that the Corporation has a positive intent and ability to hold to maturity are classified as held to maturity. As of March 31, 2008 and December 31, 2007, LNB Bancorp, Inc. did not hold any securities classified as held to maturity. Securities that are not classified as trading or held to maturity are classified as available for sale. Securities classified as available for sale are carried at their fair value with unrealized gains and losses, net of tax, included as a component of accumulated other comprehensive income, net of tax. A decline in the fair value of securities below cost that is deemed other than temporary is charged to earnings, resulting in establishment of a new cost basis for the security. Interest and dividends on securities, including amortization of premiums and accretion of discounts using the effective interest method over the period to maturity or call, are included in interest income.

Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB) Stock

These stocks are required investments for institutions that are members of the Federal Reserve and Federal Home Loan Bank systems. The required investment in the common stock is based on a predetermined formula. These stocks are recorded at redemption value which approximates fair value.

Loans held for sale

Held for sale loans are carried at the lower of amortized cost or estimated fair value, determined on an aggregate basis for each type of loan. Net unrealized losses are recognized by charges to income. Gains and losses on loan sales (sales proceeds minus carrying value) are recorded in noninterest income.

Loans

Loans are reported at the principal amount outstanding, net of unearned income and premiums and discounts. Loans which were acquired from the acquisition of Morgan Bank, NA on May 10, 2007 were valued at fair market value on or near the date of acquisition. The difference between the principal amount outstanding and the fair market valuation is being amortized over the aggregate average life of each class of loan. Unearned income includes deferred fees, net of deferred direct incremental loan origination costs. Unearned income is amortized to interest income, over the contractual life of the loan, using the interest method. Deferred direct loan origination fees and costs are amortized to interest income, over the contractual life of the loan, using the interest method.

Loans are generally placed on nonaccrual status when they are 90 days past due for interest or principal or when the full and timely collection of interest or principal becomes uncertain. When a loan has been placed on nonaccrual status, the accrued and unpaid interest receivable is reversed against interest income. Generally, a loan is returned to accrual status when all delinquent interest and principal becomes current under the terms of the loan agreement and when the collectibility is no longer doubtful.

A loan is impaired when full payment under the original loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as real estate mortgages and installment loans, and on an individual loan basis for commercial loans that are graded substandard. Factors considered by Management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis. If a loan is impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

Allowance for Loan Losses

The allowance for loan losses is Management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. Management’s determination of the allowance, and the resulting provision, is based on judgments and assumptions, including general economic conditions, loan portfolio composition, loan loss experience, Management’s evaluation of credit risk relating to pools of loan and individual borrowers, sensitivity analysis and expected loss models, value of underlying collateral, and observations of internal loan review staff or banking regulators.

The provision for loan losses is determined based on Management’s evaluation of the loan portfolio and the adequacy of the allowance for loan losses under current economic conditions and such other factors which, in Management’s judgment, deserve current recognition. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examinations.

Servicing

Servicing assets are recognized as separate assets when rights are acquired through sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum.

Bank Premises and Equipment

Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed generally on the straight-line method over the estimated useful lives of the assets. Upon the sale or other disposition of assets, the cost and related accumulated depreciation are retired and the resulting gain or loss is recognized. Maintenance and repairs are charged to expense as incurred, while renewals and improvements are capitalized. Software costs related to externally developed systems are capitalized at cost less accumulated amortization. Amortization is computed on the straight-line method over the estimated useful life.

Goodwill and Core Deposit Intangibles

Intangible assets arise from acquisitions and include goodwill and core deposit intangibles. Goodwill is the excess of purchase price over the fair value of identified net assets in acquisitions. Core deposit intangibles represent the value of depositor relationships purchased. The Corporation follows Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 147 “Acquisitions of Certain Financial Institutions”. Goodwill is tested at least annually for impairment.

Core deposit intangible assets are amortized using the straight-line method over ten years and are subject to annual impairment testing.

Other Real Estate Owned

Other real estate owned (OREO) represent properties acquired through customer loan default. Real estate and other tangible assets acquired through foreclosure are carried as OREO on the Consolidated Balance Sheet at fair value, net of estimated costs to sell, not to exceed the cost of property acquired through foreclosure.

Investment and Trust Services Assets and Income

Property held by the Corporation in fiduciary or agency capacity for its customers is not included in the Corporation’s financial statements as such items are not assets of the Corporation. Income from the Investment and Trust Services Division is reported on an accrual basis.

Income Taxes

The Corporation and its wholly-owned subsidiary file a consolidated Federal income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be removed or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded when necessary to reduce deferred tax assets to amounts which are deemed more likely than not to be realized.

Comprehensive Income

The Corporation displays the accumulated balance of other comprehensive income as a separate component of shareholders’ equity.

Stock-Based Compensation

A broad based stock option incentive plan, the 2006 Stock Incentive Plan, was adopted by the Corporation’s shareholders on April 18, 2006. The only options granted under this Plan were granted in 2007 and 2008. The Corporation also has nonqualified stock option agreements outside of the 2006 Stock Incentive Plan; grants under these agreements have been made from 2005 to 2007. On January 20, 2006, the Corporation issued an aggregate of 30,000 Stock Appreciation Rights (SAR’s) to 8 employees, 12,000 of which have expired due to employee terminations. SFAS No. 123R has been adopted for the accounting and disclosure of the stock option agreements and the SAR’s.

Recent Accounting Pronouncements

In September 2006, the FASB ratified the Emerging Issues Task Force’s (EITF) Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, which requires companies to recognize a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee extending to postretirement periods. The liability should be

recognized based on the substantive agreement with the employee. This Issue is effective beginning January 1, 2008. The Issue can be applied as either a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, or a change in accounting principle through retrospective application to all periods. The adoption of Issue 06-4 reduced retained earnings by $725,000 effective January 1, 2008.

FASB Statement No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities”, which generally permits the measurement of selected eligible financial instruments at fair value at specified election dates (“SFAS 159”). The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The provisions of this statement are effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption was permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements. The Corporation elected early adoption of SFAS 159 as of January 1, 2007 and has included disclosures in accordance with the requirements.

FASB Statement No. 156, Accounting for Servicing of Financial Assets, an Amendment of FAS 140.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FAS 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS 156”). SFAS 156 clarifies when to separately account for servicing rights, requires separately recognized servicing rights to be initially measured at fair value, and provides the option to subsequently account for those servicing rights either under the amortization method previously required under FAS 140 or at fair value. The provision of SFAS 156 is effective January 1, 2007. The Corporation has elected the amortization method. The adoption of SFAS 156 did not have a material effect on our consolidated balance sheet, results of operations or cash flows.

FASB Statement No. 157, Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. The provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Adoption of SFAS 157 was required effective January 1, 2007 as the Corporation elected early adoption of SFAS 159. Upon adoption of SFAS 159, the Corporation has developed a framework to measure the fair value of financial assets and financial liabilities and expanded disclosures in accordance with the requirements.

(2) Earnings Per Share

Basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of shares outstanding during the year. Diluted earnings per share is computed based on the weighted average number of shares outstanding plus the effects of dilutive stock options outstanding during the year. Basic and diluted earnings per share are calculated as follows:


	Three Months Ended March 31,
	2008		2007
	(Dollars in thousands except per share amounts)
Weighted average shares outstanding used in Basic Earnings per Share		7,295,663		6,443,673
Dilutive effect of incentive stock options		—		—

Weighted average shares outstanding used in Diluted Earnings Per Share		7,295,663		6,443,673

Net Income	$	1,447	$	1,535

Basic Earnings Per Share	$	0.20	$	0.24


Diluted Earnings Per Share	$	0.20	$	0.24

All outstanding options were anti-dilutive for the three months ended March 31, 2008 and March 31, 2007, respectively.

(3) Cash and Due from Banks

Federal Reserve Board regulations require the Bank to maintain reserve balances on deposits with the Federal Reserve Bank of Cleveland. The required ending reserve balance was $500 on March 31, 2008 and December 31, 2007, respectively.

(4) Goodwill and Intangible Assets

On May 10, 2007, LNB Bancorp, Inc. completed the acquisition of Morgan Bancorp, Inc., of Hudson, Ohio and its wholly-owned subsidiary, Morgan Bank, NA. Under the terms of the transaction, the Corporation acquired all of the outstanding stock of Morgan Bancorp, Inc. in a stock and cash merger transaction valued at $27,864. The acquisition was accounted for using the purchase method of accounting, and accordingly, the purchase price was allocated to the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The purchase accounting fair values are being amortized under various methods and over the lives of the corresponding assets and liabilities. Goodwill recorded for the acquisition amounted to $18,743. Goodwill is not deductible for tax purposes. The Corporation recorded $1,367 in core deposit intangibles related to the acquisition of Morgan Bank, NA. These core deposit intangibles were amortized $35 in the quarter ended March 31, 2008.

The estimated fair values of significant assets purchased and liabilities assumed related to the acquisition of Morgan Bank, NA were as follows:


	(Dollars in Thousands)
Cash	$	20,652
Loans, net of reserve for loan losses		92,019
Bank premises and equipment, net		731
Acquisition intangibles		20,110
Deposits		101,870
Short term borrowings		1,720
FHLB borrowings		4,124

The consolidated statements of income reflect the operating results of the Morgan Bank division since the effective date of the acquisition.

The Corporation recorded core deposit intangibles in 1997, related to the acquisition of three branch offices from another bank. These core deposit intangibles were fully amortized during the third quarter of 2007. Core deposit intangibles are amortized over their estimated useful life of 10 years. A summary of core deposit intangible assets, including those from the Morgan acquisition, follows:


	March 31, 2008		December 31, 2007
	(Dollars in thousands)
Core deposit intangibles	$	2,655	$	2,655
Less: accumulated amortization		1,410		1,375

Carrying value of core deposit intangibles	$	1,245	$	1,280

The Corporation assesses goodwill for impairment annually and more frequently in certain circumstances. Goodwill is assessed at a reporting unit level by applying a fair-value based test using discounted estimated future net cash flows.

(5) Securities

The amortized cost, gross unrealized gains and losses and fair values of securities available for sale at March 31, 2008 and December 31, 2007 follows:

At March 31, 2008

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

(Dollars in thousands)

Securities available for sale:

U.S. Government agencies and corporations

66,853

1,712

—

68,565

Mortgage backed securities

94,178

1,579

(41

)

95,716

State and political subdivisions

15,840

393

(33

)

16,200

Equity securities

152

—

232

Total Securities

177,023

3,764

(74

)

180,713


	At December 31, 2007
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in thousands)
Securities available for sale:
U.S. Government agencies and corporations	$	90,046	$	992	$	(87	)	$	90,951
Mortgage backed securities		72,534		585		(100	)		73,019
State and political subdivisions		14,961		294		(33	)		15,222
Equity securities		152		80		—			232

Total Securities	$	177,693	$	1,951	$	(220	)	$	179,424

There are reasons why securities may be temporarily valued at less than amortized cost. One such reason is that the current levels of interest rates as compared to the coupons on the securities held by the Corporation may be higher, in which case impairment may not be due to credit deterioration. The Corporation has the ability to hold these securities until their value recovers. At March 31, 2008, the total unrealized losses of $74 on available for sale securities were temporary in nature due to the current level of interest rates.

The cost, gross unrealized gains and losses and fair values of trading securities at March 31, 2008 follows:

At March 31, 2008

Aggregate Unrealized Gains

Aggregate Unrealized Losses

recorded to income for the

quarter ended

Fair

Cost

March 31, 2008

Value

(Dollars in thousands)

Trading Securities

37,161

—

37,220

(6) Loans and Allowance for Loan Losses

Loan balances at March 31, 2008 and December 31, 2007 are summarized as follows:


	March 31, 2008			December 31, 2007
	(Dollars in thousands)
Loans Held for Sale, at lower of cost or fair value:
Real estate mortgage loans held for sale	$	1,523		$	1,483
Installment loans held for sale		6,225			3,241

Total Loans Held for Sale		7,748			4,724

Portfolio Loans:
Commercial		433,688			433,081
Real estate mortgage		98,450			100,419
Home equity lines of credit		82,697			80,049
Installment		137,608			140,049

Total Portfolio Loans		752,443			753,598
Allowance for loan losses		(8,000	)		(7,820	)

Net Loans	$	744,443		$	745,778

Activity in the allowance for loan losses for the three-month periods ended March 31, 2008 and March 31, 2007 is summarized as follows:


	March 31, 2008			March 31, 2007
	(Dollars in thousands)
Balance at the beginning of period	$	7,820		$	7,300
Provision for loan losses		474			383
Loans charged-off		(372	)		(500	)
Recoveries on loans previously charged-off		78			75

Balance at end of period	$	8,000		$	7,258

Nonaccrual loans at March 31, 2008 were $15,044, as compared to $10,831 at December 31, 2007, and $16,675 at March 31, 2007.

(7) Stock Options and Stock Appreciation Rights

Corporation also has nonqualified stock option agreements outside of the 2006 Stock Incentive Plan; grants under these agreements have been made from 2005 to 2007. On January 20, 2006, the Corporation issued an aggregate of 30,000 Stock Appreciation Rights (SAR’s) to 8 employees. For the quarter ended March 31, 2008, there was no expense recorded for SAR’s and $21 for stock options. The number of options or SAR’s and the exercise prices as of March 31, 2008 follows:


	Year Issued
	2005			2005			2006			2007			2007			2008			2008			2006
Type	Option			Option			Option			Option			Option			Option			Option			SAR’s
Number of Options		2,500			30,000			30,000			30,000			20,000			50,000			49,500			18,000
Strike Price	$	16.50		$	19.17		$	19.10		$	16.00		$	15.35		$	14.47		$	14.47		$	19.00
Number of Options Vested		2,500			30,000			20,000			10,000			—			—			—			—

Assumptions:
Risk free interest rate		4.50	%		3.92	%		3.66	%		4.73	%		4.72	%		2.94	%		2.94	%		2.43	%
Dividend yield		4.36	%		3.76	%		3.77	%		4.50	%		4.69	%		4.98	%		4.98	%		5.78	%
Volatility		18.48	%		17.30	%		17.66	%		16.52	%		16.52	%		15.68	%		15.68	%		13.00	%
Expected Life — years		5			6			6			6			6			6			6			5.04

A summary of the status of stock options at March 31, 2008, and changes during the three months then ended, is presented in the table below:


			Weighted Average
			Exercise
	Shares		Price per Share
Outstanding at beginning of year		112,500	$	17.57
Granted		99,500		14.47
Exercised		—		—
Forfeited, expired or cancelled		—		—

Options outstanding, March 31, 2008		212,000	$	16.11

Options vested and exercisable, March 31, 2008		62,500	$	18.53

(8) Deposits

Deposit balances at March 31, 2008 and December 31, 2007 are summarized as follows:


	March 31, 2008		December 31, 2007
	(Dollars in thousands)
Demand and other noninterest-bearing	$	88,424	$	88,812
Interest checking		121,696		120,052
Savings		83,076		81,293
Money market accounts		120,959		129,961
Consumer time deposits		376,819		344,279
Public time deposits		63,277		64,913
Brokered time deposits		10,814		27,631

Total deposits	$	865,065	$	856,941

The aggregate amount of certificates of deposit in denominations of $100,000 or more amounted to $145,433 and $159,350 at March 31, 2008 and December 31, 2007, respectively. Brokered time deposits totaling $10,814 and $27,631 at March 31, 2008 and December 31, 2007, respectively, are included in these totals.

The maturity distribution of certificates of deposit as of March 31, 2008 follows:


			After 12 months		After 36 months
	Within		but within 36		but within 60
	12 months		months		months		After 5 years		Total
	(Dollars in thousands)
Consumer time deposits	$	338,007	$	36,086	$	2,726			$	376,819
Public time deposits		61,535		1,289		452		—		63,277
Brokered time deposits		8,317		2,497		—		—		10,814

Total time deposits	$	407,860	$	39,872	$	3,178	$	—	$	450,910

(9) Short-Term Borrowings

The Corporation has a line of credit for advances and discounts with the Federal Reserve Bank of Cleveland. The amount of this line of credit varies on a monthly basis. The line is equal to 85% of the balances of qualified home equity lines of credit that are pledged as collateral. At March 31, 2008, the Bank had pledged approximately $5,239 in qualifying home equity lines of credit, resulting in an available line of credit of approximately $4,453. No amounts were outstanding at March 31, 2008 or December 31, 2007.

Short-term borrowings include securities sold under repurchase agreements and Federal funds purchased from correspondent banks. The table below presents information for short-term borrowings for the periods ended March 31, 2008 and December 31, 2007.


	March 31, 2008		December 31, 2007
	(Dollars in thousands)
Securities sold uner agreements to repurchase	$	27,876	$	22,105
Federal funds purchased	$	—	$	20,000

Total short-term borrowings	$	27,876	$	42,105

(10) Federal Home Loan Bank Advances

Federal Home Loan Bank advances amounted to $59,207 and $44,207 at March 31, 2008 and December 31, 2007, respectively. All advances are bullet maturities with no call features. At March 31, 2008, collateral pledged for FHLB advances consisted of qualified real estate mortgage loans, home equity lines of credit and investment securities of $104,447, $47,745 and $0 respectively. The maximum borrowing capacity of the Bank at March 31, 2008 was $83,846 with unused collateral borrowing capacity of $24,574. The Bank maintains a $40,000 cash management line of credit (CMA) with the FHLB. There were no advances under the CMA at March 31, 2008.


	March 31, 2008		December 31, 2007
	(Dollars in thousands)
FHLB advance - 3.33%, due February 8, 2008	$	—	$	5,000
FHLB advance - 4.47%, due April 11, 2008		285		281
FHLB advance - 4.99% due November 28, 2008		5,000		5,000
FHLB advance - 5.07%, due December 12, 2008		500		500
FHLB advance - 3.36%, due March 27, 2009		10,000		10,000
FHLB advance - 4.67%, due April 10, 2009		350		350
FHLB advance - 5.00%, due December 14, 2009		500		500
FHLB advance - 3.58%, due January 8, 2010		10,000		10,000
FHLB advance - 3.67%, due January 8, 2011		10,000		10,000
FHLB advance - 3.55%, due January 1, 2014		72		76
FHLB advance - 4.76%, due July 6, 2015		2,500		2,500
FHLB advance - 3.69%, due January 9, 2009		15,000		—
FHLB advance - 3.17%, due February 8, 2011		5,000		—

Total FHLB advances	$	59,207	$	44,207

(11) Trust Preferred Securities

On May 9, 2007, the Corporation completed two private offerings of trust preferred securities through two separate Delaware statutory trusts sponsored by the Corporation. LNB Trust I (“Trust I”) sold $10.0 million of preferred securities and LNB Trust II (“Trust II”) sold $10.0 million of preferred securities (Trust I and Trust II are hereafter collectively referred to as the “Trusts”). The proceeds from the offering were used to fund the cash portion of the Morgan Bancorp, Inc. acquisition. The Corporation owns all of the common securities of each of the Trusts. The subordinated notes mature in 2037. Trust I bears a floating interest rate (current three-month LIBOR plus 148 basis points). Trust II bears a fixed rate of 6.64% through June 15, 2017, and then becomes a floating interest rate (current three-month LIBOR plus 148 basis points). Interest on the notes is payable quarterly.

The subordinated notes are redeemable in whole or in part, without penalty, at the Corporation’s option on or after June 15, 2012 and mature on June 15, 2037. The notes are junior in right of payment to the prior payment in full of all Senior Indebtedness of the Corporation, whether outstanding at the date of this Indenture or thereafter incurred. At March 31, 2008, the balance of the subordinated notes payable to Trust I and Trust II was $10,310 each. The interest rates in effect as of the last determination date in 2008 were 6.47% and 6.64% for Trust I and Trust II, respectively.

(12) Commitments, Credit Risk, and Contingencies

In the normal course of business, the Bank enters into commitments with off-balance sheet risk to meet the financing needs of its customers. These instruments are currently limited to commitments to extend credit and standby letters of credit. Commitments to extend credit involve elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the commitment is represented by the contractual amount of the commitment. The Bank uses the same credit policies in making commitments as it does for on-balance sheet instruments. Interest rate risk on commitments to extend credit results from the possibility that interest rates may have moved unfavorably from the position of the Bank since the time the commitment was made.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates of 30 to 120 days or other termination clauses and may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained by the Bank upon extension of credit is based on Management’s credit evaluation of the applicant. Collateral held is generally single-family residential real estate and commercial real estate. Substantially all of the obligations to extend credit are variable rate. Standby letters of credit are conditional commitments issued to guarantee the

performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party.

A summary of the contractual amount of commitments at March 31, 2008 follows:


	Amount
	(Dollars in thousands)
Commitments to extend credit	$	78,708
Home equity lines of credit		98,974
Standby letters of credit		3,891

Total	$	181,573

(13) Estimated Fair Value of Financial Instruments

The Corporation discloses estimated fair values for its financial instruments. Fair value estimates, methods and assumptions are set forth below for the Corporation’s financial instruments.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

	•		The carrying value of Cash and due from banks, Federal funds sold, short-term investments and accrued interest receivable and other financial assets is a reasonable estimate of fair value due to the short-term nature of the asset.

	•		The fair value of investment securities is based on quoted market prices, where available. If quoted market prices are not available, fair value is estimated using the quoted market prices of comparable instruments.

	•		For variable rate loans with interest rates that may be adjusted on a quarterly, or more frequent basis, the carrying amount is a reasonable estimate of fair value. The fair value of other types of loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

	•		The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, money market, checking and interest-bearing checking, is equal to the amount payable on demand as of December 31, for each year presented. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. For variable rate certificates of deposit, the carrying amount is a reasonable estimate of fair value.

	•		Securities sold under repurchase agreements, other short-term borrowings, accrued interest payable and other financial liabilities approximate fair value due to the short-term nature of the liability.

	•		The fair value of 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 March 31, 2008 and December 31, 2007.

The following information pertains to assets measured by fair value on a recurring basis (in thousands):


			Quoted Prices in
			Active Markets for		Significant Other		Significant
	Fair Value as of		Identical Assets		Observable Inputs		Unobservable Inputs
Description	March 31, 2007		(Level 1)		(Level 2)		(Level 3)
Trading Securities	$	37,220	$	37,220	$	—	$	—
Available for Sale Securities		180,713		164,281		16,432		—


Total	$	217,933	$	201,501	$	16,432	$	—

Gains of $214 were included under security gains in earnings for the quarter ended March 31, 2008 for assets held and measured at fair value as of March 31, 2008.

Limitations

Estimates of fair value are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Estimates of fair value are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Bank has a substantial Investment and Trust Services Division that contributes net fee income annually. The Investment and Trust Services Division is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial instruments include property, plant, and equipment and deferred tax liabilities. In addition, it is not practicable for the Corporation to estimate the tax ramifications related to the realization of the unrealized gains and losses and they have not been reflected in any of the estimates of fair value. The impact of these tax ramifications can have a significant effect on estimates of fair value. The estimated fair values of the Corporation’s financial instruments at March 31, 2008 and December 31, 2007 are summarized as follows:

At March 31, 2008

At December 31, 2007

Carrying

Estimated

Carrying

Estimated

Value

Fair Value

Value

Fair Value

(Dollars in thousands)

Financial assets

Cash and due from banks, Federal funds sold and short-term investments

22,178

23,523

Securities

185,454

179,424

Trading securities, at fair value

37,220

33,402

Portfolio loans, net

752,443

771,852

745,778

751,578

Loans held for sale

7,748

4,724

Accrued interest receivable

4,183

4,074

Financial liabilities

Deposits:

Demand, savings and money market

414,155

420,118

Certificates of deposit

450,910

459,545

436,823

441,400

Total deposits

865,065

873,700

856,941

861,518

Short-term borrowings

27,876

42,105

Federal Home Loan Bank advances

59,207

59,731

44,207

43,500

Junior subordinated debentures

20,620

25,106

20,620

21,716

Accrued interest payable

4,351

4,620

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction

LNB Bancorp, Inc. (the “Corporation”) is a financial holding company headquartered in Lorain, Ohio, deriving substantially all of its revenue from its subsidiary, The Lorain National 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 ended March 31, 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 monetary and tax policies;

	•		changes in the securities markets;

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

Critical Accounting Policies and Estimates

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 the Corporation’s management (“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. 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 Statement of Financial Accounting Standards (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 collectibility 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 of this Form 10-Q.

Summary of Earnings (Dollars in thousands except per share data)

Net income was $1,447 for the first quarter of 2008. Earnings per diluted share for the first quarter of 2008 were $.20. This compares to $1,535 or $.24 per diluted share for the first quarter of 2007. When normalizing net income to exclude certain nonrecurring items, net income for the first quarter of 2008 would have been $1,467, compared to net income of $1,223 for the first quarter of 2007, an increase of $244, or 20.0%. Nonrecurring items in the first quarter of 2008 included income on the mandatory redemption of stock received from VISA of $304 net of tax, less expenses incurred for the special shareholder meeting of $324, net of tax. Nonrecurring items in the first quarter of 2007 included a gain of $312, net of tax, due to the early election of SFAS 159. These nonrecurring transactions are further described in the paragraph that follows. First quarter net interest income totaled $2,562, compared to $2,432 for the first quarter of 2007. First quarter 2007 results do not reflect the acquisition of Morgan Bancorp, Inc. of Hudson, Ohio, which occurred in the second quarter of 2007, at which time Morgan Bank contributed $135,640 in assets.

The first quarter of 2008 was marked by rapidly falling interest rates. The Federal Open Market Committee (FOMC) cut federal fund rates by 200 basis points during the first quarter of 2008, and 300 basis points since September, 2007. Despite the Corporation’s aggressive lowering of interest rates in reaction to the federal fund rate cuts, average interest bearing deposits continued to grow, while average loans decreased on a linked quarter basis. The net interest margin was 3.06% for the first quarter of 2008, down 44 basis points from 3.50% for the first quarter of 2007. Noninterest income was $3,334 for the first quarter of 2008, an increase of $345, or 11.54%, compared to the first quarter of 2007. As a result of a membership interest, the Corporation received stock from an IPO completed by VISA and a subsequent mandatory partial redemption in the amount of $460 which was recorded as part of noninterest income for the first quarter of 2008. A gain on the sale of trading securities amounting to $473 was recorded during the first quarter of 2007as the Corporation made an early election to measure certain financial instruments in accordance with SFAS No. 159. Service charges on deposit accounts and ATM charges increased $167 during the first quarter of 2008 in comparison to the same period last year. Noninterest expense was $8,522 for the first quarter of 2008 as compared to $7,358 for the first quarter of 2007. Included in noninterest expense during the first quarter of 2008 was $491 associated with the special shareholders’ meeting held at the request of a shareholder of the Corporation..

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 69.32% of the revenues for the three months ended March 31, 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 March 31, 2008 versus Three Months Ended March 31, 2007

Net interest income, before provision for loan losses, was $7,520 for the first quarter 2008 as compared to $6,829 during the same quarter 2007. Adjusting for tax-exempt income, consolidated net interest income, before provision for loan losses, for the first quarter 2008 and 2007 was $7,615 and $6,918, respectively. The net interest margin, determined by dividing tax equivalent net interest income by average earning assets, was 3.09% for the three months ended March 31, 2008 compared to 3.54% for the three months ended March 31, 2007.

Average earning assets for the first quarter of 2008 were $988,376. This was an increase of $196,213 or 24.77% over the same quarter last year. The yield on average earning assets was 6.17% in the first quarter of 2008 as compared to 6.64% for the same period last year. The yield on average portfolio loans during the first quarter of 2008 was 6.65%. This was 50 basis points lower than that of the first quarter of 2007 at 7.15%. Interest income from securities was $2,497 (FTE) for the three months ended March 31, 2008. This compares to $1,814 during the first quarter of 2007. The yield on average securities was 4.59% and 4.63% for these periods, respectively. The cost of interest-bearing liabilities was 3.44% during the first quarter of 2008 as compared to 3.56% during the same period

Table 1: Condensed Consolidated Average Balance Sheets

Interest, Rate, and Rate/ Volume differentials are stated on a Fully-Tax Equivalent (FTE) Basis.


	Three Months Ended March 31,
	2008									2007
	Average Balance			Interest			Rate			Average Balance			Interest			Rate
							(Dollars in thousands)
Assets:
U.S. Govt agencies and corporations	$	203,393		$	2,263			4.46	%	$	146,371		$	1,619			4.49	%
State and political subdivisions		15,435			234			6.08			12,561			195			6.30
Federal funds sold and short-term investments		7,212			112			6.23			2,417			30			5.03
Commercial loans		436,421			7,319			6.73			378,040			6,952			7.46
Real estate mortgage loans		100,564			1,485			5.92			98,411			1,494			6.16
Home equity lines of credit		81,567			1,178			5.79			70,301			1,366			7.88
Purchased installment loans		—			—			0.00			41,316			510			5.01
Installment loans		143,784			2,617			7.30			42,746			795			7.54

Total Earning Assets	$	988,376		$	15,208			6.17	%	$	792,163		$	12,961			6.64	%

Allowance for loan loss		(7,913	)								(7,407	)
Cash and due from banks		24,473									22,033
Bank owned life insurance		15,564									14,841
Other assets		42,704									26,578

Total Assets	$	1,063,204								$	848,208


Liabilities and Shareholders’ Equity
Interest-bearing demand	$	118,100		$	326			1.11	%	$	86,544		$	179			0.84	%
Savings deposits		82,032			144			0.70			77,756			62			0.32
Money market accounts		123,593			827			2.68			111,767			987			3.58
Consumer time deposits		364,150			4,157			4.58			231,694			2,623			4.59
Brokered time deposits		23,637			317			5.38			56,863			718			5.12
Public time deposits		65,429			738			4.52			69,526			915			5.34
Short-term borrowings		26,080			172			2.65			21,696			233			4.36
FHLB advances		60,250			570			3.79			33,473			326			3.95
Trust preferred securities		20,798			340			6.56			—			—			—
Other		—			2			0.00			—			—			—

Total Interest-Bearing Liabilities	$	884,069		$	7,593			3.44	%	$	689,319		$	6,043			3.56	%

Noninterest-bearing deposits		84,914									81,474
Other liabilities		10,296									8,106
Shareholders’ Equity		83,925									69,309

Total Liabilities and Shareholders’ Equity	$	1,063,204								$	848,208

Net interest Income (FTE)				$	7,615			3.09	%				$	6,918			3.54	%
Taxable Equivalent Adjustment					(95	)		-0.04						(89	)		-0.04

Net Interest Income Per Financial Statements				$	7,520								$	6,829

Net Yield on Earning Assets								3.05	%								3.50	%

Rate/Volume

Net interest income may also be analyzed by comparing the volume and rate components of interest income and interest expense. Table 2 is an analysis of the changes in interest income and expense between the quarters ended March 31, 2008 and March 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 fully tax-equivalent basis.

Table 2: Rate/Volume Analysis of Net Interest Income (FTE)


	Three Months Ended March 31,
	Increase (Decrease) in Interest Income/Expense 2008 and 2007
	Volume			Rate			Total
	(Dollars in thousands)
U.S. Govt agencies and corporations	$	631		$	13		$	644
State and political subdivisions		45			(6	)		39
Federal funds sold and short-term investments		63			19			82
Commercial loans		1,319			(952	)		367
Real estate mortgage loans		29			(37	)		(8	)
Home equity lines of credit		125			(313	)		(188	)
Installment loans		969			342			1,311

Total Interest Income		3,181			(934	)		2,247

Interest-bearing demand		76			71			147
Savings deposits		7			75			82
Money market accounts		68			(228	)		(160	)
Consumer time deposits		1,500			34			1,534
Brokered time deposits		(416	)		14			(402	)
Public time deposits		(52	)		(125	)		(177	)
Short-term borrowings		22			(83	)		(61	)
FHLB advances		261			(18	)		243
Trust preferred securities and miscellaneous		170			170			340

Total Interest Expense		1,636			(90	)		1,546

Net Interest Income (FTE)	$	1,545		$	(844	)	$	701

Consolidated net interest income (FTE) for the first quarter 2008 and 2007 was $7,615 and $6,918, respectively. Interest income for the first quarter of 2008 increased $2,247 in comparison to the same period in 2007, $3,181 of the increase was attributed to volume. This was offset by a decrease of $934 attributed to rate. For the same period, interest expense increased $1,550, with $1,636 attributed to volume, offset by a decrease attributed to rate of $90. Balance sheet growth, which contributed $1,545 to net interest income (FTE), was partially offset decreases due to rapidly falling rate environment. Overall, net interest income (FTE) increased $701.

Noninterest Income

Table 3: Details on Noninterest Income


	Three Months Ended March 31,
	2008			2007
	(Dollars in thousands)
Investment and trust services	$	532		$	522
Deposit service charges		1,111			1,082
Electronic banking fees		644			436
Income from bank owned life insurance		183			167
Other income		599			137

Total fees and other income		3,069			2,344
Securities gains, net		214			473
Gains on sale of loans		187			151
Gains (losses) on sale of other assets		(136	)		21

Total noninterest income	$	3,334		$	2,989

Three Months Ended March 31, 2008 as compared to the Three Months Ended March 31, 2007

Noninterest income for the three months ended March 31, 2008 was $3,334 or an increase of $345, or 11.54%, from the same period 2007. Deposit service charges and fees from electronic banking increased $237, or 15.61%, over the same period last year, reflecting continued momentum in fee-based services.

The first quarter of 2008 included $460 received in a partial redemption of stock issued by VISA. Beginning on June 22, 2005, a series of antitrust class action lawsuits were filed against Visa, MasterCard, and several major financial institutions claiming that the interchange fees charged by card-issuing banks are unreasonable and seek injunctive relief and unspecified damages. Subsequently, VISA underwent a worldwide reorganization and completed an initial public offering. LNB had a membership interest in VISA and a potential liability of an uncertain amount. As a result of this IPO, LNB received $460 in a partial redemption of stock issued to the membership institutions. The remaining 17,068 of Class B Common Shares will remain in place for a period of three years. This redemption was recorded as other income in accordance with GAAP. Also as a result of the IPO, VISA has escrowed funds to cover potential liability from the lawsuits thereby relieving member banks of this liability. During the first quarter of 2007, $473 was recorded to gain on securities following the early election of SFAS 159. The gain of $214 on securities during the first quarter of 2008 was a combination of unrealized gain on trading securities of $45 and $169 on the sale of available-for-sale securities. During the quarter, 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.

Bank owned property sale and valuation adjustment, as properties are reappraised, resulted in a loss of $136 during the first quarter of 2008. These properties consist of 53.81% commercial and 46.19% residential property.

Noninterest Expense

Table 4: Details on Noninterest Expense


	Three Months Ended March 31,
	2008		2007
	(Dollars in thousands)
Salaries and employee benefits	$	3,778	$	3,823
Furniture and equipment		996		707
Net occupancy		657		555
Outside services		883		355
Marketing and public relations		308		262
Supplies and postage		349		310
Telecommunications		244		188
Ohio Franchise tax		220		215
Other real estate owned		98		114
Electronic banking expense		257		189
Other charge-offs and losses		62		94
Loan and collection expense		228		94
Other expense		442		452

Total noninterest expense	$	8,522	$	7,358

Three Months Ended March 31, 2008 as compared to the Three Months Ended March 31, 2007

Noninterest expense increased $1,164, or 15.82%, for the first quarter of 2008 over the same period 2007. Included in noninterest expense was $491 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. During the second quarter of 2007, the Corporation acquired Morgan Bank of Hudson, Ohio. Salaries and benefits, during the first quarter of 2008 decreased $45 in comparison to the prior year first quarter 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.

Income taxes

The Corporation recognized tax expense of $411 during the first quarter 2008 and $542 for the same period 2007. The Corporation’s effective tax rate was 22.12% for the first quarter 2008 as compared to 26.10% for the same period 2007. New market tax credit being generated by the Corporation’s subsidiary North Coast Community Development continues to contribute to the lower effective tax rate.

Balance Sheet Analysis

Overview

The Corporation’s assets at March 31, 2008 were $1,067,002 as compared to $1,056,645 at December 31, 2007. This is an increase of $10,357. Assets increased 0.98% over December 31, 2007.

Securities

The composition of the Corporation’s securities portfolio at March 31, 2008 and December 31, 2007 is presented in Note 5 to the Consolidated Financial Statements contained within this Form 10-Q. The Corporation continues to employ the securities portfolio to manage interest rate risk and to manage its liquidity needs. Currently, the portfolio is comprised of 16.72% trading securities, 81.16% available for sale securities and 2.13% Federal Home Loan Bank and Federal Reserve Bank stock. Available for sale securities are comprised of 37.94% U.S. Government agencies, 52.97% U.S. agency mortgage backed securities, 8.96% municipal securities, and 0.13% other miscellaneous equity

investments. At March 31, 2008 the available for sale securities had a net temporary unrealized loss of $74, representing .04% of the total amortized cost of the Bank’s available for sale securities. Trading securities held at fair value of March 31, 2008 were $37,220, and did not have any unrealized losses recorded against income.

Loans

The detail of loan balances are presented in Note 6 to the Consolidated Financial Statements contained within this Form 10-Q. Table 5 provides further detail by loan purpose.

Table 5: Details on Loan Balances


	March 31, 2008			December 31, 2007
	(Dollars in thousands)
Real estate loans (includes loans secured primarily by real estate only):
Construction and land development	$	73,840		$	74,379
One to four family residential		213,977			213,238
Multi-family residential		25,289			24,473
Non-farm non-residential properties		270,389			275,552
Commercial and industrial loans		58,612			56,688
Personal loans to individuals:
Auto, single payment and installment		105,602			104,360
All other loans		4,734			4,908

Total loans		752,443			753,598
Allowance for loan losses		(8,000	)		(7,820	)

Net loans	$	744,443		$	745,778

Total loans at March 31, 2008 were $752,443. This is a decrease of $1,155, or 0.15% from December 31, 2007. At March 31, 2008, commercial loans represented 57.64% of total portfolio loans. Consumer loans, consisting of installment loans and home equity loans, comprised 29.28% of total portfolio loans. Consumer loans are made to borrowers on both secured and unsecured terms dependent on the maturity and nature of the loan. Real estate mortgages comprise 13.08% of total portfolio loans.

Loans held for sale, and not included in portfolio loans, were $7,748 at March 31, 2008. Mortgage loans held for sale at fair market value represented 19.65%, and installment loans represented 80.35% of loans held for sale. There were no commercial loans held for sale at March 31, 2008. Loans held for sale at December 31, 2007 were $4,724 and consisted of 31.40% mortgage loans and 68.60% installment loans. The Corporation retains the servicing rights on these loans.

Deposits

Table 6: Deposits


	Average Balances Outstanding
	As Of
	March 31, 2008								December 31, 2007
	Average Balance		Percent of Deposits			Rate			Average Balance		Percent of Deposits			Rate
						(Dollars in thousands)
Noninterest bearing demand	$	84,914		9.86	%		0.00	%	$	84,352		10.64	%		0.00	%
Interest-bearing demand		118,100		13.70			1.11			105,018		13.23			1.21
Savings deposits		82,032		9.52			0.70			80,513		10.14			0.60
Money market accounts		123,593		14.34			2.68			127,673		16.08			3.60
Consumer time deposits		364,150		42.25			4.58			289,906		36.52			4.71
Brokered time deposits		23,637		2.74			5.38			36,497		4.60			5.22
Public time deposits		65,429		7.59			4.52			69,804		8.79			5.21

Total Deposits	$	861,855		100.00	%		3.03	%	$	793,763		100.00	%		3.11	%

Total deposits at March 31, 2008 were $865,065, an increase of $8,124, or 0.95% over December 31, 2007. Average deposits at March 31, 2008 were $861,855 compared to average deposits at December 31, 2007 of $793,763. Average consumer time deposits increased $74,244 over the three month period between December 31, 2007 and March 31, 2008 despite aggressive reaction to rate cuts during the first quarter of 2008. Average brokered time deposts decreased $12,860 during this same period as excess funds generated by this increase in deposits were used to pay down brokered time deposits as they became due. The Corporation has experienced a migration of customers from demand and other noninterest-bearing accounts to interest-bearing checking, savings and money market accounts to time deposits during the three months of 2008, which decreased $112,510 on average from December 31, 2007. Deposit accounts and the generation of deposit accounts continue to be the primary source of funds within our market area. The Corporation offers various deposit products to both retail and business customers. The Corporation also utilizes its business sweep accounts to generate funds as well as the brokered CD market to provide funding comparable to other national market borrowings, which include the Federal Home loan Bank of Cincinnati and the Federal Reserve Bank of Cleveland.

Borrowings

The Corporation utilizes both short-term and long-term borrowings to assist in the growth of earning assets. For the Corporation, short-term borrowings include federal funds purchased and repurchase agreements. As of March 31, 2008, the Corporation had $27,876 of short-term borrowings. There were no federal funds purchased at March 31, 2008, and repurchase agreements increased $5,771 over December 31, 2007. Long-term borrowings for the Corporation consist of Federal Home Loan Bank advances of $59,207 and junior subordinated debentures of $20,620. Federal Home Loan Bank advances were $44,207 at December 31, 2007. Maturities of long-term Federal Home Loan Bank advances are presented in Note 10 to the Consolidated Financial Statements contained within this Form 10-Q. During the second quarter of 2007, the Corporation completed a private offering of trust preferred securities, as described in Note 11 to the Consolidated Financial Statements contained within this Form 10-Q. The securities were issued in two $10 million tranches, one of which pays dividends at a fixed rate of 6.64% per annum and the other of which pays dividends at LIBOR plus 1.48% per annum.

Regulatory Capital

The Corporation continues to maintain an appropriate capital position. Total shareholders’ equity was $83,363 at March 31, 2008. This is an increase of 0.86% over December 31, 2007. Net income increased total shareholders’ equity by $1,447 for the three months ended March 31, 2008. Other factors increasing shareholders’ equity were a $1,293 increase in accumulated other comprehensive loss resulting from an increase in the fair value of available for sale securities, and a $8 increase for share-based payment arrangements, net of tax. Cash dividends payable to shareholders in the amount of $1,313 decreased total shareholders’ equity in the first three months of 2008. Also

decreasing total shareholders’ equity was the cumulative effect of a change in accounting principle for recognizing a liability for postretirement cost of insurance for split-dollar life insurance coverage in the amount of $725.

The Corporation held 328,194 shares of common stock as treasury stock at March 31, 2008, at a cost of $6,092. The Corporation and the Bank continue to monitor growth to stay within the guidelines established by applicable regulatory authorities. At March 31, 2008 and December 31, 2007, the Corporation and Bank maintained capital ratios consistent with guidelines to be deemed well-capitalized under Federal banking regulations.

On July 28, 2005, the Corporation announced a share repurchase program of up to 5 percent, or about 332,000, of its common shares outstanding. Repurchased shares can be used for a number of corporate purposes, including the Corporation’s stock option and employee benefit plans. Under the share repurchase program, share repurchases are expected to be made primarily on the open market from time-to-time until the 5 percent maximum is repurchased or the earlier termination of the repurchase program by the Board of Directors. Repurchases under the program will be made at the discretion of management based upon market, business, legal and other factors. As of March 31, 2008, the Corporation had repurchased an aggregate of 202,500 shares under this program.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

RISK ELEMENTS

Risk management is an essential aspect in operating a financial services company successfully and effectively. The most prominent risk exposures, for a financial services company, are credit, operational, interest rate, market, and liquidity risk. Credit risk involves the risk of uncollectible interest and principal balance on a loan when it is due. Operational risk involves fraud, legal and compliance issues, processing errors, technology and the related disaster recovery, and breaches in business continuation and internal controls. Interest rate risk includes changes in interest rates affecting net interest income. Market risk is the risk that a financial institution’s earnings and capital or its ability to meet its business objectives adversely affected by movements in market rates or prices. Such movements include fluctuations in interest rates, foreign exchange rates, equity prices that affect the changes in value of available for sale securities, credit spreads, and commodity prices. The inability to fund obligations due to investors, borrowers, or depositors is liquidity risk. For the Corporation, the dominant risks are market risk and credit risk.

Credit Risk Management

Uniform underwriting criteria, ongoing risk monitoring and review processes, and well-defined, centralized credit policies dictate the management of credit risk for the Corporation. As such, credit risk is managed through the Bank’s allowance for loan loss policy which requires the loan officer, lending officers, and the loan review committee to manage loan quality. The Corporation’s credit policies are reviewed and modified on an ongoing basis in order to remain suitable for the management of credit risks within the loan portfolio as conditions change. The Corporation uses a loan rating system to properly classify and assess the credit quality of individual commercial loan transactions. The loan rating system is used to determine the adequacy of the allowance for loan losses for regulatory reporting purposes and to assist in the determination of the frequency of review for credit exposures.

Nonperforming Assets, Delinquency and Potential Problem Loans

Total nonperforming assets consist of nonperforming loans, loans which have been restructured, and other foreclosed assets. As such, a loan is considered nonperforming if it is 90 days past due and/or in Management’s estimation the collection of interest on the loan is doubtful. Nonperforming loans no longer accrue interest and are accounted for on a cash basis. The classification of restructured loans involves the deterioration of a borrower’s financial ability leading to original terms being favorably modified or either principal or interest being forgiven.

Nonperforming loans at March 31, 2008 were $15,044 as compared to $10,831 at December 31, 2007, an increase of $4,213. Of this total, commercial loans were $11,291 as compared to $7,927 at December 31, 2007. These are commercial loans that are primarily secured by real estate and, in some cases, by SBA guarantees, and have either been charged-down to their realizable value or a specific reserve has been established for any collateral short-fall. At March 31, 2008, construction and land development represented $5,033 of the total commercial loan nonperforming, with the remaining being commercial and industrial. All nonperforming loans are being actively managed.

Management also monitors delinquency and potential commercial problem loans. Bank-wide delinquency at March 31, 2008 was 3.02% of total loans as compared to 2.26% at December 31, 2007. Total 30-90 day delinquency was 1.04% of total loans at March 31, 2008 and 0.91% December 31, 2007. 30-90 day delinquency as a percent of loan type is under 2.00% for all loan types except loans to individuals which is 3.66% and, commercial and industrial which was 2.65%.

Other foreclosed assets were $2,680 as of March 31, 2008 as compared to $2,478 at December 31, 2007. This increase was primarily due to the transfer of three residential properties from nonperforming loans to other real estate. The $2,680 is comprised of $1,474 1-4 family residential properties and $1,206 nonfarm nonresidential properties. This compares to $837 in 1-4 family residential properties with the remainder in nonfarm nonresidential properties as of December 31, 2007.

Table 8 sets forth nonperforming assets for the period ended March 31, 2008 and December 31, 2007.

Table 8: Nonperforming Assets


	March 31,2008			December 31, 2007
	(Dollars in thousands)
Commercial loans	$	11,291		$	7,927
Real estate mortgage		2,782			2,097
Home equity lines of credit		443			429
Installment loans		528			378


Total nonperforming loans		15,044			10,831

Other foreclosed assets		2,680			2,478

Total nonperforming assets	$	17,724		$	13,309


Allowance for loan losses to nonperforming loans		53.2	%		72.2	%
Nonperforming assets to total assets		1.66	%		1.26	%

Provision and Allowance for Loan Losses

The allowance for loan losses is maintained by the Corporation at a level considered by Management to be adequate and appropriate to cover probable credit losses inherent in the loan portfolio. The amount of the provision for loan losses charged to operating expenses is the amount necessary, in the estimation of Management, to maintain the allowance for loan losses at an adequate level. Management determines the adequacy of the allowance based upon past experience, changes in portfolio size and mix, trends in delinquency, relative quality of the loan portfolio and the rate of loan growth, assessments of current and future economic conditions, and information about specific borrower situations, including their financial position and collateral values, and other factors, which are subject to change over time. While Management’s periodic analysis of the allowance for loan losses may dictate portions of the allowance be allocated to specific problem loans, the entire amount is available for any loan charge-offs that may occur. Table 9 presents the detailed activity in the allowance for loan losses and related charge-off activity for the three month periods ended March 31, 2008 and 2007.

Table 9: Analysis of Allowance for Loan Losses


	Three Months Ended March 31,
	2008			2007
	(Dollars in thousands)			(Dollars in thousands)
Balance at beginning of period	$	7,820		$	7,300
Charge-offs:
Commercial		(18	)		(259	)
Real estate mortgage		(106	)		(99	)
Home equity lines of credit		(10	)		—
Installment		(186	)		(83	)
DDA overdrafts		(52	)		(59	)

Total charge-offs		(372	)		(500	)

Recoveries:
Commercial		27			28
Real estate mortgage		—			—
Home equity lines of credit		—			—
Installment		33			30
DDA overdrafts		18			17

Total Recoveries		78			75

Net Charge-offs		(294	)		(425	)

Allowance from merger		—			—
Provision for loan losses		474			383

Balance at end of period	$	8,000		$	7,258

The allowance for loan losses at March 31, 2008 was $8,000 or 1.06% of outstanding loans, compared to $7,258 or 1.17% of outstanding loans at March 31, 2007. The allowance for loan losses was 53.18% and 43.53% of nonperforming loans at March 31, 2008 and 2007, respectively.

Net charge-offs for the three months ended March 31, 2008 were $294, as compared to $425 for the three months ended March 31, 2007. Annualized net charge-offs as a percent of average loans for the first quarter of 2008 were .16%, as compared to .27% for the same period in 2007.

The provision charged to expense was $474 for the three months ended March 31, 2008 and $383 for the same period in 2007. The provision for loan losses for the three month period ended March 31, 2008 was, in the opinion of management, adequate when balancing the charge-off levels, with the level of nonperforming loans, the level of potential problem loans and delinquency. The resulting allowance for loan losses is, in the opinion of management, sufficient given its analysis of the information available about the portfolio at March 31, 2008. The Corporation continues to aggressively address potential problem loans, and underwriting standards continue to be adjusted in response to trends and asset review findings.

Market Risk Management

The Corporation manages market risk through its Asset/Liability Management Committee (“ALCO”) at the Bank level governed by policies set forth and established by the Board of Directors. This committee assesses interest rate risk exposure through two primary measures: rate sensitive assets divided by rate sensitive liabilities and earnings-at-risk simulation of net interest income over the one year planning cycle and the longer term strategic horizon in order to provide a stable and steadily increasing flow of net interest income.

The difference between a financial institution’s interest rate sensitive assets and interest rate sensitive liabilities is referred to as the interest rate gap. An institution that has more interest rate sensitive assets than interest rate sensitive liabilities in a given period is said to be asset sensitive or has a positive gap. This means that if interest rates rise a corporation’s net interest income may rise and if interest rates fall its net interest income may decline. If

interest sensitive liabilities exceed interest sensitive assets then the opposite impact on net interest income may occur. The usefulness of the gap measure is limited. It is important to know the gross dollars of assets and liabilities that may re-price in various time horizons, but without knowing the frequency and basis of the potential rate changes the predictive power of the gap measure is limited.

Two more useful tools in managing market risk are earnings-at-risk simulation and economic value of equity simulation. An earnings-at-risk analysis is a modeling approach that combines the repricing information from gap analysis, with forecasts of balance sheet growth and changes in future interest rates. The result of this simulation provides management with a range of possible net interest margin outcomes. Trends that are identified in earnings-at-risk simulation can help identify product and pricing decisions that can be made currently to assure stable net interest income performance in the future. At March 31, 2008, a “shock” treatment of the balance sheet, in which a parallel shift in the yield curve occurs and all rates increase immediately, indicates that in a +200 basis point shock, net interest income would decrease $58, or 0.78%, and in a - -200 basis point shock, net interest income would decrease $71, or 0.94%. The reason for the lack of symmetry in these results is the implied floors in many of the Corporation’s core funding which limits their downward adjustment from current offering rates. This analysis is done to describe a best or worst case scenario. Factors such as non-parallel yield curve shifts, management pricing changes, customer preferences and other factors are likely to produce different results.

The economic value of equity approach measures the change in the value of the Corporation’s equity as the value of assets and liabilities on the balance sheet change with interest rates. March 31. 2008, this analysis indicated that a +200 basis point change in rates would reduce the value of the Corporation’s equity by 16.39% while a -200 basis point change in rates would increase the value of the Corporation’s equity by 16.24%.

ITEM 4. Controls and Procedures

The Corporation’s management carried out an evaluation, under the supervision and with the participation of the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2008. Based upon that evaluation, the chief executive officer along with the chief financial officer concluded that the Corporation’s disclosure controls and procedures as of March 31, 2008 were: (1) designed to ensure that material information relating to the Corporation and its subsidiaries is made known to the chief executive officer and chief financial officer by others within the entities, and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

No change in the Corporation’s internal control over financial reporting (as defined by 13a-15(f) and 15(d)-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Effect of Recent Acquisition

On May 10, 2007, the Corporation completed its acquisition of Morgan Bancorp, Inc. In addition, on May 10, 2007, the Corporation completed the merger of Morgan Bank, NA, a wholly owned subsidiary of Morgan Bancorp, Inc., with and into The Lorain National Bank, a wholly owned subsidiary of the Corporation. Since this acquisition, the Corporation has been documenting and analyzing the systems of disclosure controls and procedures and internal control over financial reporting of the acquired companies and integrating them within the Corporation’s broader framework of controls. The Corporation plans to continue this evaluation and integration in the next quarter. While the evaluation and integration is not yet complete, the Corporation has not, at this time, identified any material weaknesses in its disclosure controls and procedures or internal control over financial reporting as a result of this acquisition.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

Pursuant to the terms of the Settlement Agreement dated as of April 18, 2008 by and among the Corporation, AMG Investments, LLC, Richard M. Osborne and Steven A. Calabrese, effective as of April 24, 2008, all of the claims in the lawsuit styled Richard M. Osborne v. LNB Bancorp, Inc., Case No. 1:08 CV 473 in the United States District Court for the Northern District of Ohio, Eastern Division were dismissed.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Item1A of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

On July 28, 2005, the Corporation announced a share repurchase program of up to 5 percent, or about 332,000, of the common shares outstanding. Repurchased shares can be used for a number of corporate purposes, including the Corporation’s stock option and employee benefit plans. Under the share repurchase program, share repurchases are expected to be made primarily on the open market from time to time until the 5 percent maximum is purchased or the earlier termination of the repurchase program by the Board of Directors. Repurchases under the program will be made at the discretion of management based upon market, business, legal and other factors. There was no repurchase activity during the quarter ended March 31, 2008. As of March 31, 2008, the Corporation had repurchased an aggregate of 202,500 shares under this program.

On March 18, 2008, the Corporation held a special meeting of shareholders to vote upon six proposals made by a shareholder of the Corporation (the “Special Meeting”). On March 28, 2008, the Corporation issued a press release announcing the results of the vote taken at the Special Meeting. The press release is included as Exhibit 99.1 to the Current Report on Form 8-K filed by the Corporation with the SEC on March 28, 2008.

On April 18, 2008, the Corporation entered into a Settlement Agreement (the “Settlement Agreement”) with Richard M. Osborne and Steven A. Calabrese and AMG Investments, LLC to settle certain contested matters, including the election of directors, concerning the upcoming 2008 annual meeting of the Corporation’s shareholders. A description of the terms of the Settlement Agreement is contained in Item 1.01 of the Current Report on Form 8-K filed by the Corporation with the SEC on April 23, 2008, which description is incorporated by reference into this Part II, Item 4 of this Quarterly Report on Form 10-Q.

Item 6. Exhibits.

(a) The exhibits to this Form 10-Q are referenced in the Exhibit Index attached hereto.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		LNB BANCORP, INC.
		(Registrant)

Date: May 8, 2008		/s/ Sharon L. Churchill Sharon L. Churchill
		Chief Financial Officer
		(Duly Authorized Officer, and Principal
		Financial Officer)


Part I — Financial Information

Item 1. Financial Statements.

Consolidated Balance Sheets March 31, 2008 (unaudited) and December 31, 2007

Consolidated Statements of Income (unaudited) For the three months ended March 31, 2008 and March 31, 2007

Consolidated Statements of Changes in Shareholders’ Equity (unaudited) For the three months ended March 31, 2008 and March 31, 2007

Consolidated Statements of Cash Flows (unaudited) For the three months ended March 31, 2008 and March 31, 2007

Notes to the Consolidated Financial Statements (unaudited)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Item 4. Controls and Procedures

Part II — Other Information

Item 1. Legal Proceedings

Item 1A. Risk Factors

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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

Item 6. Exhibits
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2


Exhibit

31.1		Chief Executive Officer Rule 13a -14(a)/15d -14(a) Certification.

31.2		Chief Financial Officer Rule 13a -14(a)/15d -14(a) Certification.

32.1		Certification pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

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Date:May 8, 2008

/s/ Daniel E. Klimas Daniel E. Klimas
President and Chief Executive Officer


/s/ Daniel E. Klimas Daniel E. Klimas
President and Chief Executive Officer
May 8, 2008