LNB Bancorp (LNBB) 10-Q 2006 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2006

OR

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

For the transition period from            to           

Commission file number: 0-13203

LNB Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Ohio	34-1406303
(State or other jurisdiction
of incorporation or organization)	(I.R.S. Employer Identification No.)
457 Broadway, Lorain, Ohio (Address of principal executive offices)	44052 - 1769 (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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YESþ NOo

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filero Accelerated Filerþ Non-accelerated Filero

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

The number of common shares of the registrant outstanding on October 31, 2006 was 6,443,673.

LNB Bancorp, Inc.
Table of Contents

 EX-31.1

 EX-31.2

 EX-32.1

 EX-32.2

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Part I — FINANCIAL INFORMATION

Item 1. Financial Statements.

Consolidated Balance Sheets

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

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Income (unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2006		2005			2006		2005
	(Dollars in thousands except share and per share amounts)
Interest Income
Loans	$	11,164	$	9,712		$	31,690	$	27,847
Securities:
U.S. Government agencies and corporations		1,488		1,185			4,249		3,256
State and political subdivisions		124		107			330		333
Other debt and equity securities		49		53			150		155
Federal funds sold and short-term investments		10		38			73		111
Total interest income		12,835		11,095			36,492		31,702
Interest Expense
Deposits:
Certificates of deposit, $100 and over		1,864		1,193			4,818		2,696
Other deposits		2,913		1,828			8,073		4,865
Federal Home Loan Bank advances		492		403			1,227		1,387
Short-term borrowings		246		201			655		395
Total interest expense		5,515		3,625			14,773		9,343
Net Interest Income		7,320		7,470			21,719		22,359
Provision for Loan Losses		600		300			915		1,098
Net interest income after provision for loan losses		6,720		7,170			20,804		21,261
Noninterest Income
Investment and trust services		482		555			1,537		1,627
Deposit service charges		1,224		1,152			3,334		3,112
Other service charges and fees		504		490			1,444		1,431
Mortgage banking revenue		—		242			—		967
Income from bank owned life insurance		187		117			474		426
Other income		56		83			160		337
Total fees and other income		2,453		2,639			6,949		7,900
Securities gains, net		—					—		174
Gains on sale of loans		—		—			—		132
Gains (losses) on sale of other assets, net		—		(31	)		2		(32	)
Total noninterest income		2,453		2,608			6,951		8,174
Noninterest Expense
Salaries and employee benefits		3,770		3,414			10,986		11,653
Furniture and equipment		737		746			2,227		2,281
Net occupancy		484		402			1,413		1,368
Outside services		406		394			1,260		1,224
Marketing and public relations		311		258			1,069		863
Supplies, postage and freight		311		290			912		934
Telecommunications		207		207			577		936
Ohio Franchise tax		207		179			636		561
Electronic banking expenses		160		136			466		400
Other expense		686		738			2,133		2,687
Total noninterest expense		7,279		6,764			21,679		22,907
Income before income tax expense		1,894		3,014			6,076		6,528
Income tax expense		475		857			1,570		1,948
Net Income	$	1,419	$	2,157		$	4,506	$	4,580
Net Income Per Common Share
Basic	$	0.22	$	0.33		$	0.70	$	0.69
Diluted		0.22		0.33			0.70		0.69
Dividends declared		0.18		0.18			0.54		0.54
Average Common Shares Outstanding
Basic		6,450,086		6,625,086			6,468,032		6,635,752
Diluted		6,450,235		6,625,168			6,468,291		6,635,780

See accompanying notes to consolidated financial statements

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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, 2005	$	6,767	$	26,243	$	41,291		$	(1,297	)	$	(2,430	)	$	70,574
Comprehensive income:
Net Income						4,580									4,580
Other comprehensive income, net of tax:
Change in unrealized gains and losses on securities, net of reclassification adjustment of $119 for gains on sale of securities, net of tax									(972	)					(972	)
Total comprehensive income															3,608
Common stock repurchased												(1,224	)		(1,224	)
Issuance of common stock under employment agreement		5		91											96
Common dividends declared, $.54 per share						(3,576	)								(3,576	)
Balance, September 30, 2005	$	6,772	$	26,334	$	42,295		$	(2,269	)	$	(3,654	)	$	69,478
Balance, January 1, 2006	$	6,772	$	26,334	$	42,945		$	(2,996	)	$	(4,649	)	$	68,406
Comprehensive income:
Net Income						4,506									4,506
Other comprehensive income, net of tax:
Change in unrealized gains and losses on securities									551						551
Total comprehensive income															5,057
Share-based compensation expense, net of tax				36											36
Purchase of 77,500 shares of Treasury Stock												(1,443	)		(1,443	)
Common dividends declared, $.54 per share						(3,485	)								(3,485	)
Balance, September 30, 2006	$	6,772	$	26,370	$	43,966		$	(2,445	)	$	(6,092	)	$	68,571

See accompanying notes to consolidated financial statements

5

Consolidated Statements of Cash Flows (unaudited)

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

See accompanying notes to consolidated financial statements

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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.

During the third quarter of 2006, dissolutions were filed with the Ohio Secretary of State for Charleston Insurance Agency, Inc., a wholly-owned subsidiary of LNB Bancorp, Inc., Charleston Title Agency, a 49%-owned subsidiary of LNB Bancorp, Inc., and LNB Mortgage, LLC, a wholly-owned subsidiary of The Lorain National Bank.

     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 and western Cuyahoga 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 selling them in the near term are deemed trading securities with any related unrealized gains and losses reported in earnings. As of September 30, 2006 and December 31, 2005, LNB Bancorp, Inc. did not hold any trading securities. Securities that the Corporation has a positive intent and ability to hold to maturity are classified as held to maturity. As of September 30, 2006 and December 31, 2005, LNB Bancorp, Inc. did not hold any held to maturity

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securities. Securities that are not classified as trading or held to maturity are classified as available for sale. As of September 30, 2006 and December 31, 2005 all securities held by the Corporation are classified as available for sale and 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

Loans are reported at the principal amount outstanding, net of unearned income and premiums and discounts. 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.

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 available for sale. 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 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

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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.

     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 “Accounting for 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 subsidiaries 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.

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     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. No awards are currently outstanding under the plan; however, at September 30, 2006 and December 31, 2005 the Corporation did have stock option agreements with two individuals outside of the 2006 Stock Incentive Plan. The Corporation also issued Stock Appreciation Rights (SARS) on January 20, 2006 to eight employees. SFAS No. 123R has been adopted for the accounting and disclosure of the stock option agreements and the SARS.

Common stock issued in 2005 under an employment agreement was charged to expense at the fair value of the common stock issued.

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

The dilutive effect of incentive stock options were 149 and 259 for the three months and nine months ended September 30, 2006, respectively. The dilutive effect of incentive stock options was 82 and 28 for the three and nine months ended September 2005, 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 average required reserve balance was $12,381 for the nine months of 2006. The required ending reserve balance was $12,710 on September 30, 2006 and $12,619 on December 31, 2005.

(4) Goodwill and Intangible Assets

The Corporation assesses goodwill for impairment annually and more frequently in certain circumstances. Goodwill was assessed at a reporting unit level by applying a fair-value based test using discounted estimated future net cash flows. During 2005 it was determined that goodwill relating to LNB Mortgage, LLC had been impaired and all goodwill relating to this entity in the amount of $311 was written off.

The Corporation recorded core deposit intangibles in 1997, related to the acquisition of three branch offices from another bank. These core deposit intangibles are tested annually for impairment.

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Core deposit intangibles are amortized over their estimated useful life of 10 years in accordance with SFAS No. 142. A summary of core deposit intangible assets follows:

	September 30, 2006		December 31, 2005
	(Dollars in thousands)
Core deposit intangibles	$	1,288	$	1,288
Less: accumulated amortization		1,180		1,095
Carrying value of core deposit intangibles	$	108	$	193

The following intangible assets are included in the accompanying consolidated financial statements and are summarized as follows at September 30, 2006 and December 31, 2005 net of accumulated amortization:

	September 30, 2006		December 31, 2005
	(Dollars in thousands)
Goodwill	$	2,827	$	2,827
Mortgage servicing rights		263		301
Core deposit intangibles		108		193
Total goodwill and intangible assets	$	3,198	$	3,321

(5) Securities

The amortized cost, gross unrealized gains and losses and fair values of securities at September 30, 2006 and December 31, 2005 follows:

	At September 30, 2006
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in thousands)
Securities available for sale:
U.S. Government agencies and corporations	$	151,006	$	27	$	(3,297	)	$	147,736
State and political subdivisions		12,000		396		(23	)		12,373
Equity securities		52		67		—			119
Federal Home Loan Bank and Federal Reserve Bank stock		3,204		—		—			3,204
Total Securities	$	166,262	$	490	$	(3,320	)	$	163,432

	At December 31, 2005
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in thousands)
Securities available for sale:
U.S. Government agencies and corporations	$	146,010	$	8	$	(3,965	)	$	142,053
State and political subdivisions		9,231		249		(24	)		9,456
Equity securities		52		68		—			120
Federal Home Loan Bank and Federal Reserve Bank stock		3,645		—		—			3,645
Total Securities	$	158,938	$	325	$	(3,989	)	$	155,274

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There are temporary reasons why securities may be valued at less than amortized cost. Temporary reasons are that the current levels of interest rates as compared to the coupons on the securities held by the Corporation are higher and impairment is not due to credit deterioration. The Corporation has the ability to hold these securities until their value recovers. At September 30, 2006, the total unrealized losses of $3,320 were temporary in nature due to the current level of interest rates.

(6) Loans and Allowance for Loan Losses

Loan balances at September 30, 2006 and December 31, 2005 are summarized as follows:

	September 30, 2006			December 31, 2005
	(Dollars in thousands)
Commercial	$	368,938		$	363,144
Real estate mortgage		87,208			81,367
Home equity lines of credit		68,739			66,134
Purchased installment		42,543			42,023
Installment		41,724			38,343
Total Loans		609,152			591,011
Allowance for loan losses		(6,304	)		(6,622	)
Net Loans	$	602,848		$	584,389

Activity in the allowance for loan losses for the period ended September 30, 2006 and September 30, 2005 is summarized as follows:

	September 30, 2006			September 30, 2005
	(Dollars in thousands)
Balance at the beginning of period	$	6,622		$	7,386
Provision for loan losses		915			1,098
Loans charged-off		(1,613	)		(787	)
Recoveries on loans previously charged-off		380			193
Balance at end of period	$	6,304		$	7,890

Nonaccrual loans at September 30, 2006 were $7,023, as compared to $6,494 at December 31, 2005, and $7,452 at September 30, 2005.

(7) Stock Options and Stock Appreciation Rights

At September 30, 2006 and December 31, 2005, the Corporation had nonqualified stock option agreements with two executives granted in 2005 and 2006. On January 20, 2006 the Corporation issued 30,000 Stock Appreciation Rights (SARS) to eight employees. The expense recorded as of September 30, 2006 was $23 for SARS and $55 for stock options. The number of options or SARS and the exercise prices for these nonqualified incentive options or SARS outstanding as of September 30, 2006 follows:

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	Year Issued
	2005			2005			2006			2006
Type	Option			Option			Option			SARS
Number		2,500			30,000			30,000			30,000
Strike Price	$	16.50		$	19.17		$	19.10		$	19.00
Number Vested		2,500			10,000						—
Assumptions:
Risk free interest rate		4.50	%		3.92	%		3.66	%		4.49	%
Dividend yield		4.36	%		3.76	%		3.77	%		4.23	%
Volatility		18.48	%		17.30	%		17.66	%		14.35	%
Expected Life — years		6.0			7.0			7.0			6.3

A summary of the status of stock options at September 30, 2006, and changes during the nine months then ended, is presented in the table below:

					Weighted Average
			Weighted Average		Remaining
			Exercise		Contractual Term
	Shares		Price per Share		(Years)
Options outstanding, December 31, 2005		32,500	$	18.96
Granted		30,000		19.10
Exercised		—		—
Forfeited, expired or cancelled		—		—
Options outstanding, September 30, 2006		62,500	$	19.03	$	6.96
Options vested and exercisable, September 30, 2006		12,500	$	19.17	$	7.00

In accordance with the disclosure requirements of Statement of Financial Accounting Standard, or SFAS, No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – An amendment of FASB Statement No. 123,” the following table provides the pro forma effect on net income and earnings per share if the fair value method of accounting for stock-based compensation had been used for all awards for the period ended September 30, 2005:

	Nine Months Ended
	September 30, 2005
	(Dollars in thousands except per share amounts)
Net Income as reported		$	4,580
Add: Stock-based compensation, net of tax, as reported			62
Deduct: Stock-based compensation, net of tax, that would have been reported if the fair value based method had been applied to all awards			(106	)
Pro forma net income		$	4,536
Pro forma net income per share:
Basic — as reported		$	0.69
Basic — pro forma			0.68
Diluted — as reported			0.69
Diluted — pro forma			0.68

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(8) Deposits

Deposit balances at September 30, 2006 and December 31, 2005 are summarized as follows:

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

The aggregate amount of certificates of deposit in denominations of $100,000 or more amounted to $155,174 and $124,626 at September 30, 2006 and December 31, 2005, respectively. Brokered time deposits totaling $61,425 and $55,266 at September 30, 2006 and December 31, 2005, respectively, are included in these totals.

The maturity distribution of certificates of deposit as of September 30, 2006 follows:

			After		After
			12 months but		36 months but
	Within 12		within 36		within 60		After
	months		months		months		5 years		Total
	(Dollars in thousands)
Consumer time deposits	$	158,002	$	54,859	$	6,126	$	—	$	218,987
Public time deposits		47,006		2,800		—		—		49,806
Brokered time deposits		50,573		10,852		—		—		61,425
Total time deposits	$	255,581	$	68,511	$	6,126	$	—	$	330,218

(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 September 30, 2006, the Bank had pledged approximately $8,946 in qualifying home equity lines of credit, resulting in an available line of credit of approximately $7,604. No amounts were outstanding at September 30, 2006 or December 31, 2005.

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 September 30, 2006 and December 31, 2005.

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	September 30, 2006		December 31, 2005
	(Dollars in thousands)
Securities sold under agreements to repurchase	$	14,475	$	16,116
Federal funds purchased		3,500		16,500
Total short-term borrowings	$	17,975	$	32,616

(10) Federal Home Loan Bank Advances

Federal Home Loan Bank advances amounted to $50,088 and $53,896 at September 30, 2006 and December 31, 2005 respectively. All advances are bullet maturities with no call features. At September 30, 2006, collateral pledged for FHLB advances consisted of qualified real estate mortgage loans, home equity lines of credit and investment securities of $89,235, $37,272 and $1,000 respectively. The maximum borrowing capacity of the Bank at September 30, 2006 was $75,382 with unused collateral borrowing capacity of $33,295. The Bank maintains a $40,000 cash management line of credit (CMA) with the FHLB. There was no outstanding balance under the CMA at September 30, 2006.

	September 30, 2006		December 31, 2005
	(Dollars in thousands)
FHLB advance - 4.27%, repaid in 2006	$	—	$	12,801
FHLB advance - 4.92%, repaid in 2006		—		1,000
FHLB advance - 2.70%, repaid in 2006		—		10,000
FHLB advance - 5.41%, due October 3, 2006		20,000		—
FHLB advance - 2.95%, due January 30, 2007		10,000		10,000
FHLB advance - 3.55%, due November 21, 2007		5,000		5,000
FHLB advance - 3.33%, due February 8, 2008		5,000		5,000
FHLB advance - 3.36%, due March 27, 2009		10,000		10,000
FHLB advance - 3.55%, due January 1, 2014		88		95
Total FHLB advances	$	50,088	$	53,896

(11) 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

15

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 September 30, 2006 follows:

	Amount
	(Dollars in thousands)
Commitments to extend credit	$	84,116
Home equity lines of credit		60,593
Standby letters of credit		7,504
Total	$	152,213

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

Introduction

LNB Bancorp, Inc. (the “Corporation”) is a financial services 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 20 banking centers throughout Lorain, eastern Erie and western Cuyahoga 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 and nine months ended September 30, 2006. 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, 2005 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.

We undertake no obligation to review or update any forward-looking statements, whether as a result of new information, future events or otherwise.

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.

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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

18

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. However, the potential impact of certain accounting pronouncements warrants further discussion.

     SFAS No. 123 (revised) “Share Based Payments”

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004) (“SFAS No. 123R”), Share Based Payments. SFAS No. 123R requires the Corporation to expense share-based payments, including employee stock options, based on their fair value. The Corporation adopted SFAS No. 123R effective as of January 1, 2006. Accordingly, the impact of the adoption of SFAS No. 123R’s fair value method is included in the Corporation’s results of operations. The adoption of SFAS No. 123R did not have a material impact on the Corporation’s results of operations, financial position or liquidity.

     SFAS No. 154 “Accounting Changes and Error Corrections”

This Statement replaces APB Opinion No. 20, “Accounting Changes”, and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements”, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. This applies to accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 did not have a material impact on the Corporation’s results of operations, financial position or liquidity.

     FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes – An Intrepretation of FASB Statement No. 109”

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“Fin No. 48”). The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Specifically, Fin No. 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Fin No. 48 also provides guidance on the related

19

derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition of uncertain tax positions. Fin No. 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not expected to have a material effect on our consolidated balance sheet, results of operations or cash flows.

FASB Statement No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132R

In September 2006, the FASB issued Statement No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132R (“SFAS 158”). SFAS 158 requires an entity to recognize in its balance sheet the funded status of its defined benefit postretirement plans, measured as the difference between the fair value of the plan assets and the benefit obligation. SFAS 158 also requires an entity to recognize changes in the funded status of a defined benefit postretirement plan within accumulated other comprehensive income, net of tax, to the extent such changes are not recognized in earnings as components of periodic net benefit cost. SFAS 158 is effective as of the end of the fiscal year ending after December 15, 2006. We are currently evaluating whether the adoption of FASB Statement No. 158 will have a material effect on our consolidated balance sheet, results of operations or cash flows.

SEC and SAB 108 Top 1N “Financial Statements – Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements”

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for fiscal years ending after November 15, 2006. We do not believe SAB 108 will have a material impact on our Consolidated Financial Statements.

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

Net income was $1,419 for the third quarter of 2006 and $4,506 for the nine months ended September 30, 2006. The third quarter contributed $.22 per diluted share. Earnings per diluted share for the first nine months of the year were $.70. Third quarter net income decreased 34.2% from net income of $2,157 reported for the same period 2005, and year-to-date income decreased 1.6% from net income of $4,580 reported for the first nine months of 2005. The difference in earnings from period to period is due, in part, to net interest margin compression in 2006 compared to 2005, and expenses related to investments in market expansion in Lorain and Cuyahoga counties. Net interest income, after provision for loan losses, was $6,720 for the three months ended September 30, 2006. This compares to $7,170 for the same period last year. Net interest income, after provision for loan losses, was $20,804 for the nine months ended September 30, 2006, which is a decrease of 2.2% compared the same period in 2005. Noninterest income was $2,453 for the third quarter of 2006, a decrease of 5.9% from the third quarter of 2005. Year-to-date noninterest income of $6,951 was a decrease of 15.0% as compared to the first nine months of 2005. Noninterest expense of $7,279 during the third quarter 2006 was an increase of 7.6% as compared to the third quarter 2005. However, year-to-date noninterest expense of $21,679 decreased 5.4% in comparison to the nine months ending September 30, 2005.

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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 74.9% of the revenues for the three months ended September 30, 2006. The amount of net interest income is affected by changes in the volume and mix of earning assets and interest bearing liabilities, the level of rates earned or paid on those assets and liabilities and the amount of loan fees earned. The Corporation reviews net interest income on a fully taxable equivalent basis, which presents interest income with an adjustment for tax-exempt interest income on an equivalent pre-tax basis assuming a 34% statutory Federal tax rate. These rates may differ from the Corporation’s actual effective tax rate. The net interest margin is net interest income as a percentage of average earning assets.

     Three Months Ended September 30, 2006 versus Three Months Ended September 30, 2005

Net interest income (FTE), before provision for loan losses, was $7,405 for the third quarter 2006 as compared to $7,519 during the same quarter 2005. This was a decrease of $114, or 1.5%. The net interest margin, determined by dividing tax equivalent net interest income by average earning assets, was 3.83% for the three months ended September 30, 2006 compared to 3.97% for the three months ended September 30, 2005.

Average earning assets for the third quarter 2006 were $767,769. This was an increase of $16,515 or 2.2% over the same quarter last year. The yield on average earning assets was 6.68% in the third quarter of 2006 as compared to 5.89% for the same period last year. Overall, the average yield on portfolio loans increased 83 basis points to 7.36% for the third quarter of 2006 as compared to 6.53% during the third quarter of 2005. The cost of interest-bearing liabilities was 3.27% in the third quarter of 2006 as compared to 2.26% during the same period 2005. The changes in both earning assets and interest-bearing liabilities were primarily as a result of interest rate changes, rather than volume. The total interest income increase over the same period 2005 attributable to rate was $1,480. At the same time, total interest expense increased $1,555 attributable to rate. This resulted in a net reduction of $75 in net interest income (FTE) from 2005 due to rate. The decrease from 2005 due to volume was $39. Interest income from securities was $1,716 (FTE) for the three months ended September 30, 2006. This compares to $1,394 during the third quarter of 2005. The yield on securities was 4.16% and 3.52% for these periods, respectively, with $259 of the difference attributable to the change in rate. Total average securities at September 30, 2006 increased $3,013 over total average securities at September 30, 2005, which resulted in $35 increase in interest income as a result of volume.

     Nine Months Ended September 30, 2006 versus Nine Months Ended September 30, 2005

Net interest income (FTE), before provision for loan losses, for the first nine months of 2006 was $21,899 as compared to $22,512 for the same period in 2005. This is a decrease of $613, or 2.7%. The net interest margin was 3.86% for the nine months ended September 30, 2006, compared to 4.09% for the nine months ended September 30, 2005.

The yield on average earning assets was 6.47% for the first nine months of 2006 as compared to 5.78% for the same period last year. The yield on earning assets was up 69 basis points, and the yield on average portfolio loans was up 73 basis points for the first nine months 2006 as compared to the same period in 2005. The yield on the loan portfolio was 7.14% for the first nine months of 2006 compared to

21

6.41% for the same period 2005. The first nine months of the year continued to experience competitive pricing pressures on new and renewing loans and a flat yield curve. The flat yield curve materially impacted the pricing and repricing of intermediate term installment and commercial loans. The cost of interest-bearing liabilities was 3.02% in the first nine months of 2006 as compared to 2.02% for the same period 2005. Higher rates impacted the cost of all components of interest-bearing liabilities. Compounding this was a shift of existing noninterest bearing demand and interest-bearing demand deposits to money market accounts, consumer time deposits and the Corporation’s commercial sweep repurchase accounts.

Average earning assets increased $21,756, or 3.0%, to $758,102 for the first nine months of 2006 as compared to $736,346 for the first nine months of 2005. Overall, average portfolio loans increased $13,764, or 2.4%, over the same period 2005. The increase was primarily in commercial loans which averaged $367,958 for the nine months ending September 30, 2006 as compared to $355,022 for the same period 2005. In addition, home equity lines of credit, and installment loans increased by 3.0% and 10.4%, respectively, while real estate mortgage loans decreased $8,587, or 9.6%.

Average interest-bearing liabilities increased $35,608, or 5.8%, to $654,823 for the first nine months of 2006 as compared to $619,215 for the first nine months of 2005. Historically, interest-bearing demand and savings accounts have provided a stable low-cost source of funds for the Corporation. However, on an average balance basis, these two sources declined $14,970, or 8.0%, in the first nine months of 2006 to $171,901 from $186,871 at September 30, 2005. In general these accounts migrated to money market accounts and to consumer time deposits. These two categories increased $12,375 and $34,260 respectively, as compared to the first nine months of 2005. In some cases, this migration increased the cost of these existing accounts by more than 300 basis points. The Corporation was also somewhat more dependent on wholesale funding in the first six months of 2006, but has become less so during the third quarter. Wholesale funding includes brokered time deposits, public time deposits, short-term borrowings and FHLB borrowings. These funding sources averaged $170,239 for the period ended September 30, 2006 and had an average cost of 4.32%. In the first nine months of 2005, they averaged $66,296, and had an average cost of 3.06%. The cost of public time deposits and short-term borrowings are particularly sensitive to short-term national market rates because of their limited duration.

Table 1 displays the components of net interest income for the three and nine months ended September 30, 2006 and 2005. Rates are computed on a tax equivalent basis and nonaccrual loans are included in the average loan balances.

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Table 1: Condensed Consolidated Average Balance Sheets

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

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

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

24

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

25

	Nine Months Ended September 30,
	Increase (Decrease) in Interest Income/Expense 2006 and 2005
	Volume			Rate			Total
	(Dollars in thousands)
U.S. Govt agencies and corporations	$	338		$	600		$	938
State and political subdivisions		(37	)		28			(9	)
Federal funds sold and short-term investments		23			(11	)		12
Commercial loans		714			2,565			3,279
Real estate mortgage loans		(399	)		(29	)		(428	)
Home equity lines of credit		103			708			811
Purchased installment loans		213			8			221
Installment loans		48			(55	)		(7	)
Total Interest Income		1,003			3,814			4,817
Interest-bearing demand		1			288			289
Savings deposits		(34	)		14			(20	)
Money market accounts		263			1,007			1,270
Consumer time deposits		916			1,280			2,196
Brokered time deposits		390			302			692
Public time deposits		171			719			890
Short-term borrowings		80			193			273
FHLB advances		(307	)		147			(160	)
Total Interest Expense		1,480			3,950			5,430
Net Interest Income (FTE)	$	(477	)	$	(136	)	$	(613	)

Interest income increased $4,817 for the first nine months of 2006 as compared to the same period 2005. 79.2% of this growth in interest income was due to rate increases. For the same period, interest expense increased $5,430, with 72.7% of the increase attributable to rate increases. While rising rates remain a benefit to the Corporation, competitive margin pressure and stiff competition in our markets resulted in a $136 reduction in rate as a result of rising rates. The deposit mix changes in the first nine months as compared to the same period 2005 resulted in a $477 reduction in net interest income due to volume decreases. These factors have resulted in a net decline in net interest income (FTE) of $613.

     Noninterest Income

Table 3: Details on Noninterest Income

	Three Months Ended September 30,					Nine Months Ended September 30,
	2006		2005			2006		2005
	(Dollars in thousands)					(Dollars in thousands)
Investment and trust services	$	482	$	555		$	1,537	$	1,627
Deposit service charges		1,224		1,152			3,334		3,112
Other service charges and fees		504		490			1,444		1,431
Mortgage banking revenue		—		242			—		967
Income from bank owned life insurance		187		117			474		426
Other income		56		83			160		337
Total fees and other income		2,453		2,639			6,949		7,900
Securities gains, net		—		—			—		174
Gains on sale of loans		—		—			—		132
Gains on sale of other assets		—		(31	)		2		(32	)
Total noninterest income	$	2,453	$	2,608		$	6,951	$	8,174

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Three Months Ended September 30, 2006 as compared to the Three Months Ended September 30, 2005

Noninterest income for the three months ended September 30, 2006 was $2,453 or a decrease of $155 from the same period 2005. The third quarter of 2005 included mortgage banking revenue of $242 from the operations of LNB Mortgage, LLC, which was closed during the fourth quarter of 2005. Deposit service charges and electronic banking fees increased $72, or 6.25% over the third quarter 2005 as a result of growth in the number of new consumer checking accounts and aggressive sales and marketing efforts this year. Income from deposit service charges has consistently improved during 2006 with an increase of 18% between the first and second quarter, and 7.2% between the second and third quarter 2006. Income from bank owned life insurance increased $70, or 59.8% over the third quarter of 2005.

Nine Months Ended September 30, 2006 as compared to the Nine Months Ended September 30, 2005

Noninterest income was $6,951 for the nine months ended September 30, 2006, a decrease of $1,223 as compared to the same period 2005. Investment and trust services for the first nine months of 2006 decreased $90, or 5.5% from the first nine months of 2005. This revenue is dependent upon the performance of the S&P 500 index and is impacted by competitive pressures. Deposit service charges increased $222 or 7.1% over the same period 2005. The first nine months of 2006 produced approximately $338 more in overdraft fees than the first nine months 2005. This was offset by a decrease in demand deposit account service charges related to business of $62. Management attributes this to the growth in the number of new consumer checking accounts which increased 25% from the first nine months of 2005 and aggressive sales and marketing efforts this year. The Corporation, however, experienced weaker business account growth during the first nine months of 2006 compared to the first nine months of 2005. During the fourth quarter 2005, the operations of LNB Mortgage, LLC were closed. This eliminated the type of mortgage fees that had been generated by LNB Mortgage, LLC in the past, resulting in a $967 decline in mortgage banking revenue in the first nine months of 2006 as compared to the same period in 2005. Income from bank owned life insurance (BOLI) increased $48 or 11.3% in the first nine months of 2006 from the same period in 2005. Other income was $418 for the first nine months of 2006 as compared to $615 for the same period 2005, a decrease of 32.0%. The first nine months of 2005 included $86 of other income attributable to commercial loan placement fees; there were none of these fees during the first nine months 2006. There were no sales of loans and securities which resulted in a gain during the first nine months of 2006. During the same period 2005, security gains were $174, and gains of $132 were recorded for the sale of two commercial loans. This was offset by a net loss on the sale of vehicles and other fixed assets of $32 during the first nine months of 2005.

     Noninterest Expense

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Table 4: Details on Noninterest Expense

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

Three Months Ended September 30, 2006 as compared to the Three Months Ended September 30, 2005

Noninterest expense increased $515, or 7.6%, for the third quarter of 2006 from the same period 2005. This increase was primarily in salaries and employee benefit, net occupancy and marketing and public relations expense. These expenses relate mostly to efforts to make investments expanding the Corporation’s presence in high growth areas, including expenses related to the Corporation’s soon to be opened Chestnut Commons branch in Elyria, the recent opening of the North Ridgeville office, and the addition of new banking associates in these offices, as well as in the Corporation’s Cuyahoga County office.

Salaries and benefits during the third quarter of 2006 were $3,770 as compared to $3,414 for the same quarter 2005. The increase in salary expense reflects the addition of sales personnel related to market expansion into Cuyahoga County in June as well as personnel for the two new branches in Elyria and North Ridgeville described above.

Net occupancy expense for the third quarter of 2006 increased $82, or 20.4%, over the same period 2005. During the third quarter of 2006, the North Ridgeville office was opened at a monthly rental of $12. In addition, facilities maintenance increased $25 and real estate taxes increased $8 for the third quarter of 2006 in comparison to the same period in 2005.

Electronic banking expense increased $24, or 17.6%, in the third quarter of 2006, in comparison to the same period in 2005. Income from electronic banking also increased in the third quarter by 5.5% over the same period last year.

Nine Months Ended September 30, 2006 as compared to the Nine Months Ended September 30, 2005

Noninterest expense was $21,679 for the nine months ended September 30, 2006 as compared to $22,907 for the same period 2005. This is a decrease of $1,228 or 5.36%. During the fourth quarter 2005, the Corporation closed the operations of LNB Mortgage, LLC as a separate business entity and absorbed mortgage lending into the operations of the Bank. As a result, $1,723 of operating expense

28

which was present in the first nine months of 2005 was no longer a factor with respect to noninterest expense in the first nine months of 2006.

Salaries and employee benefits during the first nine months of 2006 decreased $667 or 5.7% from the same period 2005. Several items were present during the period ended September 30, 2005 which did not affect the same period 2006, including LNB Mortgage, LLC salaries and employee benefits of $816. In addition personnel were added as a result of the initiatives related to market expansion into eastern Lorain County and into Cuyahoga County.

Net occupancy expense increased $45, or 3.3%, for the nine months ended September 30, 2006 as compared to the same period 2005. This was primarily attributable to expansion into Cuyahoga County in June and the addition of the North Ridgeville office, and increased real estate taxes and facilities maintenance costs associated with the addition of facilities. This was somewhat offset by the elimination of expenses related to LNB Mortgage, LLC.

Marketing and public relations expense was $1,069 and $863 for the first nine months of 2006 and 2005, respectively. This is an increase of $206, or 23.9%. This was primarily the result of increased media advertising for deposits and higher production costs, as well as promotion of new facilities.

Telecommunications expense decreased $359, or 38.4%, for the first nine months of 2006 as compared to the same period 2005. During 2004 and 2005, the Bank upgraded of its voice and data telecom systems to provide enhanced service and reliability. All redundant expenses related to this project were eliminated in 2006.

Ohio Franchise tax increased $75, or 11.8%, over the first nine months of 2005. This is an equity based tax paid by the Corporation and its subsidiaries. In 2006, the Bank and its subsidiary, North Coast Community Development Corporation, are paying higher franchise taxes based on equity accumulation.

Electronic banking expense was $466 and $400 for the first nine months of 2006 and 2005, respectively. This is an increase of $66, or 16.5%. This increase is primarily the result of increased fees associated with bank-issued debit cards as a result of the transaction growth experienced in the number of new checking accounts.

Other expense decreased $554, or 20.6%, for the first nine months of 2006 as compared to the first nine months of 2005. Included in this decrease was a single charge-off for an ATM loss of $82 during the first quarter 2005. Included in other noninterest expense for 2005 was a goodwill impairment expense of $311 for LNB Mortgage, LLC.

     Income taxes

The Corporation recognized tax expense of $475 during the third quarter 2006 and $857 for the same period 2005. The Corporation’s effective tax rate was 25.1% for the third quarter 2006 as compared to 28.4% for the same period 2005. Income tax expense of $1,570 and $1,948 was recognized for the nine month period ended September 30, 2006 and 2005, respectively. The effective tax rate for the nine months ended September 30, 2006 and 2005 was 25.8% and 29.8%, respectively. New market tax credit being generated by North Coast Community Development was at a higher level during the first nine months of 2006 as compared to the first nine months of 2005.

29

Balance Sheet Analysis

     Overview

The Corporation’s total assets at September 30, 2006 were $831,544 as compared to $801,121 at December 31, 2005. This is an increase of $30,423, or 3.8%. Total securities increased $8,158, or 5.3%, over December 31, 2005. Portfolio loans increased $18,141, or 3.1%, over December 31, 2005. Total deposits at September 30, 2006 were $688,488 as compared to $640,216 at December 31, 2005. Total interest-bearing liabilities were $668,589 as compared to $639,131 at December 31, 2005.

     Securities

The distribution of the Corporation’s securities portfolio at September 30, 2006 and December 31, 2005 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 42.0% U.S. Government agencies, 48.4% U.S. agency mortgage backed securities, and 7.6% municipal securities. Other securities, consisting of Federal Home Loan Bank stock and Federal Reserve Bank stock represent 2% of the portfolio. At September 30, 2006 the securities portfolio had a temporary unrealized loss of $3,320, representing 2.0% of the total amortized cost of the Bank’s securities. During the third quarter of 2006, portfolio activity consisted of purchases of U.S. agency and mortgage backed securities of $6,342. U.S. Government agency securities principal maturities or calls were $2,000.

     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

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

30

Total loans at September 30, 2006 were $609,152. This is an increase of $18,141, or 2.9% over December 31, 2005. At September 30, 2006, commercial loans represented 60.6% of total loans. Commercial loans held for sale at September 30, 2006 were $2,116. Consumer loans, consisting of installment loans and home equity loans, comprised 18.1% 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. The Corporation also purchases consumer loans from another institution in the Cleveland area consisting primarily of high quality car loans.

Real estate mortgages comprise 14.3% of total portfolio loans. At September 30, 2006, mortgage loans had increased $148 in comparison to December 31, 2005. At March 31, 2006 and June 30, 2006, mortgage loans were lower than those reported at December 31, 2005. The Corporation has begun to originate new real estate mortgage loans for the portfolio and this portfolio has begun to grow. This growth is expected to continue in future quarters.

     Deposits

Table 6: Deposits

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

Total deposits at September 30, 2006 were $688,488, an increase of $48,272, or 7.0% over December 31, 2005. There has been a migration from demand and other noninterest bearing accounts, as well as savings accounts to money market and time deposits during the first nine months of 2006. Core deposits, which consist of deposits other than wholesale deposits were $577,257 at September 30, 2006. Wholesale deposits consisting of brokered time deposits and public time deposits were $111,231 at September 30, 2006.

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 September 30, 2006, the Corporation had $17,975 of short-term borrowings. This was a decrease of $14,641, or 44.9%, from December 31, 2005. Long-term borrowings for the Corporation were at $50,088, a decrease of $3,808, or 7.1%, from December 31, 2005. Maturities of long-term

31

borrowings are presented in Note 10 to the Consolidated Financial Statements contained within this Form 10-Q.

     Regulatory Capital

The Corporation continues to maintain a strong capital position. Total shareholders’ equity was $68,571 at September 30, 2006. This is a increase of $165 from December 31, 2005. Net income increased total shareholders’ equity by $1,419 and $4,506 for the three and nine months ended September 30, 2006, respectively. The factors decreasing total shareholders’ equity in the first nine months of 2006 were cash dividends payable to shareholders of $3,485, a $1,443 decrease in accumulated other comprehensive loss resulting from a decrease in the fair value of available for sale securities as interest rates have increased, a $36 increase for share-based payment arrangements, net of tax, and the repurchase of 77,500 shares of Corporation common stock at a cost of $1,443. The Corporation held 328,194 shares of common stock as treasury stock at September 30, 2006, 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 September 30, 2006 and December 31, 2005, 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 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 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 September 30, 2006, the Corporation had repurchased an aggregate of 202,500 shares under this program.

     Contractual Obligations

Contractual obligations and commitments of the Corporation at September 30, 2006 are presented as follows. Benefit payments are calculated based on annual actuarial calculations and are presented in the Corporation’s 2005 Form 10-K Annual Report on page 31, and are incorporated herein by reference.

Table 7: Contractual Obligations

			After		After
			12 months but		36 months but
	Within 12		within 36		within 60		After
	months		months		months		5 years		Total
	(Dollars in thousands)
Short-term borrowings	$	17,975	$	—	$	—	$	—	$	17,975
FHLB advances		30,000		20,000		—		88		50,088
Operating Leases		994		1,762		1,149		1,590		5,495
Severance Payments		129		378		131		99		737
Total	$	49,098	$	22,140	$	1,280	$	1,777		74,295

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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. Fraud, legal and compliance issues, processing errors, technology and the related disaster recovery, and breaches in business continuation and internal controls are types of operational risks. Changes in interest rates affecting net interest income are considered interest rate risks. Market risk is the risk that a financial institution’s earnings and capital or its ability to meet its business objectives are 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.

Credit quality was stable for the three and nine month periods ended September 30, 2006 as compared to the same periods 2005. General economic conditions have contributed to improving credit quality, but a more stringent and defined credit review policy has been the driving force for the stable credit quality.

     Nonperforming Assets

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.

33

Nonperforming loans at September 30, 2006 were $7,023, an increase of $524 from December 31, 2005. Of this total, commercial loans were $5,633 as compared to $5,129 at December 31, 2005. 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 September 30, 2006, specific reserves on these loans totaled $613 as compared to $356 specifically reserved at December 31, 2005. Potential problem loans are loans identified on Management’s classified credits list which include both loans that Management has concern with the borrowers’ ability to comply with the present repayment terms and loans that Management is actively monitoring due to changes in the borrowers financial condition. At September 30, 2006, potential problem loans were $14,562 as compared to $14,440 at December 31, 2005.

Other foreclosed assets were $1,702 as of September 30, 2006 an increase of $1,270 from December 31, 2005. The $1,702 is comprised of nine commercial properties totaling $1,311 and four 1-4 family residential properties totaling $391. This compares to $211 in 1-4 family residential properties with the remainder in commercial properties as of December 31, 2005.

Table 8 sets forth nonperforming assets for the period ended September 30, 2006 and December 31, 2005.

Table 8: Nonperforming Assets

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

     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 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, 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 and nine month periods ended September 30, 2006 and 2005.

34

Table 9: Analysis of Allowance for Loan Losses

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

The allowance for loan losses at September 30, 2006 was $6,304 or 1.04% of outstanding loans, compared to $7,890 or 1.33% of outstanding loans at September 30, 2005. The allowance for loan losses was 90% and 106% of nonperforming loans at September 30, 2006 and 2005, respectively. In 2005, substandard loans totaling $5.7 million were sold. As a result, loans charged-off in 2005 include $1,173 from the sale of these loans.

Net charge-offs for the three months ended September 30, 2006 were $864, as compared to $203 for the three months ended September 30, 2005. Net charge-offs for the nine months ended September 30, 2006 were $1,233, as compared to $594 for the nine months ended September 30, 2005. Annualized net charge-offs as a percent of average loans for the third quarter and first nine months of 2006 were .57% and .28% respectively, as compared to .14% and .14% respectively, for the same periods in 2005. Charge-offs in the third quarter of 2006, as well as for the nine months ended September 30, 2006, were higher than the Corporation expected at the end of the second quarter of 2006, but reflect the resolution of four commercial loans previously identified as substandard.

Direct deposit account overdrafts were charged to the allowance for loan losses for the first nine months of 2006. These charges were previously expensed directly to noninterest expense. The net charge off of these accounts for the three and nine month periods ended September 30, 2006 were $65 and $78, respectively. The net overdraft charge-offs expensed to noninterest expense for the three month period

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ended September 30, 2005 was $31. There were $23 of net overdraft charge-offs for the nine month period ended September 30, 2005.

The provision charged to expense was $600 for the three months ended September 30, 2006 and $300 for the same period 2005. The provision for loan losses for the three and nine month periods ended September 30, 2006 was, in the opinion of management, adequate when balancing the charge-off trends, the level of nonperforming loans and the lower level of potential problem loans at September 30, 2006. The resulting allowance for loan losses is, in the opinion of management, sufficient given its analysis of the information available about the portfolio at September 30, 2006. 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 its predictive power 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 September 30, 2006, 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 increase $428, or 5.85%, and in a -200 basis point shock, net interest income would decrease $451, or 6.16%. 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. At September 30, 2006, this analysis indicated that a +200 basis point change in rates would reduce the value of the Corporation’s equity by 7.98%, while a -200 basis point change in rates would increase the value of the Corporation’s equity by 9.44%.

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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 September 30, 2006. 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 September 30, 2006 were: (1) effective in ensuring that material information relating to the Corporation and its subsidiaries is made known to the Corporation’s management including the chief executive officer and chief financial officer, by others within the entities as appropriate to allow for timely decisions regarding required disclosure, 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 September 30, 2006 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

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

Issuer Purchases of Equity Securities

The following table summarizes share repurchase activity for the quarter ended September 30, 2006.

					(c)		(d)
					Total number of		Maximum number
					shares (or units)		of shares (or units)
	(a)				purchased as		that may yet be
	Total number of		(b)		part of publicly		purchased under
	shares (or units)		Average price paid		announced plans		the plans
Period	purchased		per share (or unit)		or programs		or programs
July 1 - 31, 2006		—		n/a		—		139,500
August 1 - 31, 2006		10,000	$	17.85		10,000		129,500
September 1 - 30, 2006		—		n/a		—		129,500
Total		10,000	$	17.85		10,000		129,500

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

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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 September 30, 2006, the Corporation had repurchased an aggregate of 202,500 shares under this program.

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Item 6. Exhibits.

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: November 8, 2006	/s/ Terry M. White
	Terry M. White
	Chief Financial Officer
	(Duly Authorized Officer, and Principal Financial Officer)
Date: November 8, 2006	/s/ Sharon L. Churchill
	Sharon L. Churchill, CPA Controller
	(Duly Authorized Officer, and Principal Accounting Officer)

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LNB Bancorp, Inc.
Exhibit Index
Pursuant to Item 601 of Regulation S-K

Exhibit
31(i)(a)	Chief Executive Officer Rule 13a -14(a)/15d -14(a) Certification.
31(i)(b)	Chief Financial Officer Rule 13a -14(a)/15d -14(a) Certification.
32(a)	Certification pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32(b)	Certification pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

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