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, 2010

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 the registrant as specified on its charter)

Ohio (State of Incorporation)	34-1406303 (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. Yes þ   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o   No o

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

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

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

The number of common shares of the registrant outstanding on November 2, 2010 was 7,825,395.

LNB Bancorp, Inc.
Table of Contents

Part I — Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets September 30, 2010 (unaudited) and December 31, 2009	3
Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2010 and September 30, 2009	4
Consolidated Statements of Shareholders’ Equity (unaudited) for the nine months ended September 30, 2010 and September 30, 2009	5
Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2010 and September 30, 2009	6
Notes to the Consolidated Financial Statements (unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3. Quantitative and Qualitative Disclosures about Market Risk	36
Item 4. Controls and Procedures	38
Part II — Other Information	38
Item 1. Legal Proceedings	38
Item 1A. Risk Factors	39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 6. Exhibits	39
EX-31.1
EX-31.2
EX-32.1
EX-32.2

2

Part I — FINANCIAL INFORMATION

Item 1. Financial Statements.

Consolidated Balance Sheets

	September 30, 2010			December 31, 2009
	(unaudited)
	(Dollars in thousands except share amounts)
ASSETS
Cash and due from banks (Note 3)	$	20,524		$	16,318
Federal funds sold and short-term investments		62,550			10,615
Cash and cash equivalents		83,074			26,933
Interest-bearing deposits in other banks		347			359
Securities: (Note 5)
Trading securities, at fair value		—			8,445
Available for sale, at fair value		214,920			247,037
Total securities		214,920			255,482
Restricted stock		5,741			4,985
Loans held for sale		4,676			3,783
Loans: (Note 6)
Portfolio loans		795,909			803,197
Allowance for loan losses		(17,197	)		(18,792	)
Net loans		778,712			784,405
Bank premises and equipment, net		9,548			10,105
Other real estate owned		2,206			1,264
Bank owned life insurance		16,951			16,435
Goodwill, net (Note 4)		21,582			21,582
Intangible assets, net (Note 4)		903			1,005
Accrued interest receivable		3,740			4,072
Other assets		14,202			19,099
Total Assets	$	1,156,602		$	1,149,509
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits (Note 7)
Demand and other noninterest-bearing	$	112,721		$	118,505
Savings, money market and interest-bearing demand		326,674			305,045
Certificates of deposit		539,636			547,883
Total deposits		979,031			971,433
Short-term borrowings (Note 8)		1,491			1,457
Federal Home Loan Bank advances (Note 9)		42,502			42,505
Junior subordinated debentures (Note 10)		16,238			20,620
Accrued interest payable		1,718			2,074
Accrued taxes, expenses and other liabilities		4,279			7,279
Total Liabilities		1,045,259			1,045,368
Shareholders’ Equity
Preferred stock, Series A Voting, no par value, authorized 750,000 shares, none issued at September 30, 2010 and December 31, 2009.		—			—
Fixed rate cumulative perpetual preferred stock, Series B, no par value, $1,000 liquidation value, 25,223 shares authorized and issued at September 30, 2010 and December 31, 2009.		25,223			25,223
Discount on Series B preferred stock		(120	)		(131	)
Warrant to purchase common stock		146			146
Common stock, par value $1 per share, authorized 15,000,000 shares, issued 8,153,589 shares at September 30, 2010 and 7,623,857 at December 31, 2009.		8,154			7,624
Additional paid-in capital		39,442			37,862
Retained earnings		41,006			36,883
Accumulated other comprehensive income		3,584			2,626
Treasury shares at cost, 328,194 shares at September 30, 2010 and at December 31, 2009		(6,092	)		(6,092	)
Total Shareholders’ Equity		111,343			104,141
Total Liabilities and Shareholders’ Equity	$	1,156,602		$	1,149,509

See accompanying notes to consolidated financial statements.

3

Consolidated Statements of Income (unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(Dollars in thousands except share and per share amounts)
Interest and Dividend Income
Loans	$	10,740		$	11,536		$	32,112		$	34,507
Securities:
U.S. Government agencies and corporations		1,395			2,554			5,601			7,566
State and political subdivisions		246			261			737			760
Trading securities		—			88			49			334
Other debt and equity securities		72			65			202			183
Federal funds sold and short-term investments		10			19			30			52
Total interest and dividend income		12,463			14,523			38,731			43,402
Interest Expense
Deposits		2,554			4,326			8,279			13,829
Federal Home Loan Bank advances		319			351			953			1,131
Short-term borrowings		1			43			3			111
Junior subordinated debentures		217			225			648			721
Total interest expense		3,091			4,945			9,883			15,792
Net Interest Income		9,372			9,578			28,848			27,610
Provision for Loan Losses (Note 6)		2,076			11,067			6,294			15,360
Net interest income (loss) after provision for loan losses		7,296			(1,489	)		22,554			12,250
Noninterest Income
Investment and trust services		403			496			1,411			1,405
Deposit service charges		1,146			1,211			3,179			3,332
Other service charges and fees		792			766			2,412			2,108
Income from bank owned life insurance		171			213			515			540
Other income		86			52			248			216
Total fees and other income		2,598			2,738			7,765			7,601
Securities gains, net		—			88			38			674
Gains on sale of loans		264			341			651			963
Losses on sale of other assets, net		(28	)		(43	)		(73	)		(13	)
Gain on extinguishment of debt		2,210			—			2,210			—
Total noninterest income		5,044			3,124			10,591			9,225
Noninterest Expense
Salaries and employee benefits		3,898			3,610			11,727			11,130
Furniture and equipment		866			1,039			2,716			3,370
Net occupancy		579			571			1,775			1,785
Outside services		538			657			1,686			2,001
Marketing and public relations		256			228			828			767
Supplies, postage and freight		292			311			936			951
Telecommunications		200			208			623			596
Ohio franchise tax		274			232			836			689
FDIC assessments		568			743			1,653			2,032
Other real estate owned		95			89			247			263
Electronic banking expenses		237			209			659			598
Loan and collection expense		433			385			1,206			963
Other expense		532			455			1,527			1,432
Total noninterest expense		8,768			8,737			26,419			26,577
Income (loss) before income tax expense		3,572			(7,102	)		6,726			(5,102	)
Income tax expense (benefit)		842			(2,726	)		1,422			(2,559	)
Net Income (Loss)	$	2,730		$	(4,376	)	$	5,304		$	(2,543	)
Dividends and accretion on preferred stock		320			319			957			937
Net Income (Loss) Available to Common Shareholders	$	2,410		$	(4,695	)	$	4,347		$	(3,480	)
Net Income (Loss) Per Common Share (Note 2)
Basic	$	0.32		$	(0.64	)	$	0.59		$	(0.48	)
Diluted		0.32			(0.64	)		0.59			(0.48	)
Dividends declared		0.01			0.01			0.03			0.19
Average Common Shares Outstanding
Basic		7,514,935			7,295,663			7,400,957			7,295,663
Diluted		7,514,935			7,295,663			7,400,957			7,295,663

See accompanying notes to consolidated financial statements

4

Consolidated Statements of Shareholders’ Equity (unaudited)

	Preferred
	Stock		Warrant to				Additional						Accumulated Other
	(net of		Purchase		Common		Paid-In			Retained			Comprehensive		Treasury
	discount)		Common Stock		Stock		Capital			Earnings			Income		Stock			Total
	(Dollars in thousands except share and per share amounts)
Balance, January 1, 2009	$	25,077	$	146	$	7,624	$	37,783		$	41,682		$	839	$	(6,092	)	$	107,059
Comprehensive income:
Net Income (Loss)											(2,543	)							(2,543	)
Other comprehensive income, net of tax:
Change in unrealized gains and losses on securities														2,807					2,807
Total comprehensive income																			264
Share-based compensation								69											69
Preferred dividends and accretion of discount		12									(1,020	)							(1,008	)
Common dividends declared, $.19 per share											(1,386	)							(1,386	)
Balance, September 30, 2009	$	25,089	$	146	$	7,624	$	37,852		$	36,733		$	3,646	$	(6,092	)	$	104,998
Balance, January 1, 2010	$	25,092	$	146	$	7,624	$	37,862		$	36,883		$	2,626	$	(6,092	)	$	104,141
Comprehensive income:
Net Income											5,304								5,304
Other comprehensive income, net of tax:
Change in unrealized gains and losses on securities														958					958
Total comprehensive income																			6,262
Share-based compensation								70											70
Common shares issued (462,234 shares)						462		1,578											2,040
Restricted shares granted (67,498 shares)						68		(68	)										—
Preferred dividends and accretion of discount		11									(956	)							(945	)
Common dividends declared, $.03 per share											(225	)							(225	)
Balance, September 30, 2010	$	25,103	$	146	$	8,154	$	39,442		$	41,006		$	3,584	$	(6,092	)	$	111,343

See accompanying notes to consolidated financial statements

5

Consolidated Statements of Cash Flows (unaudited)

	Nine Months Ended September 30,
	2010			2009
	(Dollars in thousands)
Operating Activities
Net income (loss)	$	5,304		$	(2,543	)
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		6,294			15,360
Depreciation and amortization		1,041			1,243
Amortization of premiums and accretion of discounts, net		1,571			1,152
Amortization of intangibles		102			102
Amortization of loan servicing rights		189			253
Amortization of deferred loan fees		(46	)		175
Federal deferred income tax expense (benefit)		796			(3,614	)
Securities gains, net		(38	)		(674	)
Share-based compensation expense		70			69
Loans originated for sale		(60,319	)		(92,988	)
Proceeds from sales of loan originations		59,426			90,130
Net gain from loan sales		(651	)		(963	)
Net loss on sale of other assets		73			13
Net gain on extinguishment of debt		(2,210	)		—
Net decrease (increase) in accrued interest receivable and other assets		3,436			(1,584	)
Net increase (decrease) in accrued interest payable, taxes and other liabilities		(3,356	)		990
Net cash provided by operating activities		11,682			7,121
Investing Activities
Proceeds from sales of available-for-sale securities		4,170			28,089
Proceeds from maturities of available-for-sale securities		102,338			45,242
Purchase of available-for-sale securities		(74,355	)		(119,941	)
Purchase of trading securities		—			(9,005	)
Proceeds from maturities of trading securities		436			1,292
Proceeds from sale of trading securities		7,774			10,462
Change in interest-bearing deposits in other banks		12			—
Purchase of Federal Home Loan Bank Stock		—			(101	)
Purchase of Federal Reserve Bank Stock		(756	)		—
Net increase in loans made to customers		(1,544	)		(9,632	)
Proceeds from the sale of other real estate owned		419			869
Purchase of bank premises and equipment		(484	)		(366	)
Net cash provided by (used in) investing activities		38,010			(53,091	)
Financing Activities
Net decrease in demand and other noninterest-bearing		(5,784	)		(794	)
Net increase (decrease) in savings, money market and interest-bearing demand		21,629			(2,126	)
Net increase (decrease) in certificates of deposit		(8,247	)		50,736
Net increase in short-term borrowings		34			8,494
Proceeds from Federal Home Loan Bank advances		34,000			15,000
Payment of Federal Home Loan Bank advances		(34,003	)		(25,352	)
Extinguishment of debt, net		(10	)		—
Dividends paid-preferred		(945	)		(851	)
Dividends paid-common		(225	)		(1,386	)
Net cash provided by financing activities		6,449			43,721
Net increase (decrease) in cash and cash equivalents		56,141			(2,249	)
Cash and cash equivalents, January 1		26,933			36,923
Cash and cash equivalents, September 30	$	83,074		$	34,674
Supplemental cash flow information
Interest paid	$	10,239		$	16,773
Income taxes paid		675			400
Transfer of loans to other real estate owned		1,640			646
Common stock issued for extinguishment of debt		2,040			—

See accompanying notes to consolidated financial statements

6

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. For comparative purposes, certain amounts in the 2009 consolidated financial statements have been reclassified to conform to the 2010 presentation.

     New Accounting Pronouncements

ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. In July 2010, FASB issued ASU 2010-20 which is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The amendments in ASU 2010-20 encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s disclosures.

ASC Topic 860, Transfers and Servicing. In November 2009, an amendment to the accounting standards for transfers of financial assets was issued. This amendment removes the concept of a qualifying special purpose entity from existing GAAP and removes the exception from applying the accounting and reporting standards within ASC 810, Consolidation, to qualifying special purpose entities. This amendment also establishes conditions for accounting and reporting of a transfer of a portion of a financial asset, modifies the asset sale/derecognition criteria, and changes how retained interests are initially measured. This amendment is expected to provide greater transparency about transfers of financial assets and a transferor’s continuing involvement, if any, with the transferred assets. This accounting pronouncement is effective in 2010. The adoption of this pronouncement did not have a material impact on the Corporation’s financial statements.

ASC Topic 810, Consolidation. In November 2009, an amendment to the accounting standards for consolidation was issued. The new guidance amends the criteria for determining the primary beneficiary of, and the entity required to consolidate, a variable interest entity. This accounting pronouncement is effective in 2010. The adoption of this pronouncement did not have a material impact on the Corporation’s financial statements.

     Use of Estimates

LNB Bancorp Inc. prepares its financial statements in conformity with 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 valuation of goodwill, 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. The Corporation is a bank holding company engaged in the business of commercial and retail banking, investment management and trust services, with banking centers located throughout Lorain, Erie, Cuyahoga and Summit counties of Ohio. This market provides the source for substantially all of the Bank’s deposit, loan and trust activities. The majority of the Bank’s income is derived from a diverse base of commercial, mortgage and retail lending activities and investments.

7

     Statement of Cash Flows

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

     Securities

Securities that are bought and held for the sole purpose of being sold in the near term are deemed trading securities with any related unrealized gains and losses reported in earnings. The Corporation did not hold any trading securities as of September 30, 2010. The Corporation held trading securities as of December 31, 2009. Securities that the Corporation has a positive intent and ability to hold to maturity are classified as held to maturity. As of September 30, 2010 and December 31, 2009, the Corporation did not hold any securities classified as held to maturity. Securities that are not classified as trading or held to maturity are classified as available for sale. Securities classified as available for sale are carried at their fair value with unrealized gains and losses, net of tax, included as a component of accumulated other comprehensive income, net of tax. A decline in the fair value of securities below cost, that is deemed other than temporary, is charged to earnings resulting in establishment of a new cost basis for the security. Interest and dividends on securities, including amortization of premiums and accretion of discounts using the effective interest method over the period to maturity or call, are included in interest income.

     Restricted Stock

The Bank is a member of the Federal Home Loan Bank (FHLB) system. Members are required to own a certain amount of FHLB stock based on the level of borrowings and other factors, and may invest in additional amounts. The Bank is also a member of and owns stock in the Federal Reserve Bank of Cleveland. The Corporation also owns stock in Bankers Bancshares Inc., an institution that provides correspondent banking services to community banks. Stock in these institutions is classified as restricted stock, is recorded at redemption value which approximates fair value, and is periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

     Loans Held For Sale

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

     Loans

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

Loans are generally placed on nonaccrual status when they are 90 days past due for interest or principal or when the full and timely collection of interest or principal in accordance with the contractual terms of the note 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 of principal and interest 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 or below. 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.

8

     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 loans and individual borrowers, sensitivity analysis and expected loss models, value of underlying collateral, and observations of internal loan review staff or banking regulators.

The provision for loan losses is determined based on Management’s evaluation of the loan portfolio and the adequacy of the allowance for loan losses under current economic conditions and such other factors which, in Management’s judgment, deserve current recognition.

     Servicing

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

     Bank Premises and Equipment

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

     Goodwill and Core Deposit Intangibles

Intangible assets arise from acquisitions and include goodwill and core deposit intangibles. Goodwill is the excess of purchase price over the fair value of identified net assets in acquisitions. Core deposit intangibles represent the value of depositor relationships purchased. The Corporation follows ASC Topic 350, Goodwill and Other Intangibles. Goodwill is tested at least annually for impairment. Under the accounting for “Goodwill and Other Intangible Assets”, the Corporation is required to evaluate goodwill impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Corporation has elected to test for goodwill impairment as of November 30th of each year.

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) represents 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.

     Split-Dollar Life Insurance

The Corporation recognizes a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to certain employees extending to postretirement periods. The liability is recognized based on the substantive agreement with the employee.

     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.

9

     Income Taxes

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

     Stock-Based Compensation

Compensation expense is recognized at fair value for stock options and restricted stock awards issued to employees. A Black Scholes model is utilized to estimate the fair value of stock options, while the market price of the Corporation’s common shares at the date of grant is used to estimate the fair value of restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards and restricted stock awards. Certain of the Corporation’s share-based awards contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period. The Corporation recognizes compensation expense for awards with graded vesting schedules on a straight-line basis over the requisite service period for the entire award.

     Comprehensive Income

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and changes in the unfunded status of the pension plan, which are also recognized as separate components of shareholders’ equity.

Unrealized gains on the Corporation’s available-for-sale securities (after applicable income tax expense) totaling $5,313 and $4,356 at September 30, 2010 and December 31, 2009, respectively, and the minimum pension liability adjustment (after applicable income tax benefit) totaling $1,730 at September 30, 2010 and December 31, 2009 are included in accumulated other comprehensive income.

     Preferred Stock

The Corporation is authorized to issue up to 1,000,000 shares of Voting Preferred Stock, no par value. As of September 30, 2010 and December 31, 2009, 25,223 shares of the Corporation’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B (“Series B preferred stock”) have been issued. The Board of Directors of the Corporation is authorized to provide for the issuance of one or more series of Voting Preferred Stock and establish the dividend rate, dividend dates, whether dividends are cumulative, liquidation prices, redemption rights and prices, sinking fund requirements, conversion rights, and restrictions on the issuance of any series of Voting Preferred Stock. The Voting Preferred Stock may be issued with conversion rights to common stock and may rank prior to the common stock in dividends, liquidation preferences, or both. As of September 30, 2010, the Corporation had authorized 750,000 Series A Voting Preferred Shares. On October 25, 2010, the Corporation amended its Articles of Incorporation to reduce the number of authorized Series A Voting Preferred Shares from 750,000 to 150,000. No Series A Voting Preferred Shares have been 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 and warrants outstanding during the year. Basic and diluted earnings per share are calculated as follows:

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	Three Months Ended September 30,					Nine Months Ended September 30,
	2010		2009			2010		2009
	(Dollars in thousands except per share amounts)
Weighted average shares outstanding used in Basic Earnings per Common Share		7,514,935		7,295,663			7,400,957		7,295,663
Dilutive effect of incentive stock options		—		—			—		—
Dilutive effect of common stock warrants		—		—			—		—
Weighted average shares outstanding used in Diluted Earnings Per Common Share		7,514,935		7,295,663			7,400,957		7,295,663
Net Income (Loss)	$	2,730	$	(4,376	)	$	5,304	$	(2,543	)
Preferred stock dividend and accretion		320		319			957		937
Income (Loss) Available to Common Shareholders	$	2,410	$	(4,695	)	$	4,347	$	(3,480	)
Basic Earnings (Loss) Per Common Share	$	0.32	$	(0.64	)	$	0.59	$	(0.48	)
Diluted Earnings (Loss) Per Common Share	$	0.32	$	(0.64	)	$	0.59	$	(0.48	)

Stock options for 198,000 common shares and common stock warrants of 561,343 were not considered in computing diluted earnings per common share for the three and nine month periods ended September 30, 2010 and September 30, 2009, respectively, because they were antidilutive.

(3) Cash and Due from Banks

Federal Reserve Board regulations require the Bank to maintain reserve balances on deposits with the Federal Reserve Bank of Cleveland. The required ending reserve balance was $1,764 on September 30, 2010 and $919 on December 31, 2009.

(4) Goodwill and Intangible Assets

On May 10, 2007, LNB Bancorp, Inc. completed the acquisition of Morgan Bancorp, Inc., of Hudson, Ohio and its wholly-owned subsidiary, Morgan Bank, NA. Under the terms of the transaction, the Corporation acquired all of the outstanding stock of Morgan Bancorp, Inc. in a stock and cash merger transaction valued at $27,864. The acquisition was accounted for using the purchase method of accounting, and accordingly, the purchase price was allocated to the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The purchase accounting fair values are being amortized under various methods and over the lives of the corresponding assets and liabilities. Goodwill recorded for the acquisition amounted to $18,755. The Corporation recorded $1,367 in core deposit intangibles related to the acquisition of Morgan Bank, NA.

The Corporation assesses goodwill for impairment annually and more frequently in certain circumstances. Goodwill is assessed using the Bank as the reporting unit. The Corporation considers several methodologies in determining the fair value of the reporting unit, including the discounted estimated future net cash flows, price to tangible book value, and core deposit premium values. Primary reliance is placed on the discounted estimated future net cash flow approach. The key assumptions used to determine the fair value of the Corporation subsidiary include: (a) cash flow period of 5 years; (b) capitalization rate of 9.5%; and (c) a discount rate of 12.5%, which is based on the Corporation’s average cost of capital adjusted for the risk associated with its operations. A variance in these assumptions could have a significant effect on the determination of goodwill impairment. The Corporation cannot predict the occurrences of certain future events that might adversely affect the reported value of goodwill. Such events include, but are not limited to, strategic decisions in response to economic and competitive conditions, the effect of the economic environment on the Corporation’s customer base or a material negative change in the relationship with significant customers.

Core deposit intangibles are amortized over their estimated useful life of 10 years. A summary of core deposit intangible assets follows:

	September 30, 2010		December 31, 2009
	(Dollars in thousands)
Core deposit intangibles	$	1,367	$	1,367
Less: accumulated amortization		464		362
Carrying value of core deposit intangibles	$	903	$	1,005

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5) Securities

The amortized cost, gross unrealized gains and losses and fair values of securities available for sale at September 30, 2010 and December 31, 2009 follows:

	At September 30, 2010
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities available for sale:
U.S. Government agencies and corporations	$	31,250	$	674	$	—		$	31,924
Mortgage backed securities		152,514		6,170		(15	)		158,669
State and political subdivisions		23,106		1,325		(104	)		24,327
Total securities available for sale	$	206,870	$	8,169	$	(119	)	$	214,920

	At December 31, 2009
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in thousands)
Securities available for sale:
U.S. Government agencies and corporations	$	45,142	$	354	$	(281	)	$	45,215
Mortgage backed securities		172,708		6,092		(21	)		178,779
State and political subdivisions		22,588		571		(116	)		23,043
Total securities available for sale	$	240,438	$	7,017	$	(418	)	$	247,037

The Corporation held no trading securities at September 30, 2010. The cost, gross unrealized gains and losses and fair value of trading securities at December 31, 2009 follows:

	Trading Securities held at December 31, 2009
			Aggregate		Aggregate
			Unrealized Gains		Unrealized Losses		Fair
	Cost		recorded to income		recorded to income		Value
	(Dollars in thousands)
Trading Securities	$	8,327	$	118	$	—	$	8,445

(6) Loans and Allowance for Loan Losses

Loan balances at September 30, 2010 and December 31, 2009 are summarized as follows:

	September 30, 2010			December 31, 2009
	(Dollars in thousands)
Real estate loans (includes loans secured primarily by real estate only):
Construction and land development	$	52,486		$	65,052
One to four family residential		210,600			219,508
Multi-family residential		29,450			28,988
Non-farm non-residential properties		284,043			286,778
Commercial and industrial loans		60,808			61,929
Personal loans to individuals:
Auto, single payment and installment		152,328			135,097
All other loans		6,194			5,845
Total loans		795,909			803,197
Allowance for loan losses		(17,197	)		(18,792	)
Net loans	$	778,712		$	784,405

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Activity in the allowance for loan losses for the nine month periods ended September 30, 2010 and September 30, 2009 is summarized as follows:

	September 30, 2010			September 30, 2009
	(Dollars in thousands)
Balance at the beginning of period	$	18,792		$	11,652
Provision for loan losses		6,294			15,360
Loans charged-off		(8,499	)		(4,875	)
Recoveries on loans previously charged-off		610			419
Balance at the end of the period	$	17,197		$	22,556

Nonaccrual loans at September 30, 2010 were $43,574, compared to $38,837 at December 31, 2009, and $42,018 at September 30, 2009.

(7) Deposits

Deposit balances at September 30, 2010 and December 31, 2009 are summarized as follows:

	September 30, 2010		December 31, 2009
	(Dollars in thousands)
Demand and other noninterest-bearing	$	112,721	$	118,505
Interest checking		138,311		137,807
Savings		87,968		82,771
Money market accounts		100,395		84,467
Consumer time deposits		464,719		476,798
Public time deposits		74,917		71,085
Total deposits	$	979,031	$	971,433

The aggregate amount of certificates of deposit in denominations of $100,000 or more amounted to $233,507 and $218,966 at September 30, 2010 and December 31, 2009, respectively.

The maturity distribution of certificates of deposit as of September 30, 2010 follows:

			After 12 months		After 36 months
	Within		but within 36		but within 60
	12 months		months		months		After 5 years		Total
	(Dollars in thousands)
Consumer time deposits	$	278,797	$	144,957	$	40,965	$	—	$	464,719
Public time deposits		71,092		2,825		1,000		—		74,917
Total time deposits	$	349,889	$	147,782	$	41,965	$	—	$	539,636

(8) 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 50% of the balances of qualified home equity lines of credit that are pledged as collateral. At September 30, 2010, the Bank had pledged approximately $90,999 in qualifying home equity lines of credit, resulting in an available line of credit of approximately $45,499. No amounts were outstanding at September 30, 2010 or December 31, 2009. The Corporation also has a $4,000 line of credit with an unaffiliated financial institution. The balance of this line of credit was $0 as of September 30, 2010 and December 31, 2009.

Short-term borrowings include securities sold under repurchase agreements and Federal funds purchased from correspondent banks. Securities sold under repurchase agreements at September 30, 2010 and December 31, 2009 were $1,491 and $1,457, respectively. The interest rate paid on these borrowings was 0.25% at September 30, 2010 and 0.15% at December 31, 2009.

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(9) Federal Home Loan Bank Advances

Federal Home Loan Bank advances amounted to $42,502 and $42,505 at September 30, 2010 and December 31, 2009 respectively. All advances are bullet maturities with no call features. At September 30, 2010, collateral pledged for FHLB advances consisted of qualified real estate mortgage loans and investment securities of $63,176 and $26,507, respectively. The maximum borrowing capacity of the Bank at September 30, 2010 was $49,774 with unused collateral borrowing capacity of $5,731. The Bank maintains a $40,000 cash management line of credit (CMA) with the FHLB.

Maturities of FHLB advances outstanding at September 30, 2010 and December 31, 2009 are as follows.

	September 30, 2010		December 31, 2009
	(Dollars in thousands)
Maturity January 2010, fixed rate 3.58%	$	—	$	10,000
Maturities January 2011 through February 2011, with fixed rates ranging from 3.17% to 3.67%, averaging 3.50% for 2010 and 2009.		15,000		15,000
Maturity January 2012, fixed rate 2.37%		15,000		15,000
Maturities January 2014, fixed rates ranging from 2.57% to 3.55%, averaging 2.57% for 2010 and 3.55% for 2009.		10,043		55
Maturity July 2015, fixed rate 4.76%		2,459		2,450
Total FHLB advances	$	42,502	$	42,505

(10) Trust Preferred Securities

In May 2007, LNB Trust I (“Trust I”) and LNB Trust II (“Trust II”) each sold $10,000 of preferred securities to outside investors and invested the proceeds in junior subordinated debentures issued by the Corporation. The Corporation used the proceeds from the debentures to fund the cash portion of the Morgan Bancorp, Inc. acquisition. Trust I and Trust II are wholly-owned unconsolidated subsidiaries of the Corporation. The Corporation’s obligations under the transaction documents, taken together, have the effect of providing a full guarantee by the Corporation, on a subordinated basis, of the payment obligation of the Trusts.

The subordinated notes mature in 2037. Trust I bears a floating interest rate (current three-month LIBOR plus 148 basis points). Trust II bears a fixed rate of 6.64% through June 15, 2017, and then becomes a floating interest rate (current three-month LIBOR plus 148 basis points). Interest on the notes is payable quarterly. The interest rates in effect as of the last determination date in 2010 were 1.77% and 6.64% for Trust I and Trust II, respectively. At September 30, 2010 and September 30, 2009, accrued interest payable for Trust I was $6 and $8 and for Trust II was $22 and $28, respectively.

The subordinated notes are redeemable in whole or in part, without penalty, at the Corporation’s option on or after June 15, 2012 and mature on June 15, 2037. The notes are junior in right of payment to the prior payment in full of all Senior Indebtedness of the Corporation, whether outstanding at the date of the indenture governing the notes or thereafter incurred. At September 30, 2010, the balance of the subordinated notes payable to Trust I and Trust II was $8,119 each.

In August 2010, the Corporation entered into an agreement with certain holders of its currently non-pooled trust preferred securities to exchange up to $2,125 in principal amount of the securities issued by Trust I and $2,125 in principal amount of the securities issued by Trust II for up to 525,000 newly issued shares of the Corporation’s common stock. The Corporation issued 462,234 shares of common stock at a volume-weighted average price of $4.41 per share in exchange for the $4,250 in aggregate principal amount of tendered Trust I and Trust II trust preferred securities and recorded a gain of $2,210 which is included in the consolidated statements of operations as “Gain on extinguishment of debt”.

(11) Commitments, Credit Risk, and Contingencies

In the normal course of business, the Bank enters into commitments that involve 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.

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The Bank uses the same credit policies in making commitments as it does for on-balance sheet instruments. Interest rate risk on commitments to extend credit results from the possibility that interest rates may have moved unfavorably from the position of the Bank since the time the commitment was made.

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

The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained by the Bank upon extension of credit is based on Management’s evaluation of the applicant’s credit. 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. Payments under 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, 2010 follows:

	Amount
	(Dollars in thousands)
Commitments to extend credit	$	76,895
Home equity lines of credit		76,684
Standby letters of credit		8,677
Total	$	162,256

(12) Estimated Fair Value of Financial Instruments

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

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

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

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

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

• The carrying value approximates the fair value for bank owned life insurance.

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

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

• The fair value of Federal Home Loan Bank advances is estimated by discounting future cash flows using current FHLB rates for the remaining term to maturity.

• The fair value of junior subordinated debentures is based on the discounted value of contractual cash flows using rates currently offered for similar maturities.

• The fair value of commitments to extend credit approximates the fees charged to make these commitments; since rates and fees of the commitment contracts approximates those currently charged to originate similar

15

commitments. The carrying amount and fair value of off-balance sheet instruments is not significant as of September 30, 2010 and December 31, 2009.

Limitations

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

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

The estimated fair values of the Corporation’s financial instruments at September 30, 2010 and December 31, 2009 are summarized as follows:

	September 30, 2010				December 31, 2009
	Carrying		Estimated Fair		Carrying		Estimated Fair
	Value		Value		Value		Value
			(Dollars in thousands)
Financial assets
Cash and due from banks, Federal funds sold, short-term investments and interest-bearing deposits in other banks	$	83,421	$	83,421	$	27,292	$	27,292
Securities		214,920		214,920		255,482		255,482
Portfolio loans, net		778,712		780,683		784,405		786,154
Loans held for sale		4,676		4,676		3,783		3,783
Accrued interest receivable		3,740		3,740		4,072		4,072
Financial liabilities
Deposits:
Demand, savings and money market		439,395		439,395		423,550		423,550
Certificates of deposit		539,636		551,553		547,883		555,302
Total deposits		979,031		990,948		971,433		978,852
Short-term borrowings		1,491		1,491		1,457		1,457
Federal Home Loan Bank advances		42,502		43,935		42,505		43,708
Junior subordinated debentures		16,238		15,465		20,620		18,489
Accrued interest payable		1,718		1,718		2,074		2,074

The fair value of financial assets and liabilities is categorized in three levels. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. These levels are:

• Level 1 —Valuations based on quoted prices in active markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

• Level 2 —Valuations of assets and liabilities traded in less active dealer or broker markets. Valuations include quoted prices for similar assets and liabilities traded in the same market; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated by, third-party pricing services.

• Level 3 —Assets and liabilities with valuations that include methodologies and assumptions that may not be readily observable, including option pricing models, discounted cash flow models, yield curves and similar techniques. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities, but in all cases are corroborated by external data, which may include third-party pricing services.

16

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Corporation’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

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

			Quoted Prices in Active		Significant Other		Significant
	Fair Value as of		Markets for Identical		Observable Inputs		Unobservable Inputs
Description	September 30, 2010		Assets (Level 1)		(Level 2)		(Level 3)
Securities available for sale:
U.S. Government agencies and corporations	$	31,924			$	31,924
Mortgage backed securities		158,669				158,669
State and political subdivisions		24,327		—		24,327		—
Total	$	214,920	$	—	$	214,920	$	—

			Quoted Prices in Active		Significant Other		Significant
	Fair Value as of		Markets for Identical		Observable Inputs		Unobservable Inputs
Description	December 31, 2009		Assets (Level 1)		(Level 2)		(Level 3)
Trading Securities	$	8,445			$	8,445	$	—
Securities available for sale:
U.S. Government agencies and corporations		45,215				45,215
Mortgage backed securities		178,779				178,779
State and political subdivisions		23,043		—		23,043		—
Total	$	255,482	$	—	$	255,482	$	—

The Corporation has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. At September 30, 2010, such assets consist primarily of impaired loans. The Corporation has estimated the fair values of these assets using Level 3 inputs, specifically discounted cash flow projections. During the quarter ended September 30, 2010, the impairment charges recorded to the income statement for impaired loans were not significant.

Impaired loans valued using Level 3 inputs consist of non-homogeneous loans that are considered impaired. Impaired loans valued using Level 3 inputs totaled $29,751 at September 30, 2010 and $27,054 at December 31, 2009. The Corporation estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals).

(13) 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. Awards granted under this Plan as of September 30, 2010 were stock options granted in 2007, 2008 and 2009. Long-term restricted shares issued in February 2010 were also awarded under this Plan. In addition, the Corporation has nonqualified stock option agreements outside of the 2006 Stock Incentive Plan. Grants under the nonqualified stock option agreements have been made from 2005 to 2007. The maximum option term is ten years and the options generally vest over three years as follows: one-third after one year from the grant date, two-thirds after two years and completely after three years.

On January 20, 2006, the Corporation issued an aggregate of 30,000 stock appreciation rights (“SARs”) at $19.00 per share, 15,500 of which have expired due to employee terminations. On February 24, 2010, the Corporation issued 67,498 shares of long-term restricted stock at $4.35 per share. The Corporation adopted ASC Topic 718 — Compensation — Stock Compensation for the accounting and disclosure of the stock option agreements, the long-term restricted shares and the SARs.

The expense recorded for SARs for the nine months ended September 30, 2010 and September 30, 2009 was $0 and $3, respectively. The expense recorded for stock options for the nine months ended September 30, 2010 and September 30, 2009 was $13 and $48, respectively. The expense recorded for long-term restricted stock for the nine months ended September 30, 2010 was $57.

Options outstanding at September 30, 2010 were as follows:

17

	Outstanding				Exercisable
			Weighted
			Average
			Remaining				Weighted
			Contractual Life				Average Exercise
	Number		(Years)		Number		Price
Range of Exercise Prices
$5.34-$14.46		2,500		8.62		833	$	5.34
$14.47-$15.34		83,000		7.35		55,329		14.47
$15.35-$16.50		52,500		6.46		52,500		15.78
$16.51-$19.10		30,000		5.34		30,000		19.10
$19.11-$19.17		30,000		4.34		30,000		19.17
Outstanding at end of period		198,000		6.37		168,662	$	16.49

A summary of the status of stock options at September 30, 2010 and September 30, 2009 and changes during the nine months then ended is presented in the table below:

	2010		2009
			Weighted					Weighted
			Average Exercise					Average Exercise
	Options		Price per Share		Options			Price per Share
Outstanding at beginning of period		198,000	$	16.11		203,500		$	16.18
Granted		—		—		2,500			5.34
Forfeited or expired		—		—		(2,500	)		14.47
Exercised		—		—		—			—
Stock dividend or split		—		—		—			—
Outstanding at end of period		198,000	$	16.11		203,500		$	16.07
Exercisable at end of period		168,662	$	16.49		125,498		$	17.08

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

The following commentary presents a discussion and analysis of the Corporation’s financial condition and results of operations by its management (“Management”). 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, 2010. 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, 2009 and in the accompanying consolidated financial statements and notes contained in this Form 10-Q. The objective of this financial review is to enhance the reader’s understanding of the accompanying tables and charts, the consolidated financial statements, notes to the financial statements and financial statistics appearing elsewhere in the report. Where applicable, this discussion also reflects Management’s insights as to known events and trends that have or may reasonably be expected to have a material effect on the Corporation’s operations and financial condition.

Summary

The Corporation is a bank holding company headquartered in Lorain, Ohio, deriving substantially all of its revenue from the Bank. The Corporation provides a range of products and services to commercial customers and the community, and currently operates 20 banking centers throughout Lorain, Erie, Cuyahoga and Summit counties in Ohio.

Net income was $2,730 for the third quarter of 2010. Net income available to common shareholders was $2,410 and earnings per diluted common share for the third quarter of 2010 were $0.32. This compares to a net loss of $4,695 or $0.64 per diluted common share for the third quarter of 2009.

Third quarter 2010 net interest income totaled $9,372, compared to $9,578 for the third quarter of 2009. Net interest income on a fully taxable equivalent (FTE) basis for the third quarter of 2010 was $9,498, a 2.22% decrease compared with $9,714 for the third quarter of 2009. Although net interest income decreased $216 compared to the prior period due to a decline in average earning assets of 7.54%, this was offset by the effect of lower market interest rates on the funding side which resulted in an increase in the net interest margin (FTE) for the third quarter 2010 of 19 basis points to 3.49%, up from 3.30% one year ago.

The provision for loan losses was $2,076 for the quarter ended September 30, 2010 compared to $11,067 for September 30, 2009.

Noninterest income was $5,044 for the third quarter of 2010, compared to $3,124 for the third quarter of 2009. During the third quarter of 2010, the Corporation exchanged $4,250 principal amount of its non-pooled trust preferred securities for approximately 462,000 newly issued shares of the Corporation’s common stock. The gain recorded as a result of this exchange was $2,210 and is included in noninterest income as gain on extinguishment of debt. Trust fees decreased $93 compared to the prior period as a result of the elimination of the Corporation’s brokerage division. Electronic banking fees and other fees slightly decreased year over year. Gains on the sale of loans were down $77, or 22.58%, compared to the third quarter of last year. Gains on the sale of securities were down $88 for the third quarter of 2010 compared to the third quarter of 2009.

Noninterest expense was $8,768 for the third quarter of 2010, compared with $8,737 for the third quarter of 2009, a slight increase of $31, or 0.35%. The efficiency ratio, which is the measure of cost to generate revenue, declined from 68.06% in the third quarter of 2009 to 71.10% in the third quarter of 2010.

During the third quarter of 2010, overall loan demand was weak as total portfolio loans ended the quarter at $795,909 compared to $803,197 at December 31, 2009. Total assets for the third quarter ended at $1,156,602 compared to $1,149,509 at the end of 2009. Total deposits grew to $979,031 at the end of the third quarter of 2010, up from $971,433 at December 31, 2009. The growth in deposits came in the form of core deposits improving liquidity while reducing costs.

Given the current economic conditions the Corporation continues to work through asset quality challenges. At September 30, 2010 the Corporation’s non-performing assets totaled $45,780 or 3.96% of total assets compared to $40,101, or 3.49%, at December 31, 2009. The allowance for possible loan losses decreased from $18,792 at December 31, 2009 to $17,197 at September 30, 2010 as a result of increased charge-offs for specific reserves where

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liquidation has become the primary source of repayment. The allowance to total loans at September 30, 2010 equals 2.16% compared to 2.34% at December 31, 2009.

Annualized net charge-offs to average loans for the quarter ending September 30, 2010 was 2.14% compared to 1.46% at December 31, 2009. In addition to the effect of the overall economy and the level of unemployment, a significant factor impacting asset quality has been the lower market valuation of the underlying collateral, primarily in construction and development and commercial real estate loans and the need to provide additional allowances due to these lower valuations.

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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.

Table 1 presents the condensed average balance sheets for the three months ended September 30, 2010 and 2009. Rates are computed on a tax equivalent basis and nonaccrual loans are included in the average loan balances.

	Three Months Ended September 30,
	2010									2009
	Average									Average
	Balance			Interest			Rate			Balance			Interest			Rate
	(Dollars in thousands)
Assets:
U.S. Govt agencies and corporations	$	218,452		$	1,395			2.53	%	$	260,133		$	2,642			4.03	%
State and political subdivisions		23,720			353			5.91			25,774			376			5.79
Federal funds sold and short-term investments		30,708			10			0.13			59,492			19			0.13
Restricted stock		5,741			72			4.98			4,953			65			5.21
Commercial loans		442,194			5,902			5.30			453,829			6,325			5.53
Real estate mortgage loans		70,309			964			5.44			83,723			1,176			5.57
Home equity lines of credit		110,393			1,092			3.93			107,668			1,088			4.01
Installment loans		179,517			2,801			6.19			173,657			2,968			6.78
Total Earning Assets	$	1,081,034		$	12,589			4.62	%	$	1,169,229		$	14,659			4.97	%
Allowance for loan loss		(19,089	)								(13,451	)
Cash and due from banks		18,335									16,921
Bank owned life insurance		16,841									16,122
Other assets		53,063									47,234
Total Assets	$	1,150,184								$	1,236,055
Liabilities and Shareholders’ Equity
Consumer time deposits	$	457,667		$	2,239			1.94	%	$	494,926		$	3,615			2.90	%
Public time deposits		78,022			120			0.61			88,223			370			1.66
Brokered time deposits		—			—			—			5,707			55			3.84
Money market accounts		93,486			98			0.41			135,694			168			0.49
Savings deposits		87,961			38			0.17			80,054			41			0.20
Interest-bearing demand		139,598			58			0.17			119,875			77			0.25
Short-term borrowings		1,708			1			0.25			33,684			43			0.51
FHLB advances		42,589			319			2.97			43,005			351			3.24
Trust preferred securities		19,269			218			4.48			20,732			225			4.31
Total Interest-Bearing Liabilities	$	920,300		$	3,091			1.33	%	$	1,021,900		$	4,945			1.92	%
Noninterest-bearing deposits		114,826									94,489
Other liabilities		6,186									11,359
Shareholders’ Equity		108,872									108,307
Total Liabilities and Shareholders’ Equity	$	1,150,184								$	1,236,055
Net interest Income (FTE)				$	9,498			3.49	%				$	9,714			3.30	%
Taxable Equivalent Adjustment					(126	)		(0.05	)					(136	)		(0.05	)
Net Interest Income Per Financial Statements				$	9,372								$	9,578
Net Yield on Earning Assets								3.44	%								3.25	%

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Results of Operations

Three Months Ended September 30, 2010 versus Three Months Ended September 30, 2009 Net Interest Income Comparison

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 71.19% of the Corporation’s revenues for the three months ended September 30, 2010. 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 (FTE) 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.

Net interest income, before provision for loan losses, was $9,372 for the third quarter of 2010 compared to $9,578 during the same quarter of 2009. Adjusting for tax-exempt income, net interest income FTE, before provision for loan losses, for the third quarter of 2010 and 2009 was $9,498 and $9,714, respectively. The net interest margin FTE, determined by dividing tax equivalent net interest income by average earning assets, was 3.49% for the three months ended September 30, 2010 compared to 3.30% for the three months ended September 30, 2009.

Average earning assets for the third quarter of 2010 were $1,081,034. This was a decrease of $88,195 or 7.54% compared to the same quarter last year. Over the past year the Corporation has reduced its balance sheet by eliminating unprofitable sweep products and large public fund money market accounts. As a result, the net interest margin increased compared to the third quarter of 2009. Primarily due to the extended period of lower market interest rates, the yield on average earning assets was 4.62% in the third quarter of 2010 compared to 4.97% for the same period last year. The yield on average loans during the third quarter of 2010 was 5.32%, which was 28 basis points lower than the yield on average loans during the third quarter of 2009 at 5.60%. Interest income from securities was $1,748 (FTE) for the three months ended September 30, 2010, compared to $3,018 during the third quarter of 2009. The yield on average securities was 2.86% and 4.21% for these periods, respectively.

The cost of interest-bearing liabilities was 1.33% during the third quarter of 2010 compared to 1.92% during the same period in 2009. Total average interest-bearing liabilities for the quarter ended September 30, 2010 decreased $101,600, or 9.94%, compared to September 30, 2009. This decrease is mainly attributable to a decline in the average balances of money market accounts, brokered time deposits and short-term borrowings. Average core deposits for the quarter ended September 30, 2010 remained relatively constant compared to the same period of 2009. The average cost of trust preferred securities was 4.48% for the third quarter of 2010, compared to 4.31% for the third quarter of 2009. One half of the outstanding trust preferred securities pays dividends at a fixed rate of 6.64% and the other half pays dividends at LIBOR plus 1.48%.

Net interest income may also be analyzed by comparing the volume and rate components of interest income and interest expense. Table 2 is an analysis of the changes in interest income and expense between the quarters ended September 30, 2010 and September 30, 2009. The table is presented on a fully tax-equivalent basis.

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

	Three Months Ended September 30,
	Increase (Decrease) in Interest Income/Expense
	in 2010 over 2009
	Volume			Rate			Total
	(Dollars in thousands)
U.S. Govt agencies and corporations	$	(266	)	$	(981	)	$	(1,247	)
State and political subdivisions		(31	)		8			(23	)
Federal funds sold and short-term investments		(9	)		—			(9	)
Restricted stock		10			(3	)		7
Commercial loans		(155	)		(268	)		(423	)
Real estate mortgage loans		(184	)		(28	)		(212	)
Home equity lines of credit		27			(23	)		4
Installment loans		91			(258	)		(167	)
Total Interest Income		(517	)		(1,553	)		(2,070	)
Consumer time deposits		(182	)		(1,194	)		(1,376	)
Public time deposits		(4	)		(246	)		(250	)
Brokered time deposits		(55	)		—			(55	)
Money market accounts		(44	)		(26	)		(70	)
Savings deposits		3			(6	)		(3	)
Interest bearing demand		8			(27	)		(19	)
Short-term borrowings		(20	)		(22	)		(42	)
FHLB advances		(2	)		(30	)		(32	)
Trust preferred securities		(16	)		9			(7	)
Total Interest Expense		(312	)		(1,542	)		(1,854	)
Net Interest Income (FTE)	$	(205	)	$	(11	)	$	(216	)

Net interest income (FTE) for the third quarter 2010 and 2009 was $9,498 and $9,714, respectively. Interest income (FTE) for the third quarter of 2010 decreased $2,070 in comparison to the same period in 2009. This decrease is attributable to a $1,553 decrease due to rate and a decrease of $517 due to volume. Interest income on securities of U.S. Government agencies and corporations decreased $1,247, mainly as a result of the reinvestment of funds in shorter-term U.S. Government agencies and seasoned mortgage-backed securities which have less extension risk given the current interest rate environment as well amortization recorded on U.S. government agency securities that were purchased at a high premium and subsequently called due to the low interest rate environment. Interest income on commercial loans decreased $423, primarily due to lower market interest rates. The $212 decrease in interest income on real estate mortgage loans was primarily attributable to the refinancing in the existing seasoned mortgage portfolio given the low interest rate environment and the Corporation’s practice of selling new mortgage production into the secondary market. The $1,376 and $250 decreases in consumer time deposits and public time deposits, respectively, were due primarily to lower market interest rates. Total interest expense decreased $1,854, with the decrease being attributable to a $1,542 decrease due to rate and a decrease due to volume of $312. Overall, the total decline in net interest income (FTE) of $216 was mainly attributable to a decrease in volume of $205, with only an $11 reduction due to rate which is the difference between interest income and interest expense.

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Table 3: Condensed Consolidated Average Balance Sheets

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

Table 3 presents the condensed average balance sheets for the nine months ended September 30, 2010 and 2009. Rates are computed on a tax equivalent basis and nonaccrual loans are included in the average loan balances.

	Nine Months Ended September 30,
	2010									2009
	Average									Average
	Balance			Interest			Rate			Balance			Interest			Rate
	(Dollars in thousands)
Assets:
U.S. Govt agencies and corporations	$	225,330		$	5,650			3.35	%	$	244,124		$	7,900			4.49	%
State and political subdivisions		23,390			1,063			6.08			24,460			1,096			5.99
Federal funds sold and short-term investments		33,407			30			0.12			49,013			52			0.14
Restricted stock		5,461			202			4.95			4,953			183			4.99
Commercial loans		443,787			17,789			5.36			448,766			19,001			5.66
Real estate mortgage loans		73,422			2,977			5.42			89,245			3,921			5.87
Home equity lines of credit		109,391			3,233			3.95			105,087			3,151			4.01
Installment loans		172,268			8,165			6.34			168,610			8,494			6.74
Total Earning Assets	$	1,086,456		$	39,109			4.81	%	$	1,134,258		$	43,798			5.16	%
Allowance for loan loss		(19,195	)								(12,252	)
Cash and due from banks		17,820									17,804
Bank owned life insurance		16,669									15,964
Other assets		53,952									47,184
Total Assets	$	1,155,702								$	1,202,958
Liabilities and Shareholders’ Equity
Consumer time deposits	$	467,143		$	7,262			2.08	%	$	482,112		$	11,157			3.09	%
Public time deposits		84,771			440			0.69			86,188			1,445			2.24
Brokered time deposits		—			-			-			10,203			320			4.19
Money market accounts		90,497			272			0.40			115,823			500			0.58
Savings deposits		86,104			119			0.19			79,752			137			0.23
Interest-bearing demand		136,050			186			0.18			121,783			270			0.30
Short-term borrowings		1,694			3			0.24			28,513			111			0.52
FHLB advances		43,089			953			2.96			46,246			1,131			3.27
Trust preferred securities		20,236			648			4.28			20,741			721			4.65
Total Interest-Bearing Liabilities	$	929,584		$	9,883			1.42	%	$	991,361		$	15,792			2.13	%
Noninterest-bearing deposits		112,779									92,582
Other liabilities		6,503									10,924
Shareholders’ Equity		106,836									108,091
Total Liabilities and Shareholders’ Equity	$	1,155,702								$	1,202,958
Net interest Income (FTE)				$	29,226			3.60	%				$	28,006			3.30	%
Taxable Equivalent Adjustment					(378	)		(0.05	)					(396	)		(0.05	)
Net Interest Income Per      Financial Statements				$	28,848								$	27,610
Net Yield on Earning Assets								3.55	%								3.25	%

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Nine Months Ended September 30, 2010 versus Nine Months Ended September 30, 2009 Net Interest Income Comparison

Net interest income accounted for 78.53% of the Corporation’s revenues for the nine months ended September 30, 2010. 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 (FTE) 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.

Net interest income, before provision for loan losses, was $28,848 for the first three quarters of 2010 compared to $27,610 during the same period of 2009. Adjusting for tax-exempt income, net interest income FTE, before provision for loan losses, for the first three quarters of 2010 and 2009 was $29,226 and $28,006, respectively. The net interest margin FTE, determined by dividing tax equivalent net interest income by average earning assets, was 3.60% for the nine months ended September 30, 2010 compared to 3.30% for the nine months ended September 30, 2009.

Average earning assets for the first three quarters of 2010 were $1,086,456. This was a decrease of $47,802, or 4.21%, compared to the same period last year. Given the extended period of lower market interest rates, the yield on average earning assets was 4.81% in the first three quarters of 2010 compared to 5.16% for the same period last year. The yield on average loans during the first three quarters of 2010 was 5.38%, which was 31 basis points lower than the yield on average loans during the first three quarters of 2009 at 5.69%. Interest income from securities was $6,713 (FTE) for the nine months ended September 30, 2010, compared to $8,996 during the first three quarters of 2009. The yield on average securities was 3.61% and 4.40% for these periods, respectively.

The cost of interest-bearing liabilities was 1.42% during the first three quarters of 2010 compared to 2.13% during the same period in 2009. Total average interest-bearing liabilities as of September 30, 2010 decreased $61,777, or 6.23%, compared to September 30, 2009. This decrease is mainly attributable to a decline in the average balances of brokered time deposits, short-term borrowings and FHLB advances. Average core deposits as of September 30, 2010 remained relatively constant compared to the same period of 2009. The average cost of trust preferred securities was 4.28% for the first three quarters of 2010, compared to 4.65% for the first three quarters of 2009.

Net interest income may also be analyzed by comparing the volume and rate components of interest income and interest expense. Table 4 is an analysis of the changes in interest income and expense between the nine months ended September 30, 2010 and September 30, 2009. The table is presented on a fully tax-equivalent basis.

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Table 4: Rate/Volume Analysis of Net Interest Income (FTE)

	Nine Months Ended September 30,
	Increase (Decrease) in Interest Income/Expense
	in 2010 over 2009
	Volume			Rate			Total
	(Dollars in thousands)
U.S. Govt agencies and corporations	$	(471	)	$	(1,779	)	$	(2,250	)
State and political subdivisions		(49	)		16			(33	)
Federal funds sold and short-term investments		(14	)		(8	)		(22	)
Restricted stock		19			—			19
Commercial loans		(200	)		(1,012	)		(1,212	)
Real estate mortgage loans		(642	)		(302	)		(944	)
Home equity lines of credit		127			(45	)		82
Installment loans		173			(502	)		(329	)
Total Interest Income		(1,057	)		(3,632	)		(4,689	)
Consumer time deposits		(233	)		(3,662	)		(3,895	)
Public time deposits		(7	)		(998	)		(1,005	)
Brokered time deposits		(320	)		—			(320	)
Money market accounts		(76	)		(152	)		(228	)
Savings deposits		9			(27	)		(18	)
Interest bearing demand		20			(104	)		(84	)
Short-term borrowings		(49	)		(59	)		(108	)
FHLB advances		(70	)		(108	)		(178	)
Trust preferred securities		(16	)		(57	)		(73	)
Total Interest Expense		(742	)		(5,167	)		(5,909	)
Net Interest Income (FTE)	$	(315	)	$	1,535		$	1,220

Net interest income (FTE) for the first three quarters of 2010 and 2009 was $29,226 and $28,006, respectively. Interest income (FTE) for the first three quarters of 2010 decreased $4,689 in comparison to the same period in 2009. This decrease is attributable to $3,632 decrease due to rate and a decrease of $1,057 due to volume. For the same period, interest expense decreased $5,909, with the decrease being attributable to a $5,167 decrease due to rate and a decrease due to volume of $742. Overall, while average balance sheet reduction contributed $315 to net interest income (FTE), the impact of rate, the difference between interest income and interest expense of $1,535, had a more significant contribution to the overall net interest income (FTE) increase of $1,220.

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     Noninterest Income

Table 5: Details on Noninterest Income

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(Dollars in thousands)						(Dollars in thousands)
Investment and trust services	$	403		$	496		$	1,411		$	1,405
Deposit service charges		1,146			1,211			3,179			3,332
Electronic banking fees		792			766			2,412			2,108
Income from bank owned life insurance		171			213			515			540
Other income		86			52			248			216
Total fees and other income		2,598			2,738			7,765			7,601
Gain on sale of securities		—			88			38			674
Gain on sale of loans		264			341			651			963
Loss on sale of other assets, net		(28	)		(43	)		(73	)		(13	)
Gain on extinguishment of debt		2,210			—			2,210			—
Total noninterest income	$	5,044		$	3,124		$	10,591		$	9,225

Three Months Ended September 30, 2010 versus Three Months Ended September 30, 2009 Noninterest Income Comparison

Total fees and other income for the three months ended September 30, 2010 was $2,598, a decrease of $140, or 5.11%, over the same period 2009. Income earned on investment and trust services declined $93 compared to the prior period as a result of the discontinuation of the Corporation’s brokerage division which occurred during the third quarter of 2010. Deposit service charges and electronic banking fees remained relatively constant compared to the third quarter of 2009 but continue to be impacted by the economic environment and pending regulation regarding overdrafts.

Total net gains recorded during the third quarter of 2010 increased $2,060 over the third quarter of 2009. This increase was mainly attributable to the $2,210 gain on extinguishment of debt. During the third quarter of 2010, the Corporation exchanged $4,250 principal amount of its non-pooled trust preferred securities for approximately 462,000 newly issued shares of the Corporation’s common stock. No securities were sold during the third quarter of 2010. Gains on the sale of loans decreased $77 primarily as a result of the lower volume of indirect loan sales during the third quarter as most of the production was booked in the Corporation’s portfolio. Sales of bank owned property resulted in a loss of $28 during the third quarter of 2010.

Nine Months Ended September 30, 2010 versus Nine Months Ended September 30, 2009 Noninterest Income Comparison

Total fees and other income for the nine months ended September 30, 2010 was $7,765, an increase of $164, or 2.16%, over the same period of 2009. Although the Corporation discontinued its brokerage division during the third quarter of 2010, income earned on investment and trust services for the first three quarters of 2010 remained relatively constant compared to same period of 2009. Fees from deposit service charges and electronic banking increased $151, or 2.76%, compared to the same period last year.

Total net gains recorded during the first three quarters of 2010 increased $1,202 over the first three quarters of 2009. This was mainly a result of the gain on extinguishment of debt described above. Gains on the sale of securities decreased $636, as no securities were sold during the second and third quarters of 2010. Gains on the sale of loans decreased $312 for the first three quarters of 2010 compared to the same period of 2009. Sales of bank owned property resulted in a loss of $73 during the first three quarters of 2010.

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     Noninterest Expense

Table 6: Details on Noninterest Expense

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(Dollars in thousands)				(Dollars in thousands)
Salaries and employee benefits	$	3,898	$	3,610	$	11,727	$	11,130
Furniture and equipment		866		1,039		2,716		3,370
Net occupancy		579		571		1,775		1,785
Outside services		538		657		1,686		2,001
Marketing and public relations		256		228		828		767
Supplies, postage and freight		292		311		936		951
Telecommunications		200		208		623		596
Ohio Franchise tax		274		232		836		689
FDIC Assessments		568		743		1,653		2,032
Other real estate owned		95		89		247		263
Electronic banking expenses		237		209		659		598
Loan and Collection Expense		433		385		1,206		963
Other expense		532		455		1,527		1,432
Total noninterest expense	$	8,768	$	8,737	$	26,419	$	26,577

Three Months Ended September 30, 2010 versus Three Months Ended September 30, 2009 Noninterest Expense Comparison

Noninterest expense for the third quarter of 2010 remained relatively constant compared to the same period of 2009, increasing only $31. The Corporation experienced an increase in salaries and employee benefits expense of $288, or 7.98%, during the third quarter of 2010 compared to the same period of 2009 mainly due to lower deferred costs which is driven by lower loan volume. Loan and collection expense increased $48, or 12.47%, when compared to the prior period. This is mainly attributable to the Corporation’s expanded efforts related to workouts of its problem loans. Offsetting these increases was a decline in furniture and equipment expense, which decreased $173, or 16.65%, compared to the same period last year. Outside services, which includes attorney’s fees, reflects costs associated with the Corporation’s ongoing litigation with a shareholder. See Part II, Other Information, Item 1. Legal Proceedings, for more information.

Nine Months Ended September 30, 2010 versus Nine Months Ended September 30, 2009 Noninterest Expense Comparison

Noninterest expense decreased $158, or 0.59%, for the first three quarters of 2010 over the same period 2009. FDIC assessments decreased $379 compared to the same period of 2009 main as a result of the special premium assessment of $580 imposed by the FDIC during the second quarter of 2009. Furniture and equipment expense decreased $654, or 19.41%, compared to the prior period. Offsetting these decreases, salaries and employee benefits increased $597, or 5.36%, compared to the same period of 2009 mainly due to lower deferred costs. The Corporation also experienced an increase of $61, or 10.20%, in loan and collections expense, including legal costs, primarily due to the weakness of the economy and continued delinquencies.

     Income taxes

Three Months Ended September 30, 2010 versus Three Months Ended September 30, 2009 Income Taxes Comparison

The Corporation recognized income tax expense of $842 and an income tax benefit of $2,726 for the third quarter of 2010 and 2009, respectively. Included in net income for the three months ended September 30, 2010 was $413 of nontaxable income, including $140 related to life insurance policies and $273 of tax-exempt investment and loan interest income. The new market tax credit generated by North Coast Community Development Corporation, a wholly-owned subsidiary of the Bank, also had a significant impact on income tax expense and contributes to a

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lower effective tax rate for the Corporation. After considering the tax-exempt income and relatively small nondeductible expenses, income subject to tax is significantly less than income before income tax expense.

Nine Months Ended September 30, 2010 versus Nine Months Ended September 30, 2009 Income Taxes Comparison

The Corporation recognized income tax expense of $1,422 and an income tax benefit of $2,559 during the first three quarters of 2010 and 2009, respectively. Included in net income for the nine months ended September 30, 2010 was $1,240 of nontaxable income, including $422 related to life insurance policies and $818 of tax-exempt investment and loan interest income.

Financial Condition

     Overview

The Corporation’s assets at September 30, 2010 were $1,156,602 compared to $1,149,509 at December 31, 2009. This is an increase of $7,093, or 0.62%. Total securities decreased $40,562, or 15.88%, compared to December 31, 2009, mainly as a result of the Corporation’s sale of trading securities as well as U.S. Government agency securities that were called during the later part of the third quarter of 2010. Portfolio loans decreased $7,288, or 0.91%, from December 31, 2009. Total deposits at September 30, 2010 were $979,031 compared to $971,433 at December 31, 2009. The growth in deposits came in the form of core deposits which generally tends to improve liquidity while reducing costs.

     Securities

The composition of the Corporation’s securities portfolio at September 30, 2010 and December 31, 2009 is presented in Note 5 to the Consolidated Financial Statements contained within this Form 10-Q. The Corporation continues to employ its securities portfolio to manage interest rate risk and to manage its liquidity needs. Currently, the portfolio is comprised of 97.40% available for sale securities and 2.60% restricted stock. Available for sale securities are comprised of 14.85% U.S. Government agencies, 73.83% U.S. agency mortgage backed securities, and 11.32% municipal securities. At September 30, 2010 the available for sale securities had a net temporary unrealized gain of $8,050, representing 3.89% of the total amortized cost of the Bank’s available for sale securities.

     Loans

The detail of loan balances are presented in Note 6 to the Consolidated Financial Statements contained within this Form 10-Q. Table 7 provides further detail by loan purpose.

Table 7: Details on Loan Balances

	September 30, 2010			December 31, 2009
	(Dollars in thousands)
Commercial	$	438,252		$	452,341
Real estate mortgage		67,551			77,204
Home equity lines of credit		110,484			108,921
Installment		179,622			164,731
Total Loans		795,909			803,197
Allowance for loan losses		(17,197	)		(18,792	)
Net Loans	$	778,712		$	784,405

Total portfolio loans at September 30, 2010 were $795,909. This is a decrease of $7,288 from December 31, 2009. At September 30, 2010, commercial loans represented 55.06% of total portfolio loans. Consumer loans, consisting of installment loans and home equity loans, comprised 36.45% of total portfolio loans. Consumer loans are made to borrowers on both secured and unsecured terms dependent on the maturity and nature of the loan. Real estate mortgages comprise 8.49% of total portfolio loans.

Commercial loans decreased by $14,089, or 3.11%, compared to December 31, 2009. The decline of $9,653 in real estate mortgages is mainly attributable to the refinancing in the existing seasoned mortgage portfolio given the low interest rate environment and the Corporation’s practice of selling new mortgage production into the secondary market. Consumer loans increased $14,891, or 9.04%, compared to December 31, 2009.

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Loans held for sale, and not included in portfolio loans, were $4,676 at September 30, 2010. Mortgage loans held for sale represented 50.88% and installment loans represented 49.12% of loans held for sale. Loans held for sale at December 31, 2009 were $3,783 and consisted of 85.36% mortgage loans and 14.64% installment loans. The Corporation retains the servicing rights on these loans.

     Provision and Allowance for Loan Losses

The allowance for loan losses is maintained by the Corporation at a level considered by Management to be adequate and appropriate to cover probable credit losses inherent in the Corporation’s loan portfolio. The amount of the provision for loan losses charged to operating expenses is the amount necessary, in the estimation of Management, to maintain the allowance for loan losses at an adequate level. Management determines the adequacy of the allowance based upon past experience, changes in portfolio size and mix, trends in delinquency, relative quality of the loan portfolio and the rate of loan growth, assessments of current and future economic conditions, and information about specific borrower situations, including their financial position and collateral values, and other factors, which are subject to change over time. While Management’s periodic analysis of the allowance for loan losses may dictate portions of the allowance be allocated to specific problem loans, the entire amount is available for any loan charge-offs that may occur. Table 8 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, 2010 and 2009.

Table 8: Analysis of Allowance for Loan Losses

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(Dollars in thousands)						(Dollars in thousands)
Balance at beginning of period	$	19,435		$	12,978		$	18,792		$	11,652
Charge-offs:
Commercial		(3,501	)		(366	)		(6,094	)		(1,810	)
Real estate mortgage		(630	)		—			(769	)		(143	)
Home equity lines of credit		(100	)		(632	)		(858	)		(1,337	)
Installment		(160	)		(472	)		(617	)		(1,423	)
DDA Overdrafts		(69	)		(63	)		(161	)		(162	)
Total charge-offs		(4,460	)		(1,533	)		(8,499	)		(4,875	)
Recoveries:
Commercial		8			3			213			171
Real estate mortgage		—			—			—			12
Home equity lines of credit		31			—			31			24
Installment		91			32			319			175
DDA Overdrafts		16			9			47			37
Total Recoveries		146			44			610			419
Net Charge-offs		(4,314	)		(1,489	)		(7,889	)		(4,456	)
Provision for loan losses		2,076			11,067			6,294			15,360
Balance at end of period	$	17,197		$	22,556		$	17,197		$	22,556

The provision for loan losses for the quarter ended September 30, 2010 was $2,076 and for the nine month period ended September 30, 2010 was $6,294. In addition to weakness in the overall economy and the relatively high level of unemployment, a significant factor impacting asset quality has been the trend of decreasing market valuation of the underlying collateral, particularly over the past twelve to eighteen months, primarily in construction and development and commercial real estate loans, and the need to provide additional allowances due to these lower valuations. In addition, the collateral value of the properties securing these loans has declined over the past year and specific reserves were increased on a number of these loans as a result of new valuations received during the quarter.

The allowance for loan losses at September 30, 2010 was $17,197, or 2.16%, of outstanding loans, compared to $22,556, or 2.77%, of portfolio loans at September 30, 2009 and $18,792, or 2.34%, of outstanding loans at

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December 31, 2009. The allowance for loan losses was 37.56% and 52.35% of nonperforming loans at September 30, 2010 and September 30, 2009, respectively.

Net charge-offs for the three months ended September 30, 2010 were $4,314, compared to $1,489 for the three months ended September 30, 2009. Net charge-offs for the nine months ended September 30, 2010 were $7,889, compared to $4,456 for the nine months ended September 30, 2009. Annualized net charge-offs as a percent of average loans for the third quarter and first three quarters of 2010 were 2.14% and 1.33% respectively, compared to 0.73% and 0.74% for the same periods in 2009. The provision for loan losses for the three and nine month periods ended September 30, 2010 was, in the opinion of Management, adequate when balancing the charge-off levels with the level of nonperforming loans, the level of potential problem loans and delinquency. The resulting allowance for loan losses is, in the opinion of Management, sufficient given its analysis of the information available about the portfolio at September 30, 2010. The Corporation continues to aggressively address potential problem loans, and underwriting standards continue to be adjusted in response to trends and asset review findings.

     Deposits

Table 9: Deposits and Borrowings

	Average Balances Outstanding				Average Rates Paid
	For the Three Months Ended
	September 30, 2010		December 31, 2009		September 30, 2010			December 31, 2009
			(Dollars in thousands)
Demand deposits	$	114,826	$	105,074		0.00	%		0.00	%
Interest checking		139,598		137,682		0.17			0.22
Money market		93,486		90,158		0.41			0.35
Savings deposits		87,961		80,984		0.17			0.19
Consumer time deposits		457,669		483,577		1.94			2.55
Public time deposits		78,022		80,528		0.61			1.17
Total Deposits		971,562		978,003		1.04			1.44
Short-term borrowings		1,708		10,961		0.25			0.46
FHLB borrowings		42,589		42,988		2.97			3.23
Junior subordinated debentures		19,269		20,727		4.48			4.21
Total borrowings		63,566		74,676		3.36			3.10
Total funding	$	1,035,128	$	1,052,679		1.18	%		1.56	%

Average deposits for the three months ended September 30, 2010 were $971,562 compared to average deposits of $978,003 for the three months ended December 31, 2009. Average consumer time deposits decreased $25,908 over the nine month period between December 31, 2009 and September 30, 2010 primarily as a result of lower market interest rates during the first three quarters of 2010. Deposit accounts and the generation of deposit accounts continue to be the primary source of funds for the Corporation. As indicated in the table above, growth in transaction core deposits has reduced the Corporation’s reliance on consumer certificate of deposit accounts and increased the net interest margin. The Corporation offers various deposit products to both retail and business customers. The Corporation also has available 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.

Substantially all of the Bank’s deposits are insured up to applicable limits by the FDIC. Accordingly, the Bank is subject to deposit insurance premium assessments by the FDIC. Under current law, the FDIC is required to maintain the Deposit Insurance Fund (“DIF”) reserve ratio within the range of 1.15% to 1.50% of estimated insured deposits. Current law also requires the FDIC to implement a restoration plan when it determines that the DIF reserve ratio has fallen, or will fall within six months, below 1.15% of estimated insured deposits.

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     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, 2010, the Corporation had $1,491 of short-term borrowings. There were no federal funds purchased at September 30, 2010. Long-term borrowings for the Corporation consist of Federal Home Loan Bank advances of $42,502 and junior subordinated debentures of $16,238. Federal Home Loan Bank advances were $42,505 at December 31, 2009. Maturities of long-term Federal Home Loan Bank advances are presented in Note 9 to the Consolidated Financial Statements contained within this Form 10-Q. During the second quarter of 2007, the Corporation completed a private offering of trust preferred securities, as described in Note 10 to the Consolidated Financial Statements contained within this Form 10-Q. The securities were issued in two $10 million tranches, one of which pays dividends at a fixed rate of 6.64% per annum and the other of which pays dividends at LIBOR plus 1.48% per annum. During the third quarter of 2010, the Corporation exchanged and retired $4,250 principal amount of its non-pooled trust preferred securities for approximately 462,000 newly issued shares of the Corporation’s common stock.

     Regulatory Capital

The Corporation continues to maintain an appropriate capital position. Total shareholders’ equity was $111,343 at September 30, 2010. This is an increase of 6.92% over December 31, 2009. Net income increased total shareholders’ equity by $5,304 for the nine months ended September 30, 2010. Other factors increasing shareholders’ equity were a $958 increase in accumulated other comprehensive gain resulting from an increase in the fair value of available for sale securities, $2,040 for the issuance of common shares and a $70 increase for share-based payment arrangements. Cash dividends payable to common shareholders in the amount of $225 and preferred shareholders in the amount of $945 decreased total shareholders’ equity in the first nine months of 2010.

The Corporation held 328,194 shares of common stock as treasury stock at September 30, 2010, at a cost of $6,092. The Corporation and the Bank continue to monitor growth of balance sheet liabilities in an effort to stay within the guidelines established by applicable regulatory authorities. At September 30, 2010 and December 31, 2009, the Corporation and Bank maintained capital ratios consistent with current guidelines to be deemed well-capitalized under Federal banking regulations.

On July 28, 2005, the Corporation announced a share repurchase program of up to 5 percent, or about 332,000, of its common shares outstanding. Repurchased shares can be used for a number of corporate purposes, including the Corporation’s stock option and employee benefit plans. The share repurchase program provides that share repurchases are 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, at the discretion of management based upon market, business, legal and other factors. However, the terms of the Corporation’s sale of $25,223 of its Series B Preferred Stock to the U.S. Treasury in December 2008 in conjunction with the TARP Capital Purchase Program include limitations on the Corporation’s ability to repurchase its common shares. For three years after the issuance or until the U.S. Treasury no longer holds any Series B Preferred Stock, the Corporation will not be able to repurchase any of its common shares or preferred stock without, among other things, U.S. Treasury approval or the availability of certain limited exceptions, e.g., purchases in connection with the Corporation’s benefit plans. Furthermore, as long as the Series B Preferred Stock issued to the U.S. Treasury is outstanding, repurchases or redemptions relating to certain equity securities, including the Corporation’s common shares, are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions. As of September 30, 2010, the Corporation had repurchased an aggregate of 202,500 shares under this program.

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;

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• changes in political conditions or the legislative or regulatory environment, including new or heightened legal standards and regulatory requirements, practices or expectations, which may impede profitability or affect the Corporation’s financial condition (such as, for example, the Dodd-Frank Wall Street reform and Consumer Protection Act and rules and regulations that may be promulgated under the Act);

• persisting volatility and limited credit availability in the financial markets, particularly if limitations on the Corporation’s ability to raise funding to the extent required by banking regulators or otherwise; initiatives undertaken by the U.S. government do not have the intended effect on the financial markets;

• limitations on the Corporation’s ability to return capital to shareholders and dilution of the Corporation’s common shares that may result from the terms of the Capital Purchase Program (“CPP”), pursuant to which the Corporation issued securities to the United States Department of the Treasury (the “U.S. Treasury”);

• limitations on the Corporation’s ability to pay dividends;

• increases in interest rates or further weakening economic conditions that could constrain borrowers’ ability to repay outstanding loans or diminish the value of the collateral securing those loans;

• adverse effects on the Corporation’s ability to engage in routine funding transactions as a result of the actions and commercial soundness of other financial institutions;

• asset price deterioration, which has had and may continue to have a negative effect on the valuation of certain asset categories represented on the Corporation’s balance sheet;

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

• increases in deposit insurance premiums or assessments imposed on the Corporation by the FDIC;

• difficulty attracting and/or retaining key executives and/or relationship managers at compensation levels necessary to maintain a competitive market position;

• changes occurring in business conditions and inflation;

• changes in technology;

• changes in trade, monetary, fiscal and tax policies;

• changes in the securities markets, in particular, continued disruption in the fixed income markets and adverse capital market conditions;

• continued disruption in the housing markets and related conditions in the financial markets; and

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

Critical Accounting Policies and Estimates

The Corporation’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The Corporation follows general practices within the banking industry and application of these principles requires Management to make assumptions, estimates and judgments that affect the financial statements and accompanying notes. These assumptions, estimates and judgments are based on information available as of the date of the financial statements.

The most significant accounting policies followed by the Corporation are presented in Note 1 to the Consolidated Financial Statements contained within this Form 10-Q. These policies are fundamental to the understanding of results of operation and financial conditions.

The accounting policies considered by Management to be critical 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

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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 collectability 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 ASC 450, “Accounting for Contingencies,” or ASC 310-10-45, “Accounting by Creditors for Impairment of a Loan.”

The general allowance is determined by applying estimated loss factors to the credit exposures from outstanding loans. For commercial and commercial real estate loans, loss factors are applied based on internal risk grades of these loans. Many factors are considered when these grades are assigned to individual loans such as current and past delinquency, financial statements of the borrower, current net realizable value of collateral and the general economic environment and specific economic trends affecting the portfolio. For residential real estate, installment and other loans, loss factors are applied on a portfolio basis. Loss factors are based on the Corporation’s historical loss experience and are reviewed for appropriateness on a quarterly basis, along with other factors affecting the collectability of the loan portfolio.

Specific allowances are established for all classified loans when Management has determined that, due to identified significant conditions, it is probable that a loss has been incurred that exceeds the general allowance loss factor from these loans. The unallocated allowance recognizes the estimation risk associated with the allocated general and specific allowances and incorporates Management’s evaluation of existing conditions that are not included in the allocated allowance determinations. These conditions are reviewed quarterly by Management and include general economic conditions, credit quality trends and internal loan review and regulatory examination findings.

Management believes that it uses the best information available to determine the adequacy of the allowance for loan losses. However, future adjustments to the allowance may be necessary and the results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations.

Income Taxes

The Corporation’s income tax expense and related current and deferred tax assets and liabilities are presented as prescribed in ASC 740, “Accounting for Income Taxes”. The accounting 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.

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Goodwill

The goodwill impairment test is a two-step process that requires Management to make judgments in determining what assumptions to use in the calculation. The first step in impairment testing is to estimate the fair value based on valuation techniques including a discounted cash flow model with revenue and profit forecasts and comparing those estimated fair values with the carrying values, which includes the allocated goodwill. If the carrying value exceeds its fair value, goodwill impairment may be indicated and a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of an “implied fair value” of goodwill requires the Corporation to allocate fair value to the assets and liabilities. Any unallocated fair value represents the “implied fair value” of goodwill, which is compared to its corresponding carrying value. An impairment loss would be recognized as a charge to earnings to the extent the carrying amount of the goodwill exceeds the implied fair value of the goodwill. See Note 4 (Goodwill and Intangible Assets) for further detail.

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.

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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, credit and liquidity risk.

   Credit Risk Management

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

   Nonperforming Assets

Total nonperforming assets consist of nonperforming loans, loans which have been restructured, and other foreclosed assets. As such, a loan is considered nonperforming if it is 90 days past due and/or in Management’s estimation the collection of interest on the loan is doubtful. Nonperforming loans no longer accrue interest and are accounted for on a cash basis. The classification of restructured loans involves the deterioration of a borrower’s financial ability leading to original terms being favorably modified or either principal or interest being forgiven. Nonperforming loans at September 30, 2010 were $43,574 as compared to $38,837 at December 31, 2009, an increase of $4,737. Of this total, commercial loans were $29,482 compared to $26,846 at December 31, 2009. These commercial loans 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, 2010, construction and land development represented $4,180 of the total commercial loan nonperforming, with the remaining being commercial and industrial. All nonperforming loans are being actively managed.

Management also monitors delinquency and potential commercial problem loans. Bank-wide delinquency at September 30, 2010 was 5.94% of total loans as compared to 5.51% at December 31, 2009. Total 30-90 day delinquency was 0.46% of total loans at September 30, 2010 and 0.75% at December 31, 2009.

Other foreclosed assets were $2,206 as of September 30, 2010 compared to $1,264 at December 31, 2009. The $2,206 is comprised of $1,374 in 1-4 family residential properties and $832 in non-farm non-residential properties. This compares to $196 in 1-4 family residential properties and $1,068 in non-farm non-residential properties as of December 31, 2009.

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Table 10 sets forth nonperforming assets at September 30, 2010 and December 31, 2009.

Table 10: Nonperforming Assets

	September 30, 2010			December 31, 2009
	(Dollars in thousands)
Commercial loans	$	29,482		$	26,846
Real estate mortgage		9,374			9,139
Home equity lines of credit		2,615			1,417
Installment loans		2,103			1,435
Total nonperforming loans		43,574			38,837
Other foreclosed assets		2,206			1,264
Total nonperforming assets	$	45,780		$	40,101
Loans 90 days past due accruing interest	$	—		$	—
Total nonperforming loans to total loans		5.47	%		4.84	%
Allowance for loan losses to nonperforming assets		37.56	%		46.86	%

   Market Risk Management

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

The difference between a financial institution’s interest rate sensitive assets and interest rate sensitive liabilities is referred to as the interest rate gap. An institution that has more interest rate sensitive assets than interest rate sensitive liabilities in a given period is said to be asset sensitive or has a positive gap. This means that if interest rates rise, a corporation’s net interest income may rise and if interest rates fall, its net interest income may decline. If interest sensitive liabilities exceed interest sensitive assets then the opposite impact on net interest income may occur. The usefulness of the gap measure is limited. It is important to know the gross dollars of assets and liabilities that may re-price in various time horizons, but without knowing the frequency and basis of the potential rate changes the predictive power of the gap measure is limited.

Two more useful tools in managing market risk are earnings-at-risk simulation and economic value of equity simulation. An earnings-at-risk analysis is a modeling approach that combines the repricing information from gap analysis, with forecasts of balance sheet growth and changes in future interest rates. The result of this simulation provides Management with a range of possible net interest margin outcomes. Trends that are identified in earnings-at-risk simulation can help identify product and pricing decisions that can be made currently to assure stable net interest income performance in the future. At September 30, 2010, a “shock” treatment of the balance sheet, in which a parallel shift in the yield curve occurs and all rates increase immediately, indicates that in a +200 basis point shock, net interest income would decrease $865, or 3.00%, and in a -200 basis point shock, net interest income would increase $1,875, or 6.50%. 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. September 30, 2010, this analysis indicated that a +200 basis point change in rates would reduce the value of the Corporation’s equity by 11.20% while a -200 basis point change in rates would increase the value of the Corporation’s equity by 6.50%.

    Liquidity Risk Management

Liquidity risk is the possibility of the Corporation being unable to meet current and future financial obligations in a timely manner. Liquidity is managed to ensure stable, reliable and cost-effective sources of funds to satisfy demand for credit, deposit withdrawals and investment opportunities. The Corporation relies on a large, stable core deposit base and a diversified base of wholesale funding sources to manage liquidity risk.

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The Corporation’s primary source of liquidity is its core deposit base, raised though its retail branch system, along with unencumbered, or unpledged, investment securities. The Corporation also has available unused wholesale sources of liquidity, including advances from the Federal Home Loan Bank of Cincinnati, borrowings through the discount window at the Federal Reserve Bank of Cleveland and access to certificates of deposit issued through brokers. Liquidity is also provided by unencumbered, or unpledged, investment securities that totaled $64,875 at September 30, 2010.

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 of September 30, 2010, pursuant to the evaluation of these controls and procedures required by Rule 13a-15 of the Securities Exchange Act of 1934.

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, 2010 were: (1) designed to ensure that material information relating to the Corporation and its subsidiaries is made known to the Chief Executive Officer and Chief Financial Officer by others within the entities, and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. No change in the Corporation’s internal control over financial reporting (as defined by 13a-15(f) and 15(d)-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

On April 18, 2008, the Corporation and Richard M. Osborne and certain other parties entered into a settlement agreement (the “Settlement Agreement”) to settle certain contested matters relating to the Corporation’s 2008 annual meeting of shareholders. Under the Settlement Agreement, among other things, Mr. Osborne agreed not to seek representation on the Corporation’s Board of Directors or to solicit proxies with respect to the voting of the Corporation’s common shares for a period of at least 18 months after April 18, 2008. In proxy materials filed with the SEC on March 20, 2009, Mr. Osborne indicated his intent to solicit proxies in favor of the election of two nominees for election as directors at the Corporation’s 2009 annual meeting of shareholders. On March 24, 2009, the Corporation filed a complaint against Mr. Osborne for a declaratory judgment and preliminary and permanent injunctive relief in the United States District Court for the Northern District of Ohio, Eastern Division, to restrain Mr. Osborne from (a) engaging in any solicitation of proxies or consents, (b) seeking to advise, encourage or influence any person or entity with respect to the voting of any voting securities of the Corporation, (c) initiating, proposing or otherwise soliciting shareholders of the Corporation for the approval of shareholder proposals, (d) entering into any discussions, negotiations, agreements, arrangements or understanding with any third party with respect to any of the foregoing and (e) disseminating his proposed proxy materials to shareholders of the Corporation. The Corporation also sought an order from the Court temporarily restraining Mr. Osborne from engaging in any of the foregoing activities. On March 28, 2009, the Court issued an order granting the Corporation’s motion for a temporary restraining order. On April 3, 2009, the Court issued an order granting the Corporation’s motion for a preliminary injunction restraining Mr. Osborne from engaging in any of the foregoing activities. On February 15, 2010, Mr. Osborne filed a motion to dissolve the preliminary injunction, which the Corporation opposed. On March 23, 2010, the Court denied Mr. Osborne’s motion to dissolve the preliminary injunction. Prior to the Court’s decision, on March 19, 2010, Mr. Osborne filed a motion for summary judgment and the Corporation filed a motion for partial summary judgment. On April 14, 2010, Mr. Osborne filed an interlocutory appeal of the denial of his motion to dissolve the preliminary injunction with the Sixth Circuit Court of Appeals. Proceedings in the District Court have been stayed pending resolution of Mr. Osborne’s appeal by the Sixth Circuit Court of Appeals. The case has been fully briefed and the parties are awaiting a decision from the Sixth Circuit Court of Appeals regarding the continuing preliminary injunction. Once the Sixth Circuit makes its decision, the case will be remanded to the District Court for dispositive motions and, if necessary, a trial on the merits.

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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, 2009.

The impact of financial reform legislation on the Corporation is uncertain.

The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act institutes a wide range of reforms that will have an impact on all financial institutions. The Act includes, among other things, changes to the deposit insurance and financial regulatory systems, enhanced bank capital requirements and new requirements designed to protect consumers in financial transactions. Many of these provisions are subject to rule making procedures and studies that will be conducted in the future and the full effects of the legislation on the Corporation cannot yet be determined. However, these provisions, or any other aspects of current proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of the Corporation’s business activities or change certain of the Corporation’s business practices, including its ability to offer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, and could expose the Corporation to additional costs, including increased compliance costs. These changes also may require the Corporation to invest significant management attention and resources to make any necessary changes to its operations in order to comply, and could therefore also materially adversely affect the Corporation’s business, financial condition, and results of operations.

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

Issuer Purchases of Equity Securities

On July 28, 2005, the Corporation announced a share repurchase program of up to 5 percent, or about 332,000, of its common shares outstanding. Repurchased shares can be used for a number of corporate purposes, including the Corporation’s stock option and employee benefit plans. The share repurchase program provides that share repurchases are 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, at the discretion of management based upon market, business, legal and other factors. However, the terms of the Corporation’s sale of $25,223 of its series B preferred stock to the U.S. Treasury in December 2008 in conjunction with the TARP Capital Purchase Program include limitations on the Corporation’s ability to repurchase its common shares. For three years after the issuance or until the U.S. Treasury no longer holds any series B preferred stock, the Corporation will not be able to repurchase any of its common shares or preferred stock without, among other things, U.S. Treasury approval or the availability of certain limited exceptions, e.g., purchases in connection with the Corporation’s benefit plans. Furthermore, as long as the series B preferred stock issued to the U.S. Treasury is outstanding, repurchases or redemptions relating to certain equity securities, including the Corporation’s common shares, are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions. As of September 30, 2010, the Corporation had repurchased an aggregate of 202,500 shares under this program.

Item 6. Exhibits.

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

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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 4, 2010	/s/ Gary J. Elek
	Gary J. Elek
	Chief Financial Officer (Duly Authorized Officer, and Principal Financial and Accounting Officer)

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

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

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