Summary of LNB BANCORP INC

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Introduction
The Corporation competes in the Cleveland, Ohio market as defined by the Federal Reserve Bank. This market includes most of northeast Ohio. Prior to 2006, the Corporation's presence was historically limited to Lorain County. The Corporation's strategy has been to strengthen its commitment for better customer service and visibility by expanding its market presence in northeast Ohio. The Corporation was successful in 2006 and 2007 in broadening its footprint into Cuyahoga and Summit Counties.
The financial crisis of 2008 proved to be unprecedented in the history of not only the local and national economy, but the global economy as well. Described as the worst since the Great Depression, the economic environment of 2008 posed new and unprecedented challenges in the form of regulatory initiatives, margin and cost pressures, and customer demands. In an effort to stimulate the economy, the Federal Open Market Committee (FOMC) cut federal fund rates by 350 basis points during the year. With declining home values and increasing unemployment, the Corporation was negatively impacted, as with all financial institutions, by asset quality issues. The Corporation found it prudent to take additional loan loss provisions during the year, as well as the devaluation of some of its property acquired through foreclosure. While dealing with these difficult challenges, the Corporation continued to provide competitive interest rates on both loan and deposit products to customers, while maintaining a healthy balance sheet, capital position and liquidity. Net interest income increased over the prior year, and the Corporation reported net income in excess of $3.3 million for 2008.
The Federal Reserve, together with the U.S. Treasury and the FDIC, took a variety of extraordinary actions in 2008 aimed at, among other things, alleviating liquidity, capital and other balance sheet pressures of financial institutions. The EESA was enacted in October 2008 in an attempt to restore liquidity and stability to the financial system through the purchase of up to $700 billion of certain financial instruments. When the EESA was signed into law, the FDIC raised the FDIC standard maximum deposit insurance coverage limit for all deposit accounts from $100,000 to $250,000, the same amount of coverage previously provided for self-directed retirement accounts, on a temporary basis until December 31, 2009, absent further Congressional action. In accordance with the provisions of the EESA, the U.S. Treasury created its Capital Purchase Program and announced its intention to make $250 billion of capital available to U.S. financial institutions by purchasing preferred stock issued by such institutions.
On December 12, 2008, the Corporation completed a $25,223,000 capital raise as a participant in the U.S. Treasury TARP Capital Purchase Program. The Company issued to the U.S. Treasury (i) 25,223 shares of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series B, without par value, with a liquidation preference of $1,000 per share ("series B preferred stock"), and
(ii) a warrant to purchase 561,343 of the Company's common shares, without par value, at an exercise price of $6.74 per share, subject to certain anti-dilution and other adjustments. The Corporation expects to use the TARP funds to continue to grow the Corporation's balance sheet through lending in the communities the Corporation serves, position the Corporation to participate in the acquisition of weaker organizations when opportunities are presented, and ensure that the Corporation has sufficient capital to withstand the negative impact on its balance sheet of the uncertain economic environment in Northeast Ohio. For additional information about the Corporation's participation in the Capital Purchase Program, see Note 14 to the Consolidated Financial Statements.

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Key Indicators and Material Trends (Dollars in thousands) Net interest income grew 8.32% to $32,139 in 2008 from $29,670 in 2007. Since the Corporation is highly dependent on net interest income for its revenue, minimizing net interest margin compression is a very important factor in the Corporation's financial performance. The net interest margin (FTE) for 2008 was 3.23 percent versus 3.39 percent for 2007. The Corporation experienced solid growth in its loan portfolios during 2008 with an increase in average loans of 11.62% over 2007. Average interest-bearing deposits in 2008 also grew 11.64% in comparison to 2007. The spread between the yield on portfolio loans and the cost of interest-bearing deposits declined 16 basis points during 2008. Generation of noninterest income is important to the long-term success of the Corporation. Fee income from deposit service charges and electronic banking continued to increase during 2008 in part due to the Corporation's continued aggressive sales and marketing efforts, which focus on strengthening recurring sources of noninterest income. Noninterest income from investment and trust services declined in 2008 primarily as a result of the declining stock market. Asset quality is one key indicator of financial strength, and the Corporation continues to manage credit risk aggressively. While net charged-off loans in 2008 increased 5.08% over 2007, the ratio to total loans remained at 0.37% for both years. The declining housing market and general economic decline of 2008 continued to impact the Corporation's commercial and residential real estate portfolios. Total delinquency as a percentage of total loans increased from 2.26% at year-end 2007 to 3.76% at December 31, 2008. In 2008, the level of nonperforming loans increased over the prior year from $10,831 at December 31, 2007 to $19,592 at December 31, 2008, primarily due to an increase in nonperforming construction and development loans. As a result, the Corporation increased the allowance for loan losses to $11,652 during 2008, increasing the allowance to 1.44% of total loans.
Since the ability to generate deposits is a key indication of the Corporation's ability to meet its liquidity needs and fund profitable asset growth, it is a significant measure of the success of the Corporation's business plan. As measured by the FDIC at June 30, 2008, the Corporation's market share of deposits in Lorain County grew to 21.2% from 19.5% in 2007. This compares to 17.8% five years ago. The Corporation continues to maintain strong market share in the city markets of Lorain, Elyria and Amherst, where the Corporation has a long-time presence, and is pleased with the performance of its newer offices in the eastern parts of Lorain county, as well as Summit county. Results of Operations (Dollars in thousands except per share data) Summary of Earnings
Net income in 2008 was $3,396. Net income available to common shareholders was $3,305, or $0.45 per diluted common share, after preferred share dividends and amortization. Net income in 2007 was $5,512 or $.79 per diluted common share, and $5,424, or $.84 per diluted common share in 2006. Earnings per diluted common share in 2008 were affected by the dividends and discount amortization on preferred shares, as well as the increased loan loss provision discussed below. On December 12, 2008, in connection with its participation in the Capital Purchase Program, the Corporation issued 25,223 fixed rate cumulative perpetual Series B Preferred Shares. In conjunction with the issuance of the Preferred Shares, the Corporation also issued a warrant to purchase 561,343 common shares. No shares of series B preferred stock, or any other class of preferred stock, were outstanding during the years ended December 31, 2007 and 2006. Earnings per diluted share in 2007 were affected by the issuance of 851,990 common shares in May, 2007 as part of the acquisition of Morgan Bancorp.

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As the local and national economic environments progressively weakened during 2008, asset quality issues negatively impacted the Corporation's overall performance. The Corporation recorded a loan loss provision of $6,809 in 2008, in light of the continuing unpredictability of the economy, the continued decline in real estate values and the credit quality issues inherent in the portfolio. The provision for loan loss was $2,255 in 2007 and $2,280 in 2006. While earnings were impacted by a significant loan loss provision during 2008, net interest income reflected solid revenue increases during the year. In 2008, net interest income increased 8.32% to $32,139 from $29,670 in 2007. Average portfolio loans increased from $698,401 at December 31, 2007 to $779,569 at December 31, 2008. The Company experienced solid growth in commercial loans, home equity lines of credit and installment loans during 2008. Average portfolio balances at December 31, 2008 increased 9.45% in commercial loans, 19.08% in home equity lines of credit and 25.04% in installment loans, in comparison to average portfolio balances at December 31, 2007. The overall yield on portfolio loans in 2008 was down 95 basis points from 2007 as a result of the steadily falling Treasury yield curve. Average interest-bearing deposits at December 31, 2008 were up 11.64% in comparison to average interest-bearing deposits at December 31, 2007. The cost of deposits was down 78 basis points from 2007. The resulting net interest margin (FTE) was 3.23% for 2008 versus 3.39% for 2007. Noninterest income in 2008 was $12,459, an increase of $960 over 2007. The largest component of noninterest income is deposit and other service charges and fees. While deposit service charges increased slightly in 2008 over the prior year, other service charges and fees increased $371. Other service charges and fees include electronic banking and merchant service fees. Noninterest income derived from trust and investment management services declined during 2008 as compared to 2007. Many of the fees earned by the trust department are market based, and have suffered as a result of the declining stock market. Noninterest income in 2008 included two one-time noninterest income items. During 2008, $216 was received from the redemption of a bank owned life insurance policy. Also, as a result of a membership interest, the Corporation received stock from an IPO completed by VISA and a subsequent mandatory partial redemption of stock in the amount of $460 which was recorded as part of noninterest income for 2008. During 2008, available-for-sale securities which were due to be called or mature during the year were assessed and, in some cases, sold and replaced with purchases of primarily mortgage-backed securities and some agency securities. Because of the falling interest rate environment, the interest rates available on mortgage-backed securities made these securities more attractive to holders than agency securities. Prior to the decline in interest rates, agency securities had been producing a similar yield to mortgage-backed securities, but without the prepayment option and the longer term to maturity. The Corporation sold its available-for-sale securities prior to call or maturity in order to reinvest the proceeds in other securities before any further interest rate cuts reduced the yield on securities available for purchase. The net gain recorded on the sale of available-for-sale securities during 2008 was $538, including $2 in unrealized gain on trading securities.
Noninterest expense was $34,281 in 2008, compared to $31,751 in 2007. Two significant increases in expense in 2008, as compared to 2007, were FDIC assessments in connection with the FDIC's increase of the standard maximum deposit insurance coverage limit, and expense related to other real estate owned. These expenses increased $633 and $485, respectively, compared to 2007. The increase in other real estate owned expense is primarily the result of the revaluation of certain properties due to the decline in real estate market values during 2008. Included in noninterest expense during 2008 was $572 related to the special shareholders meeting requested by a shareholder of the Corporation. This affected third party services, marketing and public relations, and postage expenses.

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As a percent of average assets, net income in 2008 represents a return of .31%. This compares to .58% and .66% in 2007 and 2006, respectively. Return on assets is one measurement of operating efficiency. As a percent of average shareholders' equity this represents a return of 4.09% as compared to 7.06% and 7.89% in 2007 and 2006, respectively. Return on shareholders' equity is a measure of how well the Corporation employs leverage to maximize the return on the capital it employs.
2008 versus 2007 Net Interest Income Comparison Net interest income is the difference between interest income earned on interest-earning assets and the interest expense incurred on interest-bearing liabilities. The Corporation reviews net interest income on a fully taxable equivalent basis, which presents interest income with an adjustment for tax-exempt interest income on an equivalent pre-tax basis assuming a 34% statutory Federal tax rate. These rates may differ from the Corporation's actual effective tax rate. Net interest income is affected by changes in the volumes, rates and the composition of interest-earning assets and interest-bearing liabilities. The net interest margin is net interest income as a percentage of average earning assets.
Table 1 summarizes net interest income and the net interest margin for the three years ended December 31, 2008.
Table 1: Net Interest Income

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

Yields
Table 2 reflects the detailed components of the Corporation's net interest income for each of the three years ended December 31, 2008. Rates are computed on a tax equivalent basis and nonaccrual loans are included in the average loan balances.
The Corporation's net interest income on a fully tax equivalent basis was $32,578 in 2008, which compares to $30,052 in 2007. This follows an increase of $1,176, or 4.07% between 2007 and 2006. The net interest margin, which is determined by dividing tax equivalent net interest income by average earning assets, was 3.23% in 2008, or a decrease of 16 basis points from 2007. This follows a decrease of 39 basis points in 2007 as compared to 2006.

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Table 2: Condensed Consolidated Average Balance Sheets Interest, Rate, and Rate/ Volume differentials are stated on a Fully-Tax Equivalent (FTE) Basis.

                                                                                               Year ended December 31,
                                                  2008                                                  2007                                                  2006
                              Average Balance        Interest         Rate          Average Balance        Interest         Rate          Average Balance        Interest         Rate
                                                                                               (Dollars in thousands)

Assets:
U.S. Govt agencies and
corporations, Federal
Home Loan Bank stock and
Federal Reserve Bank
stock                        $         194,633       $   8,786          4.51 %     $         164,876       $   7,873          4.78 %     $         150,444       $   5,901          3.92 %
State and political
subdivisions                            18,697           1,121          6.00                  14,277             875          6.13                  10,599             671          6.33
Federal funds sold and
short-term investments                  15,667             451          2.88                   9,278             394          4.25                   1,737              77          4.43
Commercial loans                       437,844          28,082          6.41                 400,045          29,805          7.45                 369,512          27,851          7.54
Real estate mortgage
loans                                   98,397           5,884          5.98                 100,161           6,143          6.13                  83,790           5,175          6.18
Home equity lines of
credit                                  89,847           4,243          4.72                  75,453           5,727          7.59                  66,926           5,058          7.56
Purchased installment
loans                                        -               -           n/a                       -               -           n/a                  40,658           1,901          4.68
Installment loans                      153,481          10,200          6.65                 122,742           8,327          6.78                  40,233           2,877          7.15

Total Earning Assets         $       1,008,566       $  58,767          5.83 %     $         886,832       $  59,144          6.67 %     $         763,899       $  49,511          6.48 %

Allowance for loan loss                 (9,732 )                                              (7,764 )                                              (6,478 )
Cash and due from banks                 20,520                                                20,855                                                22,266
Bank owned life
insurance                               15,560                                                15,112                                                14,316
Other assets                            47,585                                                42,748                                                25,632

Total Assets                 $       1,082,499                                     $         957,783                                     $         819,635


Liabilities and
Shareholders' Equity
Consumer time deposits       $         395,686       $  15,392          3.89 %     $         289,906       $  13,633          4.70 %     $         212,579       $   8,665          4.08 %
Public time deposits                    63,652           2,554          4.01                  69,804           3,635          5.21                  54,248           2,756          5.08
Brokered time deposits                  13,890             696          5.01                  36,497           1,905          5.22                  53,716           2,411          4.49
Savings deposits                        82,276             504          0.60                  80,513             486          0.60                  86,325             294          0.34
Interest-bearing demand                236,495           3,160          1.34                 232,691           5,876          2.53                 189,173           4,028          2.13
Short-term borrowings                   27,700             387          1.40                  26,334           1,088          4.13                  20,759             896          4.32
FHLB advances                           62,341           2,322          3.72                  37,088           1,555          4.19                  43,948           1,585          3.61
Trust preferred
securities                              20,778           1,174          5.65                  13,466             914          6.79                       -               -           n/a

Total Interest-Bearing
Liabilities                  $         902,818       $  26,189          2.90 %     $         786,299       $  29,092          3.70 %     $         660,748       $  20,635          3.12 %

Noninterest-bearing
deposits                                87,302                                                84,352                                                83,777
Other liabilities                        9,359                                                 9,090                                                 6,375
Shareholders' Equity                    83,020                                                78,042                                                68,735

Total Liabilities and
Shareholders' Equity         $       1,082,499                                     $         957,783                                     $         819,635

Net interest Income
(FTE)                                                $  32,578          3.23 %                             $  30,052          3.39 %                             $  28,876          3.78 %
Taxable Equivalent
Adjustment                                                (439 )       (0.04 )                                  (382 )       (0.04 )                                  (269 )       (0.04 )

Net Interest Income Per
Financial Statements                                 $  32,139                                             $  29,670                                             $  28,607

Net Yield on Earning
Assets                                                                  3.19 %                                                3.35 %                                                3.74 %

Average Balances
Average earning assets increased $121,734, or 13.73%, to $1,008,566 in 2008 as compared to $886,832 in 2007. Average loans increased $81,168, or 11.62%, to $779,569 in 2008 as compared to $698,401 in 2007. Loan growth in all areas of the portfolio except real estate mortgage loans contributed to the average increase of $81,168, with an increase in the commercial loan portfolio of $37,799, an increase in installment loans of $30,739, an increase in home equity loans of $14,394, which was primarily offset by a decrease of $1,764 in mortgage loans. The increase in average loans was primarily funded with $85,538 of deposit growth. During 2008, average consumer time deposits increased $105,780, which was primarily offset by a decrease in public time deposits of $6,152 as compared to 2007. Noninterest-bearing deposits increased in 2008 by $2,950, or 3.50%, and interest-bearing demand deposits grew $3,804, or 1.63%, as compared to 2007. The Bank uses FHLB advances and brokered time deposits as alternative wholesale funding sources. The use of alternative funding sources increased $4,012, or 4.02%, during 2008 in comparison to 2007. Brokered time deposits have become an important and

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comparably priced substitute for FHLB advances, and they require no collateralization as compared to FHLB advances which require collateral in the form of real estate mortgage loans and securities.
Rate/Volume
Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. Table 3 presents an analysis of increases and decreases in interest income and expense in terms of changes in volume and interest rates during the two years ended December 31, 2008. Changes that are not due solely to either a change in volume or a change in rate have been allocated proportionally to both changes due to volume and rate. The table is presented on a tax-equivalent basis.
Table 3: Rate/Volume Analysis of Net Interest Income (FTE)

                                                                                             Year Ended December 31,
                                               Increase (Decrease) in Interest Income/Expense                         Increase (Decrease) in Interest Income/Expense
                                                             in 2008 over 2007                                                       in 2007 over 2006
                                          Volume                    Rate                    Total                 Volume                   Rate                    Total
                                                                                              (Dollars in thousands)
U.S. Govt agencies and
corporations                          $        1,468          $           (555 )        $          913         $         649          $         1,323          $       1,972
State and political
subdivisions                                     271                       (25 )                   246                   234                      (30 )                  204
Federal funds sold and
short-term investments                          (335 )                     392                      57                   335                      (18 )                  317
Commercial loans                               1,975                    (3,698 )                (1,723 )               2,306                     (352 )                1,954
Real estate mortgage loans                      (106 )                    (153 )                  (259 )               1,011                      (43 )                  968
Home equity lines of credit                      532                    (2,016 )                (1,484 )                 645                       24                    669
Installment loans                              2,090                      (217 )                 1,873                 2,573                      976                  3,549

Total Interest Income                          5,895                    (6,272 )                  (377 )               7,753                    1,880                  9,633

Consumer time deposits                         8,049                    (6,290 )                 1,759                 3,313                    1,655                  4,968
Public time deposits                            (265 )                    (816 )                (1,081 )                 792                       87                    879
Brokered time deposits                        (1,178 )                     (31 )                (1,209 )                (720 )                    214                   (506 )
Savings deposits                                  11                         7                      18                   (38 )                    230                    192
Interest bearing demand                         (164 )                  (2,552 )                (2,716 )                 979                      869                  1,848
Short-term borrowings                             18                      (719 )                  (701 )                 243                      (51 )                  192
FHLB advances                                  1,112                      (345 )                   767                  (123 )                     93                    (30 )
Trust preferred securities                       608                      (348 )                   260                   914                        -                    914

Total Interest Expense                         8,191                   (11,094 )                (2,903 )               5,360                    3,097                  8,457

Net Interest Income (FTE)             $       (2,296 )        $          4,822          $        2,526         $       2,393          $        (1,217 )        $       1,176

The impact of balance sheet growth and changing rates can be seen in Table 3, which segments the change in net interest income into volume and rate components. Total interest income on a fully tax equivalent basis was $58,767 in 2008 as compared to $59,144 in 2007. This is a decrease of $377, or 0.64%. An increase of $5,895 due to volume was offset by a decrease of $6,272 due to rate, when comparing 2008 to 2007. Total interest expense was $26,189 in 2008 as compared to $29,092 in 2007. This is a decrease of $2,903, or 9.98%. Interest . . .