UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

OR

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

For the transition period from              to             

Commission file number: 0-13203

LNB Bancorp, Inc.

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

Ohio	34-1406303
(State of Incorporation)	(I.R.S. Employer Identification No.)
457 Broadway, Lorain, Ohio	44052-1769
(Address of principal executive offices)	(Zip Code)

(440) 244-6000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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  x    No  ¨

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  x    No  ¨

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	¨	Accelerated filer	¨
Non-accelerated filer	x  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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

The number of common shares of the registrant outstanding on November 1, 2011 was 7,882,249.

LNB Bancorp, Inc.

Table of Contents

Part I — Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets September 30, 2011 (unaudited) and December 31, 2010	3
Consolidated Statements of Income (unaudited) for the three and nine months ended September  30, 2011 and September 30, 2010	4
Consolidated Statements of Shareholders’ Equity (unaudited)  for the nine months ended September 30, 2011 and September 30, 2010	5
Consolidated Statements of Cash Flows (unaudited) for the nine months ended September  30, 2011 and September 30, 2010	6
Notes to the Consolidated Financial Statements (unaudited)	7
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3. Quantitative and Qualitative Disclosures about Market Risk	46
Item 4. Controls and Procedures	48
Part II — Other Information	48
Item 1. Legal Proceedings	48
Item 1A. Risk Factors	49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 6. Exhibits	49

2

Part I — FINANCIAL INFORMATION

Item 1. Financial Statements.

Consolidated Balance Sheets

	September 30, 2011			December 31, 2010
	(unaudited)
	(Dollars in thousands except share amounts)
ASSETS
Cash and due from banks (Note 3)	$	34,682		$	17,370
Federal funds sold and interest bearing deposits in banks		5,966			31,198
Cash and cash equivalents		40,648			48,568
Securities available for sale, at fair value (Note 5)		232,358			221,725
Restricted stock		5,741			5,741
Loans held for sale		4,069			5,105
Loans: (Note 6)
Portfolio loans		837,492			812,579
Allowance for loan losses (Note 6)		(17,845	)		(16,136	)
Net loans		819,647			796,443
Bank premises and equipment, net		9,105			9,645
Other real estate owned		2,116			3,119
Bank owned life insurance		17,670			17,146
Goodwill, net (Note 4)		21,582			21,582
Intangible assets, net (Note 4)		766			868
Accrued interest receivable		3,667			3,519
Other assets		12,914			19,076
Total Assets	$	1,170,283		$	1,152,537
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits: (Note 7)
Demand and other noninterest-bearing	$	121,402		$	115,476
Savings, money market and interest-bearing demand		352,089			318,434
Time deposits		515,788			544,616
Total deposits		989,279			978,526
Short-term borrowings (Note 8)		371			932
Federal Home Loan Bank advances (Note 9)		47,498			42,501
Junior subordinated debentures (Note 10)		16,238			16,238
Accrued interest payable		1,271			1,434
Accrued taxes, expenses and other liabilities		2,928			3,442
Total Liabilities		1,057,585			1,043,073
Shareholders’ Equity
Preferred stock, Series A Voting, no par value, authorized 150,000 shares, none issued at September 30, 2011 and December 31, 2010.		—			—
Preferred stock, Series B, no par value, $1,000 liquidation value, 25,223 shares authorized and issued at September 30, 2011 and December 31, 2010.		25,223			25,223
Discount on Series B preferred stock		(105	)		(116	)
Warrant to purchase common stock		146			146
Common stock, par value $1 per share, authorized 15,000,000 shares, issued 8,210,443 shares at September 30, 2011 and 8,172,943 at December 31, 2010.		8,210			8,173
Additional paid-in capital		39,559			39,455
Retained earnings		42,989			40,668
Accumulated other comprehensive income		2,768			2,007
Treasury shares at cost, 328,194 shares at September 30, 2011 and at December 31, 2010		(6,092	)		(6,092	)
Total Shareholders’ Equity		112,698			109,464
Total Liabilities and Shareholders’ Equity	$	1,170,283		$	1,152,537

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Income (unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(Dollars in thousands except share and per share amounts)
Interest and Dividend Income
Loans	$	10,692		$	10,740		$	31,731		$	32,112
Securities:
U.S. Government agencies and corporations		1,505			1,395			4,594			5,601
State and political subdivisions		257			246			770			737
Trading securities		—			—			—			49
Other debt and equity securities		67			72			210			202
Federal funds sold and interest on deposits in banks		15			10			38			30
Total interest and dividend income		12,536			12,463			37,343			38,731
Interest Expense
Deposits		2,044			2,554			6,531			8,279
Federal Home Loan Bank advances		263			319			790			953
Short-term borrowings		—			1			2			3
Junior subordinated debentures		170			217			511			648
Total interest expense		2,477			3,091			7,834			9,883
Net Interest Income		10,059			9,372			29,509			28,848
Provision for Loan Losses (Note 6)		2,100			2,076			7,545			6,294
Net interest income after provision for loan losses		7,959			7,296			21,964			22,554
Noninterest Income
Investment and trust services		378			403			1,251			1,411
Deposit service charges		1,099			1,146			3,015			3,179
Other service charges and fees		769			792			2,494			2,412
Income from bank owned life insurance		175			171			524			515
Other income		66			86			186			248
Total fees and other income		2,487			2,598			7,470			7,765
Securities gains, net		7			—			507			38
Gains on sale of loans		181			264			598			651
Loss on sale of other assets, net		(133	)		(28	)		(158	)		(73	)
Gain on extinguishment of debt		—			2,210			—			2,210
Total noninterest income		2,542			5,044			8,417			10,591
Noninterest Expense
Salaries and employee benefits		3,986			3,898			12,149			11,727
Furniture and equipment		821			866			2,299			2,716
Net occupancy		569			579			1,769			1,775
Professional fees		450			538			1,381			1,686
Marketing and public relations		215			256			761			828
Supplies, postage and freight		265			292			826			936
Telecommunications		163			200			547			623
Ohio franchise tax		303			274			899			836
FDIC assessments		396			568			1,369			1,653
Other real estate owned		144			95			941			247
Electronic banking expenses		236			237			668			659
Loan and collection expense		334			433			1,086			1,206
Other expense		447			532			1,345			1,527
Total noninterest expense		8,329			8,768			26,040			26,419
Income before income tax expense		2,172			3,572			4,341			6,726
Income tax expense		500			842			827			1,422
Net Income	$	1,672		$	2,730		$	3,514		$	5,304
Dividends and accretion on preferred stock		319			320			956			957
Net Income Available to Common Shareholders	$	1,353		$	2,410		$	2,558		$	4,347
Net Income Per Common Share (Note 2)
Basic	$	0.17		$	0.32		$	0.32		$	0.59
Diluted		0.17			0.32			0.32			0.59
Dividends declared		0.01			0.01			0.03			0.03
Average Common Shares Outstanding
Basic		7,882,439			7,514,935			7,879,575			7,400,957
Diluted		7,882,439			7,513,935			7,879,575			7,400,957

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Shareholders’ Equity (unaudited)

	Preferred Stock (Net of Discount)		Warrant to Purchase Common Stock		Common Stock		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income		Treasury Stock			Total
	(Dollars in thousands except share and per share amounts)
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
Balance, January 1, 2011	$	25,107	$	146	$	8,173	$	39,455		$	40,668		$	2,007	$	(6,092	)	$	109,464
Comprehensive income:
Net Income											3,514								3,514
Other comprehensive income, net of tax:
Change in unrealized gains and losses on securities														761					761
Total comprehensive income																			4,275
Share-based compensation								141											141
Restricted shares granted (40,000 shares), net of forfeitures (2,500 shares)						37		(37	)										—
Preferred dividends and accretion of discount		11									(956	)							(945	)
Common dividends declared, $.03 per share											(237	)							(237	)
Balance, September 30, 2011	$	25,118	$	146	$	8,210	$	39,559		$	42,989		$	2,768	$	(6,092	)	$	112,698

See accompanying notes to consolidated financial statements

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Consolidated Statements of Cash Flows (unaudited)

	Nine Months Ended September 30,
	2011			2010
	(Dollars in thousands)
Operating Activities
Net income	$	3,514		$	5,304
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		7,545			6,294
Depreciation and amortization		935			1,041
Amortization of premiums and discounts		1,066			1,571
Amortization of intangibles		102			102
Amortization of loan servicing rights		118			189
Amortization of deferred loan fees and costs		(208	)		(46	)
Federal deferred income tax expense		453			796
Securities gains, net		(507	)		(38	)
Share-based compensation		141			70
Loans originated for sale		(47,201	)		(60,319	)
Proceeds from sales of loan originations		48,835			59,426
Net gain from loan sales		(598	)		(651	)
Net loss on sale of other assets		158			73
Net gain on extinguishment of debt		—			(2,210	)
Net decrease in accrued interest receivable and other assets		4,527			3,436
Net decrease in accrued interest payable, taxes and other liabilities		(677	)		(3,357	)
Net cash provided by operating activities		18,203			11,681
Investing Activities
Proceeds from sales of available-for-sale securities		24,560			4,170
Proceeds from maturities of available-for-sale securities		80,061			102,338
Purchase of available-for-sale securities		(114,660	)		(74,355	)
Proceeds from maturities of trading securities		—			436
Proceeds from sale of trading securities		—			7,774
Purchase of Federal Reserve Bank Stock		—			(756	)
Net increase in loans made to customers		(33,013	)		(1,544	)
Proceeds from the sale of other real estate owned		3,317			419
Purchase of bank premises and equipment		(395	)		(484	)
Net cash (used in) provided by investing activities		(40,130	)		37,998
Financing Activities
Net increase (decrease) in demand and other noninterest-bearing		5,926			(5,784	)
Net increase in savings, money market and interest-bearing demand		33,655			21,629
Net decrease in time deposits		(28,828	)		(8,247	)
Net increase (decrease) in short-term borrowings		(560	)		34
Proceeds from Federal Home Loan Bank advances		24,500			34,000
Payment of Federal Home Loan Bank advances		(19,504	)		(34,003	)
Extinguishment of debt, net		—			(10	)
Dividends paid-preferred		(945	)		(945	)
Dividends paid-common		(237	)		(225	)
Net cash provided by financing activities		14,007			6,449
Net increase (decrease) in cash and cash equivalents		(7,920	)		56,128
Cash and cash equivalents, January 1		48,568			26,946
Cash and cash equivalents, September 30	$	40,648		$	83,074
Supplemental cash flow information
Interest paid	$	7,998		$	10,239
Income taxes paid		860			675
Loans transferred to other real estate owned		2,899			1,640
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 primary 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.

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnote disclosures necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of the Corporation included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010. However, all adjustments (consisting only of normal recurring accruals) which, in the opinion of the Corporation’s management (“Management”), are necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the nine month period ended September 30, 2011, are not necessarily indicative of the results which may be expected for a full year.

Use of Estimates

LNB Bancorp Inc. prepares its financial statements in conformity with generally accepted accounting principles (GAAP), which requires 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, mortgage servicing rights, 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 assets and liabilities.

Segment Information

The Corporation’s activities are considered to be a single industry segment for financial reporting purposes. LNB Bancorp, Inc. is a financial holding company engaged in the business of commercial and retail banking, investment management and trust services with operations conducted through its main office and 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.

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. As of September 30, 2011 and December 31, 2010, the Corporation did not hold any trading securities. Securities that the Corporation has a positive intent and ability to hold to maturity are classified as held to maturity. As of September 30, 2011 and December 31, 2010, LNB Bancorp, Inc. did not hold any securities classified as held to maturity. Securities that are not classified as trading or held to maturity are classified as available for sale. Securities classified as available for sale are carried at their fair value with unrealized gains and losses, net of tax, included as a component of accumulated other comprehensive income. 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.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. When evaluating investment securities,

7

consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Corporation has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. In analyzing an issuer’s financial condition, the Corporation may consider whether the securities are issued by the federal government or its agencies, or U.S. Government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to Management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether the Corporation intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If the Corporation decides to sell or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, the OTTI will be recognized in earnings equal to the difference between the investment’s amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. If a security is determined to be other-than-temporarily impaired, but the Corporation does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive 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 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. 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 and is recorded at redemption value which approximates fair value. The Corporation periodically evaluates the restricted stock for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Loans Held For Sale

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

Loans

Loans are reported at the principal amount outstanding, net of unearned income and 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 becomes uncertain. When a loan has been placed on nonaccrual status, the accrued and unpaid interest receivable is reversed against interest income. Placement of an account on nonaccrual status includes a reversal of all previously accrued but uncollected interest against interest income. When doubt exists as to the collectability of the principal portion of the loan, payments received must be applied to principal to the extent necessary to eliminate such doubt.

While in nonaccrual status, some or all of the cash interest payments may be treated as interest income on a cash basis as long as the remaining principal (after charge-off of identified losses, if any) is deemed to be fully collectible. The determination as to the ultimate collectability must be supported by a current, well-documented credit evaluation of the borrower’s financial condition and prospects for repayment, including consideration of the borrower’s historical repayment performance and other relevant factors. 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 collectability 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

8

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.

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. Additional information can be found in Note 6 (Loans and Allowance for Loan Losses).

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 on a quarterly basis 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. Goodwill is tested at least annually for impairment or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Corporation tests for goodwill impairment annually as of November 30^th 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) is comprised of property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure, and loans classified as in-substance foreclosure. Other real estate owned is recorded at the lower of the recorded investment in the loan at the time of acquisition or the fair value of the underlying property collateral, less estimated selling costs. Any write-down in the carrying value of a property at the time of acquisition is charged to the allowance for loan losses. Any subsequent write-downs to reflect current fair market value, as well as gains and losses on disposition and revenues and expenses incurred in maintaining such properties, are treated as period costs. Other real estate owned also includes bank premises formerly but no longer used for banking. Banking premises are transferred at the lower of carrying value or estimated fair value, less estimated selling costs.

9

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 post-retirement periods. Based on the present value of expected future cash flows, 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.

Income Taxes

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

Comprehensive Income

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 funded 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 $4,240 and $3,479 at September 30, 2011 and December 31, 2010, respectively, and the minimum pension liability adjustment (after applicable income tax benefit) totaling $1,472 for both September 30, 2011 and December 31, 2010 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, 2011, the Corporation had authorized 150,000 Series A Voting Preferred Shares. No Series A Voting Preferred Shares have been issued.

As of September 30, 2011 and December 31, 2010, 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. In connection with the Corporation’s sale of $25.2 million of its Series B preferred stock to the U.S. Treasury in conjunction with the TARP Capital Purchase Program, the Corporation also issued a warrant to purchase 561,343 of its common shares at an exercise price of $6.74.

New Accounting Pronouncements

Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. On September 15, 2011 the FASB issued an accounting standards update to simplify testing of goodwill for impairment. The changes will reduce complexity and costs by allowing an entity (public or nonpublic) to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. Specifically, an entity will have the option of first assessing qualitative factors (events and circumstances) to determine whether it is more likely than not (meaning a likelihood of more than fifty percent) that the fair value of a reporting unit is less than its carrying amount. The amendments will be effective for annual and interim goodwill impairment testing performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of this pronouncement is not expected to have a material impact on the Corporation’s financial statements.

ASC Topic 310: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. On April 5, 2011, the FASB issued a final standard to assist creditors in determining whether a modification of the terms of a receivable meets the definition of a troubled debt restructuring (TDR). The final standard, Accounting Standards Update (ASU) No. 2011-02, “Receivables (Topic 310): A Creditor’s Determination of

10

Whether a Restructuring Is a Troubled Debt Restructuring,” was issued as a result of stakeholders questioning whether additional guidance or clarification was needed to assist creditors with determining whether a modification is a TDR. The final standard does not change the long-standing guidance that a restructuring of a debt constitutes a TDR “if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.” In other words, the creditor must conclude that both the restructuring constitutes a concession, and the debtor is experiencing financial difficulties. The new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and has been applied retrospectively to restructurings occurring on or after January 1, 2011. As of September 30, 2011, the Corporation identified $1,817 in loans that were newly considered troubled debt restructurings under the provisions of ASU No. 2011-02. These loans did not require an allowance as each was either previously partially charged-off or was adequately secured by collateral. Refer to Note 6, Loans and Allowance for Loan Losses, for additional information.

ASC Topic 220: Comprehensive Income: Presentation of Comprehensive Income. On June 16, 2011, the FASB issued Accounting Standards Update (ASU) 2011-05. This ASU is intended to increase the prominence of other comprehensive income in financial statements. The new guidance does not change whether items are reported in net income or in other comprehensive income or whether and when items of other comprehensive income are reclassified to net income. ASU 2011-05 eliminates the option in current U.S. generally accepted accounting principles that permits the presentation of other comprehensive income in the statement of changes in equity. The new guidance in the ASU requires that an entity report comprehensive income in either a single continuous statement that presents the components of net income or a separate but consecutive statement. The new guidance is to be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this pronouncement is not expected to have a material impact on the Corporation’s financial statements.

Reclassification

Certain amounts appearing in the prior year’s financial statements have been reclassified to conform to the current period’s financial statements.

(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:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
	(Dollars in thousands except per share amounts)
Weighted average shares outstanding used in Basic Earnings per Common Share		7,882,439		7,514,935		7,879,575		7,400,957
Dilutive effect of incentive stock options and warrants		—		—		—		—
Weighted average shares outstanding used in Diluted Earnings Per Common Share		7,882,439		7,514,935		7,879,575		7,400,957
Net Income	$	1,672	$	2,730	$	3,514	$	5,304
Dividends and accretion on preferred stock		319		320		956		957
Income Available to Common Shareholders	$	1,353	$	2,410	$	2,558	$	4,347
Basic Earnings Per Common Share	$	0.17	$	0.32	$	0.32	$	0.59
Diluted Earnings Per Common Share	$	0.17	$	0.32	$	0.32	$	0.59

Options for an aggregate of 197,000 common shares and a common stock warrant for 561,343 shares were considered in computing diluted earnings per common share for the three and nine month periods ended September 30, 2011. All stock options and the stock warrant were antidilutive for the three and nine month periods ended September 30, 2011.

(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 $1,394 on September 30, 2011 and $1,195 on December 31, 2010.

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(4) Goodwill and Intangible Assets

The Corporation has goodwill of $21,582 primarily from an acquisition completed in 2007. 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 10.0%; and (c) a discount rate of 13.0%, 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, 2011		December 31, 2010
	(Dollars in thousands)
Core deposit intangibles	$	1,367	$	1,367
Less: accumulated amortization		601		499
Carrying value of core deposit intangibles	$	766	$	868

(5) Securities

The amortized cost, gross unrealized gains and losses and fair values of securities available for sale at September 30, 2011 and December 31, 2010 are as follows:

	At September 30, 2011
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(Dollars in thousands)
Securities available for sale:
U.S. Government agencies and corporations	$	58,784	$	134	$	(285	)	$	58,633
Mortgage backed securities		113,916		4,540		(247	)		118,209
Collateralized mortgage obligations		28,632		717		(5	)		29,344
State and political subdivisions		24,600		1,578		(6	)		26,172
Total securities available for sale	$	225,932	$	6,969	$	(543	)	$	232,358

	At December 31, 2010
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(Dollars in thousands)
Securities available for sale:
U.S. Government agencies and corporations	$	56,239	$	511	$	(682	)	$	56,068
Mortgage backed securities		91,793		4,128		(30	)		95,891
Collateralized mortgage obligations		44,297		1,249		(27	)		45,519
State and political subdivisions		24,125		522		(400	)		24,247
Total securities available for sale	$	216,454	$	6,410	$	(1,139	)	$	221,725

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The carrying value of securities pledged to secure trust deposits, public deposits, line of credit, and for other purposes required by law amounted to $140,552 and $152,079 at September 30, 2011 and December 31, 2010 respectively.

The amortized cost and fair value of the debt securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if issuers have the right to call or prepay obligations with or without call or prepayment penalties. U.S. Government agencies and corporations include callable and bullet agency issues and agency-backed mortgage backed securities. Mortgage backed securities and collateralized mortgage obligations are not due at a single maturity date and are shown separately.

	At September 30, 2011
	(Dollars in thousands)
Securities available for sale:	Amortized Cost		Fair Value
Due in one year or less	$	—	$	—
Due from one year to five years		25,805		25,826
Due from five years to ten years		17,947		18,844
Due after ten years		39,632		40,135
Mortgage backed securities and collateralized mortgage obligations		142,548		147,553
Total	$	225,932	$	232,358

Realized gains and losses related to securities available-for-sale sold during the nine-month periods ended September 30, 2011 and 2010 are as follows:

	September 30,
	2011		2010
	(Dollars in thousands)
Gross realized gains	$	500	$	138
Gross realized losses		—		(100	)
Net securities gains	$	500	$	38
Proceeds from the sale of available for sale securities	$	24,560	$	4,170

The securities portfolio contained $1,205 and $6,721 in non-rated securities of state and political subdivisions at September 30, 2011 and December 31, 2010, respectively. Based upon yield, term to maturity and market risk, the fair value of these securities was estimated to be $1,289 and $6,784 at September 30, 2011 and December 31, 2010, respectively. Management reviewed these non-rated securities and has determined that there was no other-than-temporary impairment to their value at September 30, 2011 and December 31, 2010.

The following is a summary of securities that had unrealized losses at September 30, 2011 and December 31, 2010. The information is presented for securities that have been in an unrealized loss position for less than 12 months and for more than 12 months. At September 30, 2011 there were 7 securities with unrealized losses totaling $543 and at December 31, 2010, the Corporation held 33 securities with unrealized losses totaling $1,139. Factors that are temporary in nature may result in securities being valued at less than amortized cost. For example, when the current levels of interest rates offered on securities are higher compared to the coupon interest rates on the securities held by the Corporation or when impairment is not due to credit deterioration, securities will be valued at less than amortized cost. The Corporation has the ability and the intent to hold these securities until their value recovers.

	At September 30, 2011
	Less than 12 months					12 months or longer				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
U.S. Government agencies and corporations	$	14,715	$	(285	)	$	—	$	—	$	14,715	$	(285	)
Mortgage backed securities		16,320		(247	)		—		—		16,320		(247	)
Collateralized mortgage obligations		4,354		(5	)		—		—		4,354		(5	)
State and political subdivisions		355		(6	)		—		—		355		(6	)
Total	$	35,744	$	(543	)	$	—	$	—	$	35,744	$	(543	)

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	At December 31, 2010
	Less than 12 months					12 months or longer				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
U.S. Government agencies and corporations	$	29,352	$	(682	)	$	—	$	—	$	29,352	$	(682	)
Mortgage backed securities		14,617		(30	)		—		—		14,617		(30	)
Collateralized mortgage obligations		10,027		(27	)		—		—		10,027		(27	)
State and political subdivisions		1,633		(400	)		—		—		1,633		(400	)
Total	$	55,629	$	(1,139	)	$	—	$	—	$	55,629	$	(1,139	)

(6) Loans and Allowance for Loan Losses

The allowance for loan losses is maintained by the Corporation at a level considered by Management to be adequate to cover probable credit losses inherent in the loan portfolio. The amount of the provision for loan losses charged to operating expenses is the amount necessary, in the estimation of Management, to maintain the allowance for loan losses at an adequate level. 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. 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.

The allowance is comprised of a general allowance and a specific allowance for identified problem loans. The general allowance is determined by applying estimated loss factors to the credit exposures from outstanding loans. The methodology applies to the Corporation’s total loan portfolio including the performing portion of commercial and commercial real estate loans, real estate, and all types of other loans. The loss factors are applied accordingly 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. These other factors include but are not limited to: changes in lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices; changes in national and local economic and business conditions, including the condition of various market segments; changes in the nature and volume of the portfolio; changes in the experience, ability, and depth of lending management and staff; changes in the volume and severity of past due and classified loans, the volume of nonaccrual loans, troubled debt restructurings and other loan modifications; the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and the effect of external factors, such as legal and regulatory requirements, on the level of estimated credit losses in the Corporation’s current portfolio. Specific allowances are established for all impaired loans when Management has determined that, due to identified significant conditions, it is probable that a loss will be incurred.

Activity in the loan balances and the allowance for loan losses by segment at September 30, 2011 and December 31, 2010 are summarized as follows:

Nine Months Ended September 30, 2011
	Commercial			Commercial Real Estate			Residential			Home Equity Loans			Indirect			Consumer			Total
	(Dollars in thousands)
Allowance for loan losses:
Balance, beginning of period	$	1,317		$	11,127		$	805		$	1,512		$	904		$	471		$	16,136
Losses charged off		(236	)		(2,669	)		(1,746	)		(957	)		(264	)		(490	)		(6,362	)
Recoveries		38			249			49			15			77			98			526
Provision charged to expense		6			3,079			2,142			1,744			234			340			7,545
Balance, end of period	$	1,125		$	11,786		$	1,250		$	2,314		$	951		$	419		$	17,845
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	157		$	5,234		$	—		$	—		$	—		$	—		$	5,391
Collectively evaluated for impairment		968			6,552			1,250			2,314			951			419			12,454
Total ending allowance balance	$	1,125		$	11,786		$	1,250		$	2,314		$	951		$	419		$	17,845
Loans:
Individually evaluated for impairment	$	839		$	33,966		$	1,002		$	—		$	—		$	—		$	35,807
Collectively evaluated for impairment		68,919			350,712			64,745			129,665			174,521			13,123			801,685
Total ending loans balance	$	69,758		$	384,678		$	65,747		$	129,665		$	174,521		$	13,123		$	837,492

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	Twelve Months Ended December 31, 2010
	Commercial			Commercial Real Estate			Residential			Home Equity Loans			Indirect			Consumer			Total
	(Dollars in thousands)
Allowance for loan losses:
Balance, beginning of year	$	862		$	14,390		$	528		$	1,591		$	799		$	622		$	18,792
Losses charged off		(1,507	)		(8,508	)		(1,491	)		(1,091	)		(455	)		(573	)		(13,625	)
Recoveries		157			87			30			39			293			138			744
Provision charged to expense		1,805			5,158			1,738			973			267			284			10,225
Balance, end of year	$	1,317		$	11,127		$	805		$	1,512		$	904		$	471		$	16,136
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	206		$	6,865		$	46		$	—		$	—		$	—		$	7,117
Collectively evaluated for impairment		1,111			4,262			759			1,512			904			471			9,019
Total ending allowance balance	$	1,317		$	11,127		$	805		$	1,512		$	904		$	471		$	16,136
Loans:
Individually evaluated for impairment	$	1,333		$	38,853		$	4,482		$	—		$	—		$	—		$	44,668
Collectively evaluated for impairment		64,329			336,950			70,203			132,536			150,031			13,862			767,911
Total ending loans balance	$	65,662		$	375,803		$	74,685		$	132,536		$	150,031		$	13,862		$	812,579

Delinquencies

Delinquencies are a sign of weakness in credit quality. Lending staff at the Corporation monitor the financial performance and delinquency of borrowers in its portfolios. Staff members are responsible for managing delinquencies by following up with borrowers and arranging for payments. The Corporation determines if a commercial or commercial real estate loan is delinquent based on the number of days past due according to the contractual terms of the loan. For residential, home equity and consumer loans, the Corporation considers the borrower delinquent if the borrower is in arrears by two or more monthly payments. The following procedure is followed in managing delinquent accounts:

• 15-30 days past due- a collection notice is sent reminding the borrower of past due status and the urgency of bringing the account current.

• 45 days past due- a default letter is sent declaring the loan in default and advising the borrower that legal action will be necessary if the account is not brought current immediately.

• 60 days past due- an “attorney letter” accelerating the loan is sent advising the borrower that legal proceedings to collect the debt will begin immediately.

Management monitors delinquencies and potential problem loans on a recurring basis. At September 30, 2011 there were $29,318 in total past due loans or 3.50% of total loans compared to $36,316 or 4.48% of total loans at December 31, 2010. A table showing total loan delinquencies as of September 30, 2011 and December 31, 2010 by loan segment is as follows:

Age Analysis of Past Due Loans

as of September 30, 2011

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past  Due		Greater than 90  Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
Commercial	$	—	$	—	$	849	$	849	$	68,909	$	69,758	$	—
Commercial Real Estate		287		3,236		15,574		19,097		365,581		384,678		—
Residential		556		718		3,858		5,132		60,615		65,747		—
Home Equity Loans		1,034		130		2,128		3,292		126,373		129,665		—
Indirect		684		87		10		781		173,740		174,521
Consumer		28		7		132		167		12,956		13,123		—
Total	$	2,589	$	4,178	$	22,551	$	29,318	$	808,174	$	837,492	$	—

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Age Analysis of Past Due Loans

as of December 31, 2010

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
Commercial	$	31	$	211	$	793	$	1,035	$	64,627	$	65,662	$	—
Commercial Real Estate		1,906		856		19,970		22,732		353,071		375,803		—
Residential		1,018		1,284		7,172		9,474		65,211		74,685		—
Home Equity Loans		776		235		1,130		2,141		130,395		132,536		—
Indirect		612		123		112		847		149,184		150,031
Consumer		61		—		26		87		13,775		13,862		—
Total	$	4,404	$	2,709	$	29,203	$	36,316	$	776,263	$	812,579	$	—

Impaired Loans

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 are evaluated for impairment. Impaired loans are written down by the establishment of a specific allowance where necessary. Interest income recognized on impaired loans while considered impaired was immaterial for all periods. Information regarding impaired loans as of September 30, 2011 and December 31, 2010 is as follows:

At September 30, 2011	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Balance
(Dollars in thousands)
With no related allowance recorded:
Commercial	$	335	$	335	$	—	$	432
Commercial Real Estate		9,491		14,005		—		10,278
Residential		1,002		1,750		—		1,399
Home Equity Loans		—		—		—		—
Indirect		—		—		—		—
Consumer		—		—		—		—
With allowance recorded:
Commercial		504		979		157		681
Commercial Real Estate		24,475		26,347		5,234		24,941
Residential		—		—		—		662
Home Equity Loans		—		—		—		—
Indirect		—		—		—		—
Consumer		—		—		—		—
Total	$	35,807	$	43,416	$	5,391	$	38,393

At December 31, 2010	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Balance
(Dollars in thousands)
With no related allowance recorded:
Commercial	$	549	$	549	$	—	$	600
Commercial Real Estate		6,393		10,367		—		8,643
Residential		3,102		3,432		—		3,211
Home Equity Loans		—		—		—		—
Indirect		—		—		—		—
Consumer		—		—		—		—
With allowance recorded:
Commercial		784		1,432		206		1,143
Commercial Real Estate		32,460		35,483		6,865		29,946
Residential		1,380		1,416		46		1,420
Home Equity Loans		—		—		—		—
Indirect		—		—		—		—
Consumer		—		—		—		—
Total	$	44,668	$	52,679	$	7,117	$	44,963

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Nonaccrual loans at September 30, 2011 were $37,115, compared to $41,831 at December 31, 2010. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

Loans On NonAccrual Status

	September 30, 2011			December 31, 2010
	(Dollars in thousands)
Commercial	$	1,124		$	1,333
Commercial Real Estate		23,589			25,941
Residential		7,705			11,052
Home Equity Loans		3,629			2,372
Indirect		728			667
Consumer		340			466
Total Nonaccrual Loans	$	37,115		$	41,831
Percentage of nonaccrual loans to portfolio loans		4.43	%		5.15	%
Percentage of nonaccrual loans to total assets		3.17	%		3.63	%

Troubled Debt Restructuring

A restructuring of a debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. That concession either stems from an agreement between the creditor and the debtor or is imposed by law or a court. The Corporation adheres to ASC 310-40, Troubled Debt Restructurings by Creditors, to determine whether a troubled debt restructuring applies in a particular instance. Included in loans individually evaluated for impairment as of September 30, 2011 are loans with a recorded investment of $1,817 whose terms have been modified in troubled debt restructurings and considered nonaccrual. The Corporation has allocated reserves of $113 for the nonaccrual TDR loans at September 30, 2011. At December 31, 2010, the recorded investment of one loan whose terms had been modified in a troubled debt restructuring was $636. This loan was accruing with no specific reserve allocated at December 31, 2010. There are no commitments to lend additional amounts to borrowers with loans that are classified as troubled debt restructurings at September 30, 2011 and December 31, 2010. At September 30, 2011 the borrowers have made timely payments of principal and interest on those loans per the modified agreements. Information regarding TDR loans for the three and nine month periods ended September 30, 2011 is as follows:

	For the Three Months Ended				For the Nine Months Ended
	September 30, 2011				September 30, 2011
	(Dollars in thousands)				(Dollars in thousands)
	Number of Contracts		Post-Modification Outstanding Recorded Investment		Number of Contracts		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings Commercial Real Estate		—	$	—		1	$	391

There were no loans modified in a TDR from October 1, 2010 through September 30, 2011 that subsequently defaulted (i.e., 60 days or more past due following a modification) during the three and nine months ended September 30, 2011.

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Corporation offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Commercial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor may be requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. Land

17

loans are also included in the class of commercial real estate loans. Land loans are typically structured as interest-only monthly payments with a balloon payment due at maturity. Land loans modified in a TDR typically involve extending the balloon payment by one to three years, changing the monthly payments from interest-only to principal and interest, while leaving the interest rate unchanged.

Loans modified in a TDR are typically already on nonaccrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR for the Corporation may have the financial effect of increasing the specific allowance associated with the loan. The allowance for impaired loans that have been modified in a TDR is measured based on the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent or on the present value of expected future cash flows discounted at the loan’s effective interest rate. Management exercises significant judgment in developing these estimates.

Credit Risk Grading

Sound credit systems, practices and procedures such as credit risk grading systems; effective credit review and examination processes; effective loan monitoring, problem identification, and resolution processes; and a conservative loss recognition process and charge-off policy are integral to Management’s proper assessment of the adequacy of the allowance. Many factors are considered when grades are assigned to individual loans such as current and historic delinquency, financial statements of the borrower, current net realizable value of collateral and the general economic environment and specific economic trends affecting the portfolio. Commercial, commercial real estate and residential construction loans are assigned internal credit risk grades. The loan’s internal credit risk grade is reviewed on at least an annual basis and more frequently if needed based on specific borrower circumstances. Credit quality indicators used in Management’s periodic analysis of the adequacy of the allowance include the Corporation’s internal credit risk grades which are described below and are included in the table below for September 30, 2011 and December 31, 2010:

• Grades 1 -5: defined as “Pass” credits — loans which are protected by the borrower’s current net worth and paying capacity or by the value of the underlying collateral. Pass credits are current or have not displayed a significant past due history.

• Grade 6: defined as “Special Mention” credits — loans where a potential weakness or risk exists, which could cause a more serious problem if not monitored. Loans listed for special mention generally demonstrate a history of repeated delinquencies, which may indicate a deterioration of the repayment abilities of the borrower.

• Grade 7: defined as “Substandard” credits — loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.

• Grade 8: defined as “Doubtful” credits — loans classified as doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable.

• Grade 9: defined as “Loss” credits — loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.

For residential, home equity, indirect and consumer loan segments, the Corporation monitors credit quality using a combination of the delinquency status of the loan and/or the Corporation’s internal credit risk grades as indicated above.

The following table presents the recorded investment of commercial, commercial real estate and residential construction loans by internal credit risk grade and the recorded investment in residential, home equity, indirect and consumer loans based on delinquency status as of September 30, 2011 and December 31, 2010:

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	Commercial		Commercial Real Estate		Residential*		Home Equity Loans		Indirect		Consumer		Total
Commercial Credit Exposure	September 30, 2011
	(Dollars in thousands)
Loans graded by internal credit risk grade:
Grade 1 - Minimal	$	3,172	$	—	$	—	$	—	$	—	$	—	$	3,172
Grade 2 - Modest		—		—		—		—		—		—		—
Grade 3 - Better than average		147		2,912		—		—		—		—		3,059
Grade 4 - Average		3,453		58,079		259		—		—		—		61,791
Grade 5 - Acceptable		59,007		262,408		4,903		—		—		—		326,318
Total Pass Credits		65,779		323,399		5,162		—		—		—		394,340
Grade 6 - Special mention		2,685		16,223		720		—		—		—		19,628
Grade 7 - Substandard		1,294		45,056		1,444		—		—		—		47,794
Grade 8 - Doubtful		—		—		—		—		—		—		—
Grade 9 - Loss		—		—		—		—		—		—		—
Total loans internally credit risk graded		69,758		384,678		7,326		—		—		—		461,762
Loans not monitored by internal risk grade:
Current loans not internally risk graded		—		—		53,289		126,373		173,740		12,956		366,358
30-59 days past due loans not internally risk graded		—		—		556		1,034		684		28		2,302
60-89 days past due loans not internally risk graded		—		—		718		130		87		7		942
90+ days past due loans not internally risk graded		—		—		3,858		2,128		10		132		6,128
Total loans not internally credit risk graded		—		—		58,421		129,665		174,521		13,123		375,730
Total loans internally and not internally credit risk graded	$	69,758	$	384,678	$	65,747	$	129,665	$	174,521	$	13,123	$	837,492
	Commercial		Commercial Real Estate		Residential*		Home Equity Loans		Indirect		Consumer		Total
Commercial Credit Exposure	December 31, 2010
	(Dollars in thousands)
Loans graded by internal credit risk grade:
Grade 1 - Minimal	$	3,124	$	—	$	—	$	—	$	—	$	—	$	3,124
Grade 2 - Modest		—		—		—		—		—		—		—
Grade 3 - Better than average		162		3,055		—		—		—		—		3,217
Grade 4 - Average		8,343		59,651		267		—		—		—		68,261
Grade 5 - Acceptable		49,727		246,475		5,733		—		—		—		301,935
Total Pass Credits		61,356		309,181		6,000		—		—		—		376,537
Grade 6 - Special mention		2,599		13,807		170		—		—		—		16,576
Grade 7 - Substandard		1,707		52,815		2,516		—		—		—		57,038
Grade 8 - Doubtful		—		—		—		—		—		—		—
Grade 9 - Loss		—		—		—		—		—		—		—
Total loans internally credit risk graded		65,662		375,803		8,686		—		—		—		450,151
Loans not monitored by internal risk grade:
Current loans not internally risk graded		—		—		57,389		130,395		149,184		13,775		350,743
30-59 days past due loans not internally risk graded		—		—		1,018		776		612		61		2,467
60-89 days past due loans not internally risk graded		—		—		1,032		235		123		—		1,390
90+ days past due loans not internally risk graded		—		—		6,560		1,130		112		26		7,828
Total loans not internally credit risk graded		—		—		65,999		132,536		150,031		13,862		362,428
Total loans internally and not internally credit risk graded	$	65,662	$	375,803	$	74,685	$	132,536	$	150,031	$	13,862	$	812,579

* Residential loans with an internal commercial credit risk grade include loans that are secured by non owner occupied 1-4 family residential properties and conventional 1-4 family residential properties.

The Corporation adheres to underwriting standards consistent with its Loan Policy for indirect and consumer loans. Final approval of a consumer credit depends on the repayment ability of the borrower. Repayment ability generally requires the determination of the borrower’s capacity to meet current and proposed debt service requirements. A borrower’s repayment ability is monitored based on delinquency, generally for time periods of 30 to 59 days past due, 60 to 89 days past due and greater than 90 days past due. This information is provided in the above past due loans table.

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(7) Deposits

Deposit balances at September 30, 2011 and December 31, 2010 are summarized as follows:

	September 30, 2011		December 31, 2010
	(Dollars in thousands)
Demand and other noninterest-bearing	$	121,402	$	115,476
Interest checking		150,774		134,375
Savings		100,567		91,882
Money market accounts		100,748		92,177
Consumer time deposits		438,086		464,860
Public time deposits		77,702		79,756
Total deposits	$	989,279	$	978,526

The aggregate amount of certificates of deposit in denominations of $100,000 or more amounted to $239,056 and $240,127 at September 30, 2011 and December 31, 2010, respectively.

The maturity distribution of certificates of deposit as of September 30, 2011 follows:

	Within 12 months		After 12 months but within 36 months		After 36 months but within 60 months		After 5 years		Total
	(Dollars in thousands)
Consumer time deposits	$	302,730	$	102,228	$	33,128	$	—	$	438,086
Public time deposits		60,090		15,068		2,544		—		77,702
Total time deposits	$	362,820	$	117,296	$	35,672	$	—	$	515,788

(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, 2011, the Bank had pledged approximately $86,801 in qualifying home equity lines of credit, resulting in an available line of credit of approximately $43,401. No amounts were outstanding at September 30, 2011 or December 31, 2010. 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, 2011 and December 31, 2010.

Short-term borrowings include securities sold under repurchase agreements and Federal funds purchased from correspondent banks. Securities sold under repurchase agreements at September 30, 2011 and December 31, 2010 were $371 and $932, respectively. The interest rate paid on these borrowings was 0.15% at September 30, 2011 and 0.25% at December 31, 2010. No Federal Funds were purchased as of September 30, 2011 and December 31, 2010.

(9) Federal Home Loan Bank Advances

Federal Home Loan Bank advances amounted to $42,498 and $42,501 at September 30, 2011 and December 31, 2010, respectively. All advances are bullet maturities with no call features. At September 30, 2011, collateral pledged for FHLB advances consisted of qualified real estate mortgage loans and investment securities of $61,824 and $28,961, respectively. The maximum borrowing capacity of the Bank at September 30, 2011 was $53,580 with unused collateral borrowing capacity of $12,793. The Bank maintains a $40,000 cash management line of credit (CMA) with the FHLB. The amount outstanding was $5,000 for the CMA line of credit as of September 30, 2011 and $0 at December 31, 2010.

Maturities of FHLB advances outstanding at September 30, 2011 and December 31, 2010 are as follows.

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	September 30, 2011		December 31, 2010
	(Dollars in thousands)
Maturities January 2011 through February 2011, with fixed rates ranging from 3.17% to 3.67%	$	—	$	15,000
Maturity December 2011, variable rate 0.15% at September 30, 2011		5,000		—
Maturity January 2012, fixed rate 2.37%		15,000		15,000
Maturities January 2014 though August 2014, fixed rates ranging from 2.06% to 3.55%		15,030		10,040
Maturity January 2015 fixed rate 2.00% and July 2015, fixed rate 4.76%		12,468		2,461
Total FHLB advances	$	47,498	$	42,501

(10) Trust Preferred Securities

In May 2007, LNB Trust I (“Trust I”) and LNB Trust II (“Trust II”) each sold $10,000 of trust 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 its acquisition of Morgan Bancorp, Inc. 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. The debentures issued to Trust I bear a floating interest rate (current three-month LIBOR plus 148 basis points). The debentures issued to Trust II bear a fixed rate of 6.64% through June 15, 2017, which then becomes a floating interest rate (current three-month LIBOR plus 148 basis points). Interest on the debentures is payable quarterly. The interest rates in effect as of the last determination date in 2011 were 1.83% and 6.64% for Trust I securities and Trust II securities, respectively. At September 30, 2011 and December 31, 2010, accrued interest payable for Trust I securities was $6 and $6 and for Trust II securities was $22 and $30, respectively.

The subordinated debentures 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 debentures 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 debentures or thereafter incurred. At September 30, 2011, the balance of the subordinated debentures payable to Trust I and Trust II were each $8,119.

In August 2010, the Corporation entered into an agreement with certain holders of its then 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 on extinguishment of debt of $2,210 ($1,459 after-tax).

(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. 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

21

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, 2011 follows:

	September 30, 2011
	(Dollars in thousands)
Commitments to extend credit	$	80,840
Home equity lines of credit		77,529
Standby letters of credit		8,344
Total	$	166,713

(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 commitments. The carrying amount and fair value of off-balance sheet instruments is not significant as of September 30, 2011 and December 31, 2010.

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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 Corporation 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, 2011 and December 31, 2010 are summarized as follows:

	September 30, 2011				December 31, 2010
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
	(Dollars in thousands)
Financial assets
Cash and due from banks, federal funds sold and interest-bearing deposits in banks	$	40,648	$	40,648	$	48,568	$	48,568
Securities		232,358		232,358		221,725		221,725
Portfolio loans, net		819,647		837,781		796,443		801,585
Loans held for sale		4,069		4,069		5,105		5,105
Accrued interest receivable		3,667		3,667		3,519		3,519
Financial liabilities
Deposits:
Demand, savings and money market		473,491		473,491		433,910		433,910
Time deposits		515,788		521,054		544,616		551,832
Total deposits		989,279		994,545		978,526		985,742
Short-term borrowings		371		371		932		932
Federal Home Loan Bank advances		47,498		48,928		42,501		43,613
Junior subordinated debentures		16,238		15,943		16,238		15,746
Accrued interest payable		1,271		1,271		1,434		1,434

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.

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

23

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):

Description	Fair Value as of September 30, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(Dollars in thousands)
Securities available for sale:
U.S. Government agencies and corporations	$	58,633	$	—	$	58,633	$	—
Mortgage backed securities		118,209		—		118,209		—
Collateralized mortgage obligations		29,344		—		29,344		—
State and political subdivisions		26,172		—		26,172		—
Total	$	232,358	$	—	$	232,358	$	—

Description	Fair Value as of December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(Dollars in thousands)
Securities available for sale:
U.S. Government agencies and corporations	$	56,068	$	—	$	56,068	$	—
Mortgage backed securities		95,891		—		95,891		—
Collateralized mortgage obligations		45,519		—		45,519		—
State and political subdivisions		24,247		—		24,247		—
Total	$	221,725	$	—	$	221,725	$	—

There were no transfers between Levels 1 and 2 of the fair value hierarchy during the nine months ended September 30, 2011. For the available for sale securities, the Corporation obtains fair value measurements from an independent third party service and or from independent brokers.

The following tables present the balances of assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2011 and December 31, 2010:

September 30, 2011	Quoted Market Prices in Active Markets (Level 1)		Internal Models with Significant Observable Market Parameters (Level 2)		Internal Models with Significant Unobservable Market Parameters (Level 3)		Total
(Dollars in thousands)
Impaired loans	$	—	$	—	$	35,807	$	35,807
Other real estate owned		—		—		2,116		2,116
Mortgage servicing rights						775		775
Total assets at fair value on a nonrecurring basis	$	—	$	—	$	38,698	$	38,698

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December 31, 2010	Quoted Market Prices in Active Markets (Level 1)		Internal Models with Significant Observable Market Parameters (Level 2)		Internal Models with Significant Unobservable Market Parameters (Level 3)		Total
(Dollars in thousands)
Impaired loans	$	—	$	—	$	44,668	$	44,668
Other real estate owned		—		—		3,119		3,119
Mortgage servicing rights						758		758
Total assets at fair value on a nonrecurring basis	$	—	$	—	$	48,545	$	48,545

The Corporation has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. The fair value of collateral-dependent impaired loans and other real estate owned is determined through the use of an independent third-party appraisal (Level 3 input), once a loan is identified as impaired or the Corporation takes ownership of a property. The Corporation maintains a disciplined approach of obtaining updated independent third-party appraisals relating to such loans or property on at least an annual basis, at which time the determination of fair value is updated as necessary to reflect the appraisal. In addition, Management reviews the fair value of those collateral-dependent impaired loans in amounts that it considers to be material ($250,000 or greater) on a monthly basis and makes necessary adjustments to the fair value based on individual facts and circumstances, which review may include obtaining new third-party appraisals.

Mortgage Servicing Rights (MSR). The Corporation carries its mortgage servicing rights at lower of cost or fair value, and therefore, can be subject to fair value measurements on a nonrecurring basis. Since sales of mortgage servicing rights occur in private transactions and the precise terms and conditions of the sales are typically not readily available (Level 3), there is a limited market to refer to in determining the fair value of mortgage servicing rights. As such the Corporation utilizes a third party vendor to perform a valuation on the mortgage servicing rights to estimate the fair value. The Corporation reviews the estimated fair values and assumptions used by the third party vendor on a quarterly basis.

Impaired Loans. Impaired loans valued using Level 3 inputs consist of non-homogeneous loans that are considered impaired. The Corporation estimates the fair value of these loans based on the estimated realizable values of available collateral, which is typically based on current independent third-party appraisals.

Other Real Estate Owned. Other real estate owned (“OREO”) is measured and reported at fair value when the current book value exceeds the estimated fair value of the property. Management’s determination of the fair value for these loans uses a market approach representing the estimated net proceeds to be received from the sale of the property based on observable market prices and market value provided by independent, licensed or certified appraisers (Level 3 Inputs).

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(13) Share-Based Compensation

A broad-based stock incentive plan, the 2006 Stock Incentive Plan, was adopted by the Corporation’s shareholders on April 18, 2006. As of September 30, 2011, outstanding awards granted under this Plan consisted of stock options granted in 2007, 2008 and 2009 and long-term restricted shares issued in 2010 and 2011. In addition, the Corporation has nonqualified stock option agreements outside of the 2006 Stock Incentive Plan. Grants under the nonqualified stock option agreements were made from 2005 to 2007.

Stock Options

The expense recorded for stock options was $1 and $13 for the first nine months of September 30, 2011 and September 30, 2010, respectively. 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.

Options outstanding at September 30, 2011 were as follows:

	Outstanding				Exercisable
	Number		Weighted Average Remaining Contractual Life (Years)		Number		Weighted Average Exercise Price
Range of Exercise Prices
$5.34-$5.34		2,500		7.62		1,667	$	5.34
$14.47-$15.34		82,000		6.35		82,000		14.47
$15.35-$16.50		52,500		5.46		52,500		15.78
$16.51-$19.10		30,000		4.34		30,000		19.10
$19.11-$19.17		30,000		3.34		30,000		19.17
Outstanding at end of period		197,000		5.37		196,167	$	16.17

A summary of the status of stock options at September 30, 2011 and September 30, 2010 and changes during the nine months then ended is presented in the table below:

	2011				2010
	Options		Weighted Average Exercise Price per Share		Options		Weighted Average Exercise Price per Share
Outstanding at beginning of period		197,000	$	16.12		198,000	$	16.12
Granted		—		—		—		—
Forfeited or expired		—		—		—		—
Exercised		—		—		—		—
Stock dividend or split		—		—		—		—
Outstanding at end of period		197,000	$	16.12		198,000	$	16.12
Exercisable at end of period		196,167	$	16.17		161,996	$	16.54

There were no options exercised during the first nine months of 2011, therefore the total intrinsic value of options exercised was $0. The total intrinsic value of all options outstanding at September 30, 2011 was $0.

A summary of the status of nonvested stock options at September 30, 2011 is presented in the table below:

26

	Nonvested Shares		Weighted Average Exercise Price per share
Nonvested at January 1, 2011		29,004	$	13.95
Granted		—		—
Vested		28,171		14.20
Forfeited or expired		—		—
Nonvested at September 30, 2011		833		5.34

Restricted Shares

In January 2011, the Corporation issued 40,000 shares of long-term restricted stock, 2,500 of which have expired due to employee terminations. The long-term restricted stock was issued at the current market price of the Corporation’s stock on the date of grant which was $5.28 per share. In 2010, the Corporation issued 86,852 shares of long-term restricted stock at a weighted average price of $4.42 per share. Shares of long-term restricted stock generally vest in two equal installments on the second and third anniversaries of the date of grant, or upon the earlier death or disability of the recipient or a qualified change of control of the Corporation. The expense recorded for long-term restricted stock for the nine months ended September 30, 2011 and 2010 was $140 and $57, respectively.

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. A summary of the status of restricted shares at September 30, 2011 is presented in the table below:

	Nonvested Shares			Weighted Average Grant Date Fair Value
Nonvested at January 1, 2011		86,852		$	4.42
Granted		40,000			5.28
Vested		—			—
Forfeited or expired		(2,500	)		5.28
Nonvested at September 30, 2011		124,352			4.68

Stock Appreciation Rights (“SARs”)

In 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. The SARs 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. Any unexercised portion of the SARs shall expire at the end of the stated term which is decided at the date of grant and shall not exceed ten years. The SARs issued in 2006 will expire in January 2016. The expense recorded for SARs for the first nine months of 2011 and 2010 was $0.

27

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 nine months ended September 30, 2011. 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, 2010 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 $1,672 for the third quarter of 2011. Net income available to common shareholders was $1,353 or $0.17 per diluted common share. This compares to net income available to common shareholders of $2,410 or $0.32 per diluted common share for the third quarter of 2010. 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. The gain recorded as a result of this exchange was $2,210 ($1,459 after-tax) and was included in noninterest income as gain on extinguishment of debt. Earnings per diluted common share for 2010 reflect the issuance of common shares from the trust preferred securities exchange.

Net interest income on a fully taxable equivalent (FTE) basis for the third quarter of 2011 was $10,203, a 7.41% increase, compared to $9,498 for the third quarter of 2010. Net interest income increased $705 compared to one year ago mainly due to the effect of lower market interest rates on the funding side as well as a favorable change in the mix of average earning assets. As a result, the net interest margin improved from 3.49% for the third quarter of 2010 to 3.74% for the third quarter of 2011.

The provision for loan losses was $2,100 for the quarter ended September 30, 2011 compared to $2,076 for the quarter ended September 30, 2010.

Noninterest income in the third quarter totaled $2,542 compared to $5,044 for the third quarter of 2010, which included the $2,210 gain from the exchange of trust preferred securities mentioned above. Gains on the sale of loans decreased $83 for the third quarter of 2011 compared to the same period a year ago. Trust income and service charges on deposits were down from a year ago primarily as a result of the negative impact of lower market valuations on management fees and new federal regulations regarding certain bank overdraft fees and charges.

Noninterest expense was $8,329 for the third quarter of 2011, compared to $8,768 for the third quarter of 2010, a decrease of $439, or 5.01%. The decrease was driven primarily by reduced professional fees, FDIC assessments and loan and collection expense. Other real estate owned expenses increased as further write-downs in the valuation of these properties were recorded. The efficiency ratio, which is a measure of the cost to generate revenue, decreased from 71.10% in the third quarter of 2010 to 65.36% in the third quarter of 2011.

During the third quarter of 2011, loan demand improved as total portfolio loans ended the quarter at $837,492, a 3.07% increase compared to $812,579 at December 31, 2010. Total assets for the third quarter ended at $1,170,283 compared to $1,152,537 at the end of 2010. Total deposits grew to $989,279 at the end of the third quarter of 2011, up from $978,526 at December 31, 2010. The growth in deposits primarily came in the form of transaction core deposits, which improved liquidity while reducing costs. This growth has reduced the Corporation’s reliance on public certificate of deposit accounts and has helped maintain the net interest margin.

The Corporation continues to work through asset quality challenges as evidenced by a reduction in non-performing loans as well as non-performing assets. The Corporation’s non-performing loans totaled $37,115 at September 30, 2011, or 4.43% of total loans, an improvement from $41,831, or 5.15%, at December 31, 2010. The Corporation’s

28

non-performing assets totaled $39,231 at September 30, 2011, or 3.35% of total assets, an improvement from $44,949, or 3.90% at December 31, 2010.

In addition to the negative 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 additional allowances provided as a result of these lower valuations.

The allowance for loan losses was $17,845 at September 30, 2011 compared to $16,136 at December 31, 2010, equaling 2.13% of total loans at September 30, 2011 compared to 1.99% at December 31, 2010. The allowance for loan losses was 48.08% and 38.58% of nonperforming loans at September 30, 2011 and December 31, 2010, respectively. Annualized net charge-offs to average loans for the nine months ended September 30, 2011 was 0.95% compared to 1.62% for the year-ended December 31, 2010.

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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, 2011 and 2010. Rates are computed on a tax equivalent basis. Nonaccrual loans and loans held for sale are included in the average loan balances.

	Three Months Ended
	September 30, 2011									September 30, 2010
	Average Balance			Interest			Rate			Average Balance			Interest			Rate
	(Dollars in thousands)
Assets:
U.S. Govt agencies and corporations	$	200,807		$	1,505			2.84	%	$	218,452		$	1,395			2.53	%
State and political subdivisions		25,704			369			5.70			23,720			353			5.91
Federal funds sold and interest-bearing deposits in banks		11,200			16			0.57			30,708			10			0.13
Restricted stock		5,741			67			4.63			5,741			72			4.98
Commercial loans		461,242			6,178			5.31			442,194			5,902			5.30
Real estate mortgage loans		59,323			829			5.55			70,309			964			5.44
Home equity lines of credit		109,739			1,063			3.84			110,393			1,092			3.93
Installment loans		207,940			2,653			5.06			179,517			2,801			6.19
Total Earning Assets	$	1,081,696		$	12,680			4.65	%	$	1,081,034		$	12,589			4.62	%
Allowance for loan loss		(18,035	)								(19,089	)
Cash and due from banks		34,279									18,335
Bank owned life insurance		17,555									16,841
Other assets		51,619									53,063
Total Assets	$	1,167,114								$	1,150,184
Liabilities and Shareholders’ Equity
Consumer time deposits	$	448,897		$	1,811			1.60	%	$	457,667		$	2,239			1.94	%
Public time deposits		68,695			76			0.44			78,022			120			0.61
Money market accounts		100,515			61			0.24			93,486			98			0.41
Savings deposits		99,007			41			0.16			87,961			38			0.17
Interest-bearing demand		147,928			55			0.15			139,598			58			0.17
Short-term borrowings		732			—			0.16			1,708			1			0.25
FHLB advances		42,949			263			2.43			42,589			319			2.97
Trust preferred securities		16,317			170			4.15			19,269			218			4.48
Total Interest-Bearing Liabilities	$	925,040		$	2,477			1.06	%	$	920,300		$	3,091			1.33	%
Noninterest-bearing deposits		125,147									114,826
Other liabilities		4,249									6,186
Shareholders’ Equity		112,678									108,872
Total Liabilities and Shareholders’ Equity	$	1,167,114								$	1,150,184
Net interest Income (FTE)				$	10,203			3.74	%				$	9,498			3.49	%
Taxable Equivalent Adjustment					(144	)		(0.05	)					(126	)		0.05
Net Interest Income Per Financial Statements				$	10,059								$	9,372
Net Yield on Earning Assets								3.69	%								3.44	%

30

Results of Operations

Three Months Ended September 30, 2011 versus Three Months Ended September 30, 2010 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 79.83% of the Corporation’s revenues for the three months ended September 30, 2011. 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 was $10,059 for the third quarter of 2011 compared to $9,372 during the same quarter of 2010. Adjusting for tax-exempt income, net interest income FTE for the third quarter of 2011 and 2010 was $10,203 and $9,498, respectively. The net interest margin FTE, determined by dividing tax equivalent net interest income by average earning assets, was 3.74% for the three months ended September 30, 2011 compared to 3.49% for the three months ended September 30, 2010.

Average earning assets for the third quarter of 2011 were $1,081,696 and remained relatively constant compared to the same quarter of last year at $1,081,034. The yield on average earning assets reflected a favorable change in the mix of earning assets. The yield on average assets totaled 4.65% in the third quarter of 2011 compared to 4.62% for the same period a year ago. The yield on average loans during the third quarter of 2011 was 5.08%, which was 24 basis points lower than the yield on average loans during the third quarter of 2010 of 5.32%. Interest income from securities was $1,941 (FTE) for the three months ended September 30, 2011, compared to $1,820 during the third quarter of 2010. The yield on average securities was 3.32% and 2.91% for these periods, respectively. During the third quarter of 2010, significant amortization was recorded on U.S. government agency securities that were purchased at a high premium and subsequently called due to the low interest rate environment.

The cost of interest-bearing liabilities was 1.06% during the third quarter of 2011 compared to 1.33% during the same period in 2010. This decrease is primarily due to an improved deposit mix with noninterest bearing accounts of $125,147, increasing 8.99% when compared to the same period a year ago. Total average interest-bearing liabilities for the quarter ended September 30, 2011 increased $4,740, or 0.52%, compared to September 30, 2010. Average core deposits for the quarter ended September 30, 2011 increased $26,047, or 2.68%, compared to the same period of 2010. The average cost of trust preferred securities was 4.15% for the third quarter of 2011, compared to 4.48% for the third quarter of 2010. One half of the Corporation’s outstanding trust preferred securities accrues dividends at a fixed rate of 6.64% and the other half accrues 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, 2011 and September 30, 2010. 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 2011 over 2010
	Volume			Rate			Total
	(Dollars in thousands)
U.S. Govt agencies and corporations	$	(132	)	$	242		$	110
State and political subdivisions		28			(12	)		16
Federal funds sold and interest-bearing deposits in banks		(28	)		34			6
Restricted stock		—			(5	)		(5	)
Commercial loans		255			21			276
Real estate mortgage loans		(154	)		19			(135	)
Home equity lines of credit		(6	)		(23	)		(29	)
Installment loans		363			(511	)		(148	)
Total Interest Income		326			(235	)		91
Consumer time deposits		(35	)		(393	)		(428	)
Public time deposits		(13	)		(31	)		(44	)
Money market accounts		4			(41	)		(37	)
Savings deposits		5			(2	)		3
Interest bearing demand		3			(6	)		(3	)
Short-term borrowings		—			(1	)		(1	)
FHLB advances		2			(58	)		(56	)
Trust preferred securities		(32	)		(16	)		(48	)
Total Interest Expense		(66	)		(548	)		(614	)
Net Interest Income (FTE)	$	392		$	313		$	705

Net interest income (FTE) for the third quarter 2011 and 2010 was $10,203 and $9,498, respectively. Interest income (FTE) for the third quarter of 2011 increased $91 in comparison to the same period in 2010. This increase is primarily attributable to an increase of $326 due to volume, offset by a $235 decrease due to rate. Interest income on securities of U.S. Government agencies and corporations increased $110 as lower volumes were offset with higher yields. Interest income on commercial loans increased $276, primarily due to increasing loan demand. The $135 decrease in interest income on real estate mortgage loans was primarily attributable to refinancing in the existing seasoned mortgage portfolio given the low interest rate environment and to the Corporation’s practice of selling new mortgage production into the secondary market. The $148 decrease in interest income on indirect loans was primarily a result of the low interest rate environment offset by increased loan volume. The $428 and $44 decreases in consumer time deposits and public time deposits, respectively, were due primarily to lower market interest rates. Total interest expense decreased $614, with the decrease being attributable to a $548 decrease due to rate and a decrease due to volume of $66. Overall, the total increase in net interest income (FTE) of $705 was mainly attributable to an increase in volume of $392 and an increase of $313 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 1 presents the condensed average balance sheets for the nine months ended September 30, 2011 and 2010. Rates are computed on a tax equivalent basis. Nonaccrual loans and loans held for sale are included in the average loan balances.

	Nine Months Ended
	September 30, 2011									September 30, 2010
	Average Balance			Interest			Rate			Average Balance			Interest			Rate
	(Dollars in thousands)
Assets:
U.S. Govt agencies and corporations	$	206,516		$	4,594			2.97	%	$	225,330		$	5,650			3.35	%
State and political subdivisions		25,137			1,109			5.90			23,390			1,063			6.08
Federal funds sold and interest-bearing deposits in banks		24,278			38			0.21			33,407			30			0.12
Restricted stock		5,741			210			4.89			5,461			202			4.95
Commercial loans		454,305			17,984			5.29			443,787			17,789			5.36
Real estate mortgage loans		61,963			2,595			5.60			73,422			2,977			5.42
Home equity lines of credit		109,442			3,192			3.90			109,391			3,233			3.95
Installment loans		199,033			8,021			5.39			172,268			8,165			6.34
Total Earning Assets	$	1,086,415		$	37,743			4.64	%	$	1,086,456		$	39,109			4.81	%
Allowance for loan loss		(17,508	)								(19,195	)
Cash and due from banks		28,510									17,820
Bank owned life insurance		17,382									16,669
Other assets		52,548									53,952
Total Assets	$	1,167,347								$	1,155,702
Liabilities and Shareholders’ Equity
Consumer time deposits	$	460,731		$	5,770			1.67	%	$	467,143		$	7,262			2.08	%
Public time deposits		65,062			215			0.44			84,771			440			0.69
Money market accounts		99,627			227			0.30			90,497			272			0.40
Savings deposits		96,372			119			0.17			86,104			119			0.19
Interest-bearing demand		149,192			200			0.18			136,050			186			0.18
Short-term borrowings		830			2			0.21			1,694			3			0.24
FHLB advances		42,651			790			2.48			43,089			953			2.96
Trust preferred securities		16,321			511			4.18			20,236			648			4.28
Total Interest-Bearing Liabilities	$	930,786		$	7,834			1.13	%	$	929,584		$	9,883			1.42	%
Noninterest-bearing deposits		120,680									112,779
Other liabilities		4,448									6,503
Shareholders’ Equity		111,433									106,836
Total Liabilities and Shareholders’ Equity	$	1,167,347								$	1,155,702
Net interest Income (FTE)				$	29,909			3.68	%				$	29,226			3.60	%
Taxable Equivalent Adjustment					(400	)		(0.05	)					(378	)		(0.05	)
Net Interest Income Per Financial Statements				$	29,509								$	28,848
Net Yield on Earning Assets								3.63	%								3.55	%

Nine Months Ended September 30, 2011 versus Nine Months Ended September 30, 2010 Net Interest Income Comparison

Net interest income accounted for 77.81% of the Corporation’s revenues for the nine months ended September 30, 2011. Net interest income was $29,509 for the first nine months of 2011 compared to $28,848 during the same period of 2010. Adjusting for tax-exempt income, net interest income FTE for the first nine months of 2011 and 2010 was $29,909 and $29,226, respectively. The net interest margin FTE, determined by dividing tax equivalent

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net interest income by average earning assets, was 3.68% for the nine months ended September 30, 2011 compared to 3.60% for the nine months ended September 30, 2010. This increase is mainly attributable to lower cost of funds as a result of the lower interest rate environment.

Average earning assets for the first nine months of 2011 remained relatively constant compared to the prior year. Due in part to the current extended period of lower market interest rates, the yield on average earning assets was 4.64% in the first nine months of 2011 compared to 4.81% for the same period last year. The yield on average loans during the first nine months of 2011 was 5.15%. This was 23 basis points lower than that of the first nine months of 2010 at 5.38%. Interest income from securities was $5,913 (FTE) for the nine months ended September 30, 2011, compared to $6,915 during the first nine months of 2010. The yield on average securities was 3.33% and 3.64% for these periods, respectively.

The cost of interest-bearing liabilities was 1.13% during the first nine months of 2011 compared to 1.42% during the same period in 2010. Total average interest-bearing liabilities as of September 30, 2011 remained relatively constant compared to September 30, 2010. Average core deposits increased $14,320, or 1.47%, as of September 30, 2011 compared to the same period of 2010. The average cost of trust preferred securities was 4.18% for the first nine months of 2011, compared to 4.28% for the first nine months of 2010.

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, 2011 and September 30, 2010. 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 2011 over 2010
	Volume			Rate			Total
	(Dollars in thousands)
U.S. Govt agencies and corporations	$	(419	)	$	(637	)	$	(1,056	)
State and political subdivisions		77			(31	)		46
Federal funds sold and interest-bearing deposits in banks		—			8			8
Restricted stock		10			(2	)		8
Commercial loans		415			(220	)		195
Real estate mortgage loans		(480	)		98			(382	)
Home equity lines of credit		1			(42	)		(41	)
Installment loans		1,079			(1,223	)		(144	)
Total Interest Income		683			(2,049	)		(1,366	)
Consumer time deposits		(80	)		(1,412	)		(1,492	)
Public time deposits		(65	)		(160	)		(225	)
Money market accounts		21			(66	)		(45	)
Savings deposits		13			(13	)		—
Interest bearing demand		18			(4	)		14
Short-term borrowings		—			(1	)		(1	)
FHLB advances		(8	)		(155	)		(163	)
Trust preferred securities		(122	)		(15	)		(137	)
Total Interest Expense		(223	)		(1,826	)		(2,049	)
Net Interest Income (FTE)	$	906		$	(223	)	$	683

Net interest income (FTE) for the first nine months of 2011 and 2010 was $29,909 and $29,226, respectively. Interest income (FTE) for the first nine months of 2011 decreased $1,366 in comparison to the same period in 2010. This decrease is attributable to $2,049 decrease due to rate, offset by an increase of $683 due to volume. Interest income on securities of U.S. Government agencies and corporations decreased $1,056 equally due to the continued low interest rate environment and reduced volumes. Interest income on commercial loans increased $195, primarily due to increasing loan demand. The $144 decrease in interest income on indirect loans was primarily a result of the low interest rate environment offset by increased loan volume. For the same period, interest expense decreased $2,049, with the decrease being primarily attributable to a $1,826 decrease due to rate and a decrease due to volume of $223. The $1,492 and $225 decreases in consumer time deposits and public time deposits, respectively, were due primarily to lower market interest rates however the reduction in these balances were partially offset by increases in core transaction accounts. Overall, the total increase in net interest income (FTE) of $683 was mainly attributable to an increase in volume of $906 offset by a $223 reduction due to rate which is the difference between interest income and interest expense.

35

Noninterest Income

Table 5: Details on Noninterest Income

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(Dollars in thousands)						(Dollars in thousands)
Investment and trust services	$	378		$	403		$	1,251		$	1,411
Deposit service charges		1,099			1,146			3,015			3,179
Electronic banking fees		769			792			2,494			2,412
Income from bank owned life insurance		175			171			524			515
Other income		66			86			186			248
Total fees and other income		2,487			2,598			7,470			7,765
Gain on sale of securities		7			—			507			38
Gain on sale of loans		181			264			598			651
Gains (losses) on sale of other assets		(133	)		(28	)		(158	)		(73	)
Gain on extinguishment of debt		—			2,210			—			2,210
Total noninterest income	$	2,542		$	5,044		$	8,417		$	10,591

Three Months Ended September 30, 2011 versus Three Months Ended September 30, 2010 Noninterest Income Comparison

Total fees and other income for the three months ended September 30, 2011 was $2,487, a decrease of $111, or 4.27%, over the same period of 2010. Income earned on investment and trust services declined $25 compared to the prior period primarily as a result the negative impact of lower market valuations on management fees. Deposit service charges decreased by $47 when compared to a year ago and continued to be negatively impacted by the economic environment and new regulations regarding overdrafts.

Total net gains recorded during the third quarter of 2011 decreased $2,391 over the third quarter of 2010. This decrease was mainly attributable to the $2,210 one-time gain on extinguishment of debt in 2010. 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. Gains on the sale of loans decreased $83, primarily as a result of the lower volume of indirect consumer loan sales during the third quarter of 2011 compared to the same period of 2010. A total of $7,668 of indirect consumer loans were sold during the third quarter of 2011 compared to $10,351 for third quarter 2010, a decrease of 25.92%. Sales of bank owned property resulted in a loss of $133 during the first nine months of 2011 compared to a loss of $28 for the prior period.

Nine Months Ended September 30, 2011 versus Nine Months Ended September 30, 2010 Noninterest Income Comparison

Total fees and other income for the nine months ended September 30, 2011 was $7,470, a decrease of $295, or 3.80%, over the same period of 2010. Income earned on investment and trust services decreased $160, or 11.34% compared to 2010, mainly as a result of the discontinuation of the Corporation’s brokerage division which occurred during the third quarter of 2010 as well as the negative impact of lower market valuations on management fees. Fees from electronic banking increased $82 compared to the same period last year. Service charges on deposits decreased $164, which resulted primarily from the negative impacts of the economic environment and of new government regulations regarding overdraft fees.

Total net gains recorded during the first nine months of 2011 decreased $1,879 over the first nine months of 2010. This decrease was mainly a result of the one-time gain on extinguishment of debt in 2010 described above as well as a decrease of $53 attributable to the sale of loans. This decrease was offset by an increase of $469 attributable to the gain on the sale of securities compared to the first nine months of 2010. Sales of bank owned property resulted in a loss of $158 during the first nine months of 2011 compared to a loss of $73 for the prior period.

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Noninterest Expense

Table 6: Details on Noninterest Expense

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
	(Dollars in thousands)				(Dollars in thousands)
Salaries and employee benefits	$	3,986	$	3,898	$	12,149	$	11,727
Furniture and equipment		821		866		2,299		2,716
Net occupancy		569		579		1,769		1,775
Professional fees		450		538		1,381		1,686
Marketing and public relations		215		256		761		828
Supplies, postage and freight		265		292		826		936
Telecommunications		163		200		547		623
Ohio Franchise tax		303		274		899		836
FDIC Assessments		396		568		1,369		1,653
Other real estate owned		144		95		941		247
Electronic banking expenses		236		237		668		659
Loan and Collection Expense		334		433		1,086		1,206
Other expense		447		532		1,345		1,527
Total noninterest expense	$	8,329	$	8,768	$	26,040	$	26,419

Three Months Ended September 30, 2011 versus Three Months Ended September 30, 2010 Noninterest Expense Comparison

Noninterest expense for the third quarter of 2011 decreased $439, or 5.00%, compared to the same period of 2010. The decline in noninterest expense was mainly attributable to lower professional fees and loan and collection expense which declined $187, or 19.26%, compared to the third quarter of 2010, primarily as a result of the Corporation’s establishment of an internal legal function. FDIC assessments also declined relative to the third quarter of 2010, due to the new risk-based assessment system adopted by the FDIC during the second quarter of 2011. Other real estate costs increased $49 for the third quarter of 2011 compared to 2010, mainly due to higher costs associated with foreclosure proceedings and valuation allowances recorded for these properties.

Nine Months Ended September 30, 2011 versus Nine Months Ended September 30, 2010 Noninterest Expense Comparison

Noninterest expense decreased by $379, or 1.43%, for the first nine months of 2011 over the same period of 2010. FDIC assessments decreased $284 compared to the same period of 2010. Furniture and equipment expense decreased $417, or 15.35%, compared to the prior period. The decrease in furniture and equipment expense was mainly as a result of the consolidation of data servicing centers during the first quarter of 2010. Professional fees decreased $305, or 18.09%, compared to the same period a year ago, mainly due to the establishment of the Corporation’s internal legal function. Offsetting these decreases, salaries and employee benefits increased $422, or 3.60%, compared to the same period of 2010. The Corporation also experienced an increase of $694 in other real estate costs primarily due to higher costs associated with foreclosure proceedings and valuation allowances recorded for these properties.

Income taxes

Three Months Ended September 30, 2011 versus Three Months Ended September 30, 2010 Income Taxes Comparison

The Corporation recognized income tax expense of $500 and $842 for the third quarter of 2011 and 2010, respectively. Included in net income for the three months ended September 30, 2011 and September 30, 2010 was $457 and $413 of nontaxable income, including $143 and $140 related to life insurance policies and $314 and $273 of tax-exempt investment and loan interest income, respectively. The new market tax credit generated by North

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Coast Community Development Corporation, a wholly-owned subsidiary of the Bank, also had a significant impact on income tax expense and contributes to a lower effective tax rate for the Corporation. After considering the tax-exempt income and relatively small nondeductible expenses, income subject to tax for the quarter was significantly less than income before income tax expense.

Nine Months Ended September 30, 2011 versus Nine Months Ended September 30, 2010 Income Taxes Comparison

The Corporation recognized income tax expense of $827 and $1,422 during the first nine months of 2011 and 2010, respectively. Included in net income for the nine months ended September 30, 2011 and September 30, 2010 was $1,300 and $1,240 of nontaxable income, including $430 and $422 related to life insurance policies and $870 and $544 of tax-exempt investment and loan interest income, respectively. 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 lower effective tax rate for the Corporation. After considering the tax-exempt income and relatively small nondeductible expenses, income subject to tax for the nine month period was significantly less than income before income tax expense.

Financial Condition

Overview

The Corporation’s assets at September 30, 2011 were $1,170,283 compared to $1,152,537 at December 31, 2010. This is an increase of $17,746, or 1.54%, which is primarily attributable to an increase in portfolio loans of $24,913, or 3.06%, from December 31, 2010. Total deposits at September 30, 2011 were $989,279 compared to $978,526 at December 31, 2010. The growth in deposits primarily 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, 2011 and December 31, 2010 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. Total securities increased $10,633, or 4.80%, compared to December 31, 2010, mainly as a result of the Corporation’s purchase of U.S. Government agency securities and U.S. agency mortgage backed securities. As of September 30, 2011 the portfolio was comprised of 97.59% available for sale securities and 2.41% restricted stock. Available for sale securities were comprised of 25.23% U.S. Government agencies, 50.88% U.S. agency mortgage backed securities, 12.63% U.S. agency collateralized mortgage obligations and 11.26% municipal securities. At September 30, 2011, the available for sale securities had a net temporary unrealized gain of $6,426, representing 2.84% 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 detail by loan segment.

Table 7: Details on Loan Balances

	September 30, 2011			December 31, 2010
	(Dollars in thousands)
Commercial real estate	$	384,678		$	375,803
Commercial		69,758			65,662
Real estate mortgage		65,747			74,685
Home equity loans		129,665			132,536
Indirect		174,521			150,031
Consumer		13,123			13,862
Total Loans		837,492			812,579
Allowance for loan losses		(17,845	)		(16,136	)
Net Loans	$	819,647		$	796,443

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Despite the relatively limited availability of quality loan opportunities throughout the financial industry, the Corporation significantly increased its commercial real estate, commercial and indirect loan portfolios during the first nine months of 2011. Total portfolio loans at September 30, 2011 were $837,492. This is an increase of $24,913 from December 31, 2010. Commercial real estate loans increased by $8,875, or 2.36%, compared to December 31, 2010 and commercial loans increased by $4,096, or 6.24%, compared to December 31, 2010. Indirect loans increased by $24,490, or 16.32%, compared to December 31, 2010. With the continued lower interest rate environment and reduced property values, real estate mortgage and home equity loans continued to decline while the Corporation experienced only limited production during the first nine months of 2011. Real estate mortgage and home equity loans declined $8,938 and $2,871, respectively, compared to December 31, 2010. Consumer loans did not change significantly compared to December 31, 2010.

At September 30, 2011, commercial and commercial real estate loans represented 54.26% of total portfolio loans. Real estate mortgages and home equity loans comprise 7.85% and 15.48% of total portfolio loans, respectively. Indirect and consumer loans were 22.41% of total portfolio loans. Consumer loans are made to borrowers on both secured and unsecured terms, depending on the maturity and nature of the loan.

Loans held for sale, and not included in portfolio loans, were $4,069 at September 30, 2011. Mortgage loans held for sale and indirect loans held for sale accounted for $2,129 and $1,940 of this amount, respectively. The Corporation has a practice of retaining the servicing rights on loans that are sold.

Expected cash flow and interest rate information for loans is presented in the following table:

Table 8: Cash Flow and Interest Rate Information for Loans:

	As of September 30, 2011
Due in one year or less	$	252,456
Due after one year but within five years		311,710
Due after five years		273,326
Totals	$	837,492
Due after one year with a predetermined fixed interest rate	$	496,148
Due after one year with a floating interest rate		88,888
Totals	$	585,036

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 9 presents the detailed activity in the allowance for loan losses and related charge-off activity for the three and nine month periods ended September 30, 2011 and 2010.

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Table 9: Analysis of Allowance for Loan Losses

	Three Months Ended						Nine Months Ended
	September 30, 2011			September 30, 2010			September 30, 2011			September 30, 2010
	(Dollars in thousands)						(Dollars in thousands)
Balance at beginning of period	$	17,351		$	19,435		$	16,136		$	18,792
Charge-offs:
Commercial real estate		577			2,326			2,669			4,875
Commercial & industrial		13			1,173			236			1,218
Real estate mortgage		722			629			1,746			769
Home equity lines of credit		270			100			957			858
Indirect		117			4			264			418
Consumer		—			157			358			200
DDA Overdrafts		53			69			132			161
Total charge-offs		1,752			4,458			6,362			8,499
Recoveries:
Commercial real estate		34			6			249			77
Commercial & industrial		2			1			38			136
Real estate mortgage		39			—			49			—
Home equity lines of credit		14			31			15			31
Indirect		32			56			77			273
Consumer		13			34			55			46
DDA Overdrafts		12			16			43			47
Total Recoveries		146			145			526			611
Net Charge-offs		1,606			4,314			5,836			7,889
Provision for loan losses		2,100			2,076			7,545			6,294
Balance at end of period	$	17,845		$	17,197		$	17,845		$	17,197
Loans outstanding at end of period	$	837,492		$	795,909		$	837,492		$	795,909
Allowance for loan losses as a percent of loans outstanding at the end of the period		2.13	%		2.16	%		2.13	%		2.16	%
Average Loans Outstanding	$	835,090		$	802,412		$	820,644		$	798,867
Annualized ratio to average loans:
Net Charge-offs		0.76	%		2.13	%		0.95	%		1.32	%
Provision for loan losses		1.00	%		1.03	%		1.23	%		1.05	%

The allowance for loan losses at September 30, 2011 was $17,845, or 2.13%, of outstanding loans, compared to $17,197, or 2.16%, of portfolio loans at September 30, 2010 and $16,136, or 1.99%, of outstanding loans at December 31, 2010. Due to the overall economic conditions and increasing levels of problem loans experienced industry wide, primarily commercial and commercial real estate loans, the Corporation created a dedicated loan workout group early in the fourth quarter of 2009 staffed with new hires with workout experience. During 2010, as the group became familiar with the Corporation’s problem loans, a segment of commercial and commercial real estate loans which had previously been identified as having higher risk factors in accordance with ASC 450 (FAS 5) was designated as impaired in accordance with ASC 310-10-35 (FAS 114). In addition, the Corporation improved the timeliness of recognizing liquidation as the primary source of repayment of the problem loans. These loans were then charged-down to their net realizable values, less costs to sell, in accordance with ASC 310-10-35 (FAS 114). As a result, the Corporation experienced an increase in charge-offs in 2010, primarily with respect to commercial and commercial real estate loans, which in turn reduced the level of specific reserves provided for these loans under ASC 310-10-35 (FAS 114). During the same period and in response to increasing levels of problem loans experienced by the Corporation, the level of the portion of the Corporation’s allowance for loan losses allocated to loans having high risk factors in accordance with ASC 450 (FAS 5) increased.

The provision for loan losses for the quarter ended September 30, 2011 was $2,100 compared to provision for loan losses of $2,076 one year ago and for the nine months ended September 30, 2011 was $7,545 compared to $6,294 for the nine months ended September 30, 2010. Management continues to allocate a portion of the allowance to general reserves for loans having higher risk factors. As specific reserves have been charged-off, the composition of the allowance has shifted from an equal allocation of specific and general reserves at September 30, 2010 to approximately 70% general reserves and 30% specific reserves at September 30, 2011. General reserves as of September 30, 2011 totaled $12,454 compared to $8,693 at September 30, 2010.

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Net charge-offs for the three months ended September 30, 2011 were $1,606, compared to $4,314 for the three months ended September 30, 2010. Net charge-offs for the nine months ended September 30, 2011 were $5,835, compared to $7,889 for the nine months ended September 30, 2010. Annualized net charge-offs as a percent of average loans for the third quarter and first nine months of 2011 were 0.76% and 0.95% respectively, compared to 2.14% and 1.33% for the same periods in 2010. Net charge-offs on commercial and commercial real estate loans are primarily a result of loans that are collateral dependent and deemed uncollectible. As a result, the loans are written down to their net realizable value which is current appraised value less costs to sell. Given the current real estate market, valuations continue to show declines that are reflected in the lower appraised values and are a major component of the net charge-offs when the underlying collateral is the primary source of repayment for commercial and commercial real estate loans. Net charge-offs related to real estate and home equity loans continue to be impacted by increased bankruptcies and foreclosure proceedings as well as higher loan-to-value ratios which are primarily the result of declining market values.

The provision for loan losses for the three and nine month periods ended September 30, 2011 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 Corporation continues to aggressively address potential problem loans, and underwriting standards continue to be adjusted in response to trends and asset review findings. Refer to Note 6, Loans and Allowance for Loan Losses, for additional information.

Deposits

Table 10: Deposits and Borrowings

	Average Balances Outstanding				Average Rates Paid
	For the three months ended
	September 30, 2011		December 31, 2010		September 30, 2011			December 31, 2010
			(Dollars in thousands)
Demand deposits	$	120,968	$	112,810		0.00	%		0.00	%
Interest checking		155,012		141,974		0.14			0.17
Savings deposits		97,982		89,982		0.17			0.17
Money Market Accounts		100,305		93,502		0.24			0.41
Consumer time deposits		459,262		464,924		1.57			1.81
Public time deposits		64,078		80,990		0.47			0.54
Total Deposits		997,607		984,182		0.88			0.98
Short-term borrowings		757		1,852		0.15			0.25
FHLB borrowings		42,955		42,501		2.43			2.98
Junior subordinated debentures		16,323		16,322		4.15			3.18
Total borrowings		60,035		60,675		2.91			2.95
Total funding	$	1,057,642	$	1,044,857		1.05	%		1.23	%

Average deposits for the three months ended September 30, 2011 were $997,607 compared to average deposits of $984,182 for the three months ended December 31, 2010. Deposit accounts and the generation of deposit accounts continued to be the primary source of funds for the Corporation. As indicated in the table above, growth in deposits by core account holders has reduced the Corporation’s reliance on public certificate of deposit accounts and has maintained 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.

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The following table summarizes total consumer and public time deposits greater than or equal to $100,000 as of September 30, 2011 by remaining maturity:

Table 11: Consumer and Public Time Deposits Greater Than $100,000

	September 30, 2011
	(Dollars in thousands)
Less than 3 months	$	53,528
3 to 6 months		53,340
6 to 12 months		71,357
Over 12 months		60,831
Total	$	239,056

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, 2011, the Corporation had $371 of short-term borrowings. There were no federal funds purchased at September 30, 2011 and December 31, 2010. Long-term borrowings for the Corporation consist of Federal Home Loan Bank advances of $47,498 and junior subordinated debentures related to trust preferred securities of $16,238. Federal Home Loan Bank advances were $42,501 at December 31, 2010. 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 continued to maintain an appropriate capital position. Total shareholders’ equity was $112,698 at September 30, 2011. This is an increase of 2.95% over December 31, 2010. For the nine months ended September 30, 2011, total shareholders’ equity was increased by net income of $3,514, $141 for share-based compensation and a $761 increase in accumulated other comprehensive gain resulting from an increase in the fair value of available for sale securities. Factors decreasing shareholders’ equity were cash dividends payable to common shareholders in the amount of $237 and cash dividends payable to preferred shareholders in the amount of $945. The Corporation held 328,194 shares of common stock as treasury stock at September 30, 2011, at a cost of $6,092.

The Corporation and the Bank continue to monitor balance sheet growth in an effort to stay within the guidelines established by applicable regulatory authorities. At September 30, 2011 and December 31, 2010, 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 approximately 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

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shares, are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions. As of September 30, 2011, the Corporation had repurchased an aggregate of 202,500 shares under this program. The Corporation did not repurchase any shares under this program during the third quarter of 2011.

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:

• 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;

• 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;

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

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

• changes in political conditions or the legislative or regulatory environment, 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 have been or may be promulgated under the Act);

• persisting volatility and limited credit availability in the financial markets, particularly if market conditions limit the Corporation’s ability to raise funding to the extent required by banking regulators or otherwise; or if 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;

• 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;

• 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, 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; 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.

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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 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

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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.

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 Corporation’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 and other foreclosed assets. 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 ratio of nonperforming loans to total loans decreased from 5.15% at December 31, 2010 to 4.43% at September 30, 2011. This is in large part attributable to Management’s continued focus on asset quality. Nonperforming loans at September 30, 2011 were $37,115 compared to $41,831 at December 31, 2010, a decrease of $4,716. Of this total, commercial real estate loans were $25,255 or 68.04% of total nonperforming loans compared to $28,613 or 68.40% of total nonperforming loans at December 31, 2010. These 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. All nonperforming loans are being actively managed.

Other foreclosed assets were $2,116 as of September 30, 2011 compared to $3,119 at December 31, 2010. The $2,116 is comprised of $1,296 in residential properties and $820 in commercial real estate properties. This compares to $1,935 in residential properties and $1,184 in commercial real estate properties as of December 31, 2010.

Table 12 sets forth nonperforming assets at September 30, 2011 and December 31, 2010.

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Table 12: Nonperforming Assets

	September 30, 2011			December 31, 2010
	(Dollars in thousands)
Commercial loans	$	25,255		$	28,613
Real estate mortgage		6,174			8,853
Home equity lines of credit		3,754			2,398
Installment loans		1,933			1,967
Total nonperforming loans		37,115			41,831
Other foreclosed assets		2,116			3,119
Total nonperforming assets	$	39,231		$	44,950
Loans 90 days past due accruing interest	$	—		$	—
Total nonperforming loans to total loans		4.43	%		5.15	%
Allowance for loan losses to nonperforming assets		45.49	%		35.90	%

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 net interest income at risk simulation and economic value of equity simulation. A net interest income-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 net interest income 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. Using a rolling 12 month forecast, at September 30, 2011, a “shock” treatment of the balance sheet, in which a parallel shift in the yield curve occurs and all rates increase immediately, indicates that in a +200 basis point shock, net interest income would increase $922, or 2.30%, and in a -200 basis point shock, net interest income would decrease $2,326, or 5.80%. 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 at Risk (EVE) is the difference between the present value of all asset cash flows and the present value of all liability cash flows. EVE at risk is an estimate of the Corporation’s capital at risk to adverse changes in interest rates and represents the structural mismatch between the rate sensitivity of the assets versus the liabilities. It is a comprehensive measure for assessing and managing the Corporation’s interest rate risk exposure. At September 30, 2011, this analysis indicated that a +200 basis point change in rates would reduce the value of the Corporation’s equity by 11.70% while a -200 basis point change in rates would increase the value of the Corporation’s equity by 5.10%.

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

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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.

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 $113,070 at September 30, 2011.

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, 2011, 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, 2011 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 in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2011 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, 2010, Mr. Osborne indicated his intent to solicit proxies in favor of the election of two nominees for election as directors at the Corporation’s 2010 annual meeting of shareholders. On March 24, 2010, 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, 2010, the Court issued an order granting the Corporation’s motion for a temporary restraining order. On April 3, 2010, 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. On July 25, 2011, the Sixth Circuit affirmed the decision of the District Court and refused to dissolve the preliminary injunction. The case was then remanded to the District Court, and the parties have completed briefing the cross motions for summary judgment. The parties are awaiting a ruling from the District Court.

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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, 2010.

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, 2011, the Corporation had repurchased an aggregate of 202,500 shares under this program. The Corporation did not repurchase any shares under this program during the third quarter of 2011.

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, 2011	/s/ Gary J. Elek
	Gary J. Elek
	Chief Financial Officer (Duly Authorized Officer, and Principal Financial and Accounting Officer)

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Exhibit Index

Exhibit No.	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.
101	Financial statements from the quarterly report on Form 10-Q of LNB Bancorp, Inc. for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2011 (unaudited) and December 31, 2010; (ii) Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2011 and 2010; (iii) Consolidated Statements of Shareholders’ Equity (unaudited) for the nine months ended September 30, 2011 and 2010; (iv) Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2011 and 2010; and (v) Notes to the Unaudited Consolidated Financial Statements.

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