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LNB Bancorp 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
e10vq
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 0-13203
LNB Bancorp, Inc.
(Exact name of the registrant as specified on its charter)
     
Ohio   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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
        (Do not check if a smaller reporting company)    
     Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of common shares of the registrant outstanding on May 2, 2011 was 7,884,749.
 
 

 


 

LNB Bancorp, Inc.
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 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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Part I — FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets
                 
    March 31, 2011     December 31, 2010  
    (unaudited)          
    (Dollars in thousands except share amounts)  
ASSETS
               
Cash and due from banks (Note 3)
  $ 19,243     $ 17,370  
Federal funds sold and short-term investments
    45,150       30,850  
 
           
Cash and cash equivalents
    64,393       48,220  
Interest-bearing deposits in other banks
    348       348  
Securities available for sale, at fair value (Note 5)
    235,563       221,725  
Restricted stock
    5,741       5,741  
Loans held for sale
    5,261       5,105  
Loans: (Note 6)
               
Portfolio loans
    810,629       812,579  
Allowance for loan losses (Note 6)
    (17,315 )     (16,136 )
 
           
Net loans
    793,314       796,443  
 
           
Bank premises and equipment, net
    9,353       9,645  
Other real estate owned
    3,348       3,119  
Bank owned life insurance
    17,320       17,146  
Goodwill, net (Note 4)
    21,582       21,582  
Intangible assets, net (Note 4)
    835       868  
Accrued interest receivable
    3,788       3,519  
Other assets
    14,532       19,076  
 
           
Total Assets
  $ 1,175,378     $ 1,152,537  
 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Deposits (Note 7)
               
Demand and other noninterest-bearing
  $ 119,704     $ 115,476  
Savings, money market and interest-bearing demand
    348,412       318,434  
Certificates of deposit
    532,983       544,616  
 
           
Total deposits
    1,001,099       978,526  
 
           
Short-term borrowings (Note 8)
    580       932  
Federal Home Loan Bank advances (Note 9)
    42,500       42,501  
Junior subordinated debentures (Note 10)
    16,238       16,238  
Accrued interest payable
    1,450       1,434  
Accrued taxes, expenses and other liabilities
    3,462       3,442  
 
           
Total Liabilities
    1,065,329       1,043,073  
 
           
Shareholders’ Equity
               
Preferred stock, Series A Voting, no par value, authorized 150,000 shares, none issued at March 31, 2011 and December 31, 2010.
           
Preferred stock, Series B, no par value, $1,000 liquidation value, 25,223 shares authorized and issued at March 31, 2011 and December 31, 2010.
    25,223       25,223  
Discount on Series B preferred stock
    (112 )     (116 )
Warrant to purchase common stock
    146       146  
Common stock, par value $1 per share, authorized 15,000,000 shares, issued 8,212,943 shares at March 31, 2011 and 8,172,943 at December 31, 2010.
    8,213       8,173  
Additional paid-in capital
    39,459       39,455  
Retained earnings
    41,400       40,668  
Accumulated other comprehensive income
    1,812       2,007  
Treasury shares at cost, 328,194 shares at March 31, 2011 and at December 31, 2010
    (6,092 )     (6,092 )
 
           
Total Shareholders’ Equity
    110,049       109,464  
 
           
Total Liabilities and Shareholders’ Equity
  $ 1,175,378     $ 1,152,537  
 
           
See accompanying notes to consolidated financial statements.

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Consolidated Statements of Income (unaudited)
                 
    Three Months Ended  
    March 31, 2011     March 31, 2010  
    (Dollars in thousands except share     and per share amounts)  
Interest and Dividend Income
               
Loans
  $ 10,516     $ 10,792  
Securities:
               
U.S. Government agencies and corporations
    1,477       2,136  
State and political subdivisions
    256       246  
Trading securities
          49  
Other debt and equity securities
    72       61  
Federal funds sold and short-term investments
    14       9  
 
           
Total interest and dividend income
    12,335       13,293  
Interest Expense
               
Deposits
    2,283       2,980  
Federal Home Loan Bank advances
    266       318  
Short-term borrowings
    1       1  
Junior subordinated debentures
    171       215  
 
           
Total interest expense
    2,721       3,514  
 
           
Net Interest Income
    9,614       9,779  
Provision for Loan Losses (Note 6)
    2,100       2,109  
 
           
Net interest income after provision for loan losses
    7,514       7,670  
Noninterest Income
               
Investment and trust services
    403       445  
Deposit service charges
    916       939  
Other service charges and fees
    906       794  
Income from bank owned life insurance
    174       171  
Other income
    79       93  
 
           
Total fees and other income
    2,478       2,442  
Securities gains, net
    412       38  
Gains on sale of loans
    179       192  
Gains (losses) on sale of other assets, net
    2       (21 )
 
           
Total noninterest income
    3,071       2,651  
Noninterest Expense
               
Salaries and employee benefits
    4,091       3,918  
Furniture and equipment
    680       933  
Net occupancy
    612       615  
Outside services
    486       553  
Marketing and public relations
    271       246  
Supplies, postage and freight
    272       342  
Telecommunications
    215       212  
Ohio franchise tax
    298       281  
FDIC assessments
    574       528  
Other real estate owned
    590       81  
Electronic banking expenses
    209       184  
Loan and collection expense
    442       323  
Other expense
    449       477  
 
           
Total noninterest expense
    9,189       8,693  
 
           
Income before income tax expense
    1,396       1,628  
Income tax expense
    266       297  
 
           
Net Income
  $ 1,130     $ 1,331  
 
           
Dividends and accretion on preferred stock
    319       319  
 
           
Net Income Available to Common Shareholders
  $ 811     $ 1,012  
 
           
Net Income Per Common Share (Note 2)
               
Basic
  $ 0.10     $ 0.14  
Diluted
    0.10       0.14  
Dividends declared
    0.01       0.01  
Average Common Shares Outstanding
               
Basic
    7,871,416       7,322,662  
Diluted
    7,871,432       7,322,662  
See accompanying notes to consolidated financial statements

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Consolidated Statements of Shareholders’ Equity (unaudited)
                                                                 
    Preferred                                     Accumulated              
    Stock     Warrant to             Additional             Other              
    (Net of     Purchase     Common     Paid-In     Retained     Comprehensive     Treasury        
    Discount)     Common Stock     Stock     Capital     Earnings     Income (Loss)     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
                                    1,331                       1,331  
Other comprehensive income, net of tax:
                                                               
Change in unrealized gains and losses on securities
                                            285               285  
Total comprehensive income
                                                            1,616  
Share-based compensation
                            13                               13  
Restricted shares granted (67,498 shares)
                    67       (67 )                              
Preferred dividends and accretion of discount
    4                               (319 )                     (315 )
Common dividends declared, $.01 per share
                                    (74 )                     (74 )
 
                                               
Balance, March 31, 2010
  $ 25,096     $ 146     $ 7,691     $ 37,808     $ 37,821     $ 2,911     $ (6,092 )   $ 105,381  
 
                                                               
Balance, January 1, 2011
  $ 25,107     $ 146     $ 8,173     $ 39,455     $ 40,668     $ 2,007     $ (6,092 )   $ 109,464  
Comprehensive income:
                                                               
Net Income
                                    1,130                       1,130  
Other comprehensive income, net of tax:
                                                               
Change in unrealized gains and losses on securities
                                            (195 )             (195 )
Total comprehensive income
                                                            935  
Share-based compensation
                            44                               44  
Restricted shares granted (40,000 shares)
                    40       (40 )                             -  
Preferred dividends and accretion of discount
    4                               (319 )                     (315 )
Common dividends declared, $.01 per share
                                    (79 )                     (79 )
 
                                               
Balance, March 31, 2011
  $ 25,111     $ 146     $ 8,213     $ 39,459     $ 41,400     $ 1,812     $ (6,092 )   $ 110,049  
 
                                               
See accompanying notes to consolidated financial statements

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Consolidated Statements of Cash Flows (unaudited)
                 
    Three Months Ended  
    March 31, 2011     March 31, 2010  
    (Dollars in thousands)  
Operating Activities
               
Net income
  $ 1,130     $ 1,331  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    2,100       2,109  
Depreciation and amortization
    310       383  
Amortization of premiums and discounts
    337       407  
Amortization of intangibles
    33       34  
Amortization of loan servicing rights
    63       73  
Amortization of deferred loan fees
    (98 )     (36 )
Federal deferred income tax expense (benefit)
    958       (430 )
Securities gains, net
    (412 )     (38 )
Share-based compensation expense
    44       13  
Loans originated for sale
    (21,859 )     (24,150 )
Proceeds from sales of loan originations
    20,468       24,434  
Net gain from loan sales
    (179 )     (192 )
Net (gain) loss on sale of other assets
    (2 )     21  
Net decrease (increase) in accrued interest receivable and other assets
    2,357       (71 )
Net increase in accrued interest payable, taxes and other liabilities
    36       264  
 
           
Net cash provided by operating activities
    5,286       4,152  
 
           
Investing Activities
               
Proceeds from sales of available-for-sale securities
    15,499       4,170  
Proceeds from maturities and calls of available-for-sale securities
    11,202       20,381  
Purchase of available-for-sale securities
    (40,761 )     (25,010 )
Change in interest-bearing deposits in other banks
          (1 )
Proceeds from sale of trading securities
          7,774  
Net decrease in loans made to customers
    2,184       8,620  
Proceeds from the sale of other real estate owned
    954       47  
Purchase of bank premises and equipment
    (18 )     (60 )
 
           
Net cash used in and provided by investing activities
    (10,940 )     15,921  
Financing Activities
               
Net increase (decrease) in demand and other noninterest-bearing
    4,228       (6,609 )
Net increase (decrease) in savings, money market and interest-bearing demand
    29,978       (334 )
Net increase (decrease) in certificates of deposit
    (11,633 )     14,562  
Net increase (decrease) in short-term borrowings
    (350 )     132  
Proceeds from Federal Home Loan Bank advances
    15,000       30,000  
Payment of Federal Home Loan Bank advances
    (15,003 )     (30,001 )
Dividends paid
    (393 )     (389 )
 
           
Net cash provided by financing activities
    21,827       7,361  
 
           
Net increase in cash and cash equivalents
    16,173       27,434  
Cash and cash equivalents, January 1
    48,220       26,933  
 
           
Cash and cash equivalents, March 31
  $ 64,393     $ 54,367  
 
           
Supplemental cash flow information
               
Interest paid
  $ 2,705     $ 3,638  
Income taxes paid
           
Transfer of loans to other real estate owned
    1,563       310  
See accompanying notes to consolidated financial statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
(1) Summary of Significant Accounting Policies
     Basis of Presentation
The consolidated financial statements include the accounts of LNB Bancorp, Inc. (the “Corporation”) and its wholly-owned subsidiary, The Lorain National Bank (the “Bank”). The consolidated financial statements also include the accounts of North Coast Community Development Corporation which is a wholly-owned subsidiary of the Bank. All intercompany transactions and balances have been eliminated in consolidation.
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 management, are necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the three month period ended March 31, 2011, are not necessarily indicative of the results which may be expected for the entire year.
     Use of Estimates
LNB Bancorp Inc. prepares its financial statements in conformity with generally accepted accounting principles (GAAP), which requires the Corporation’s management (“Management”) to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas involving the use of Management’s estimates and assumptions include the allowance for loan losses, the valuation of goodwill, the realization of deferred tax assets, fair values of certain securities, 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, title insurance, and insurance 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 and 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 March 31, 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 March 31, 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,

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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 entire 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

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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 30th of each year. Core deposit intangible assets are amortized using the straight-line method over ten years and are subject to annual impairment testing.
     Other Real Estate Owned
Other real estate (ORE) 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.

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     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 $3,284 and $3,479 at March 31, 2011 and December 31, 2010, respectively, and the minimum pension liability adjustment (after applicable income tax benefit) totaling $1,472 for both March 31, 2011 and December 31, 2010, and 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 March 31, 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 Capital Purchase Program, the Corporation also issued a warrant to purchase 561,343 of its common shares at an exercise price of $6.74.
On October 25, 2010, the Corporation amended its Articles of Incorporation to reduce the number of authorized Series A Voting Preferred Shares from 750,000 to 150,000. As of March 31, 2011, the Corporation had authorized 150,000 Series A Voting Preferred Shares. No Series A Voting Preferred Shares have been issued.
     New Accounting Pronouncements
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 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 will be effective for interim and annual periods beginning on or after June 15, 2011, and should be applied retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. The adoption of this standard is

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not expected to have a material impact on the Corporation’s financial statements. See Note 6, Allowance for Loan Losses, for additional information.
ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures About Fair Value Measurements. In January 2010, FASB issued ASU 2010-06 which requires new disclosures regarding significant transfers in and out of Level 1 and 2 fair value measurements and the reasons for the transfers. This ASU also requires that a reporting entity should present separately information about purchases, sales, issuances and settlements, on a gross basis rather than a net basis for activity in Level 3 fair value measurements using significant unobservable inputs. It also clarifies existing disclosures on the level of disaggregation, in that the reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities, and that a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and 3. The new disclosures and clarifications of existing disclosures for ASC 820 became effective for interim and annual reporting periods beginning after December 15, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. See Note 13, Estimated Fair Value of Financial Instruments, for additional information.
     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 March 31,  
    2011     2010  
    (Dollars in thousands except per share amounts)  
Weighted average shares outstanding used in Basic Earnings per Common Share
    7,871,416       7,322,662  
Dilutive effect of incentive stock options and warrants
    16        
 
           
Weighted average shares outstanding used in Diluted Earnings Per Common Share
    7,871,432       7,322,662  
 
           
Net Income
  $ 1,130     $ 1,331  
Dividends and accretion on preferred stock
    319       319  
 
           
Income Available to Common Shareholders
  $ 811     $ 1,012  
 
           
Basic Earnings Per Common Share
  $ 0.10     $ 0.14  
 
           
 
Diluted Earnings Per Common Share
  $ 0.10     $ 0.14  
 
           
Options for 197,000 common shares and common stock warrants for 561,343 shares were considered in computing diluted earnings per common share for the three month period ended March 31, 2011. As of March 31, 2011, stock options of 2,500 were considered dilutive and the remaining stock options and the stock warrants were antidilutive. Stock options for 198,000 common shares and common stock warrants of 561,343 were considered in computing diluted earnings per common share for the three month period ended March 31, 2010. All stock options and warrants were antidilutive as of March 31, 2010.
(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 $1,811 on March 31, 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:
                 
    March 31, 2011     December 31, 2010  
    (Dollars in thousands)  
Core deposit intangibles
  $ 1,367     $ 1,367  
Less: accumulated amortization
    532       499  
 
           
Carrying value of core deposit intangibles
  $ 835     $ 868  
 
           
(5) Securities
The amortized cost, gross unrealized gains and losses and fair values of securities available for sale at March 31, 2011 and December 31, 2010 is as follows:
                                 
    At March 31, 2011  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
    (Dollars in thousands)  
Securities available for sale:
                               
U.S. Government agencies and corporations
  $ 58,885     $ 132     $ (546 )   $ 58,471  
Mortgage backed securities
    106,219       3,890       (51 )     110,058  
Collateralized mortgage obligations
    40,845       1,054             41,899  
State and political subdivisions
    24,639       702       (206 )     25,135  
 
                       
Total securities available for sale
  $ 230,588     $ 5,778     $ (803 )   $ 235,563  
 
                       
                                 
    At December 31, 2010  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     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  
 
                       
The carrying value of securities pledged to secure trust deposits, public deposits, line of credit, and for other purposes required by law amounted to $140,238 and $152,079 at March 31, 2011 and December 31, 2010 respectively.

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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 are not due at a single maturity date and are shown separately.
                 
    At March 31, 2011  
    (Dollars in thousands)  
    Amortized     Fair  
    Cost     Value  
Securities available for sale:
               
Due in one year or less
  $     $  
Due from one year to five years
    36,129       36,000  
Due from five years to ten years
    18,264       18,822  
Due after ten years
    29,131       28,784  
Mortgage backed securities and Collateralized Mortgage Obligations
    147,064       151,957  
 
           
Total
  $ 230,588     $ 235,563  
 
           
Realized gains and losses related to securities available-for-sale at March 31, 2011 and 2010 is as follows:
                 
    March 31,  
    2011     2010  
    (Dollars in thousands)  
Gross realized gains
  $ 412     $ 138  
Gross realized losses
          (100 )
 
           
Net securities gains
  $ 412     $ 38  
 
           
Proceeds from the sale of available for sale securities
  $ 15,499     $ 4,170  
 
           
The securities portfolio contained $6,000 and $6,721 in non-rated securities of state and political subdivisions at March 31, 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 $6,114 and $6,784 at March 31, 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 March 31, 2011 and December 31, 2010.
The following is a summary of securities that had unrealized losses at March 31, 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 March 31, 2011 there were 28 securities with unrealized losses totaling $803 and at December 31, 2010, the Corporation held 33 securities with unrealized losses totaling $1,139. There are temporary reasons why securities may be valued at less than amortized cost. Temporary reasons are that the current levels of interest rates as compared to the coupons on the securities held by the Corporation are higher and impairment is not due to credit deterioration. The Corporation has the ability and the intent to hold these securities until their value recovers.

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    At March 31, 2011  
    Less than 12 months     12 months or longer     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
    (Dollars in thousands)  
U.S. Government agencies and corporations
  $ 38,278     $ (546 )   $     $     $ 38,278     $ (546 )
Mortgage backed securities
    6,395       (51 )                 6,395       (51 )
State and political subdivisions
    1,942       (206 )                 1,942       (206 )
 
                                   
Total
  $ 46,615     $ (803 )   $     $     $ 46,615     $ (803 )
 
                                   
                                                 
    At December 31, 2010  
    Less than 12 months     12 months or longer     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Losses     Value     Losses     Value     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 March 31, 2011 and December 31, 2010 are summarized as follows:

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                            Home                    
            Commercial             Equity                    
March 31, 2011   Commercial     Real Estate     Residential     Loans     Indirect     Consumer     Total  
    (Dollars in thousands)  
Allowance for loan losses:
                                                       
 
                                                       
Balance, beginning of year
  $ 1,317     $ 11,127     $ 805     $ 1,512     $ 471     $ 904     $ 16,136  
Losses charged off
          (230 )     (273 )     (345 )     (195 )     (69 )     (1,112 )
Recoveries
    31       102       4       1       25       28       191  
Provision charged to expense
    (197 )     1,004       390       772       601       (470 )     2,100  
 
                                         
Balance, end of period
  $ 1,151     $ 12,003     $ 926     $ 1,940     $ 902     $ 393     $ 17,315  
 
                                         
 
                                                       
Ending allowance balance attributable to loans:
                                                       
Individually evaluated for impairment
  $ 199     $ 7,508     $ 26     $     $     $     $ 7,733  
Collectively evaluated for impairment
    952       4,495       900       1,940       902       393       9,582  
 
                                         
Total ending allowance balance
  $ 1,151     $ 12,003     $ 926     $ 1,940     $ 902     $ 393     $ 17,315  
 
                                         
 
                                                       
Loans:
                                                       
Individually evaluated for impairment
  $ 1,027     $ 38,850     $ 2,561     $     $     $     $ 42,438  
Collectively evaluated for impairment
    65,597       340,358       67,604       131,119       150,196       13,317       768,191  
 
                                         
Total ending loans balance
  $ 66,624     $ 379,208     $ 70,165     $ 131,119     $ 150,196     $ 13,317     $ 810,629  
 
                                         
                                                         
                            Home                    
            Commercial             Equity                    
December 31, 2010   Commercial     Real Estate     Residential     Loans     Indirect     Consumer     Total  
    (Dollars in thousands)  
Allowance for loan losses:
                                                       
 
                                                       
Balance, beginning of year
  $ 862     $ 14,390     $ 528     $ 1,591     $ 622     $ 799     $ 18,792  
Losses charged off
    (1,507 )     (8,508 )     (1,491 )     (1,091 )     (573 )     (455 )     (13,625 )
Recoveries
    157       87       30       39       138       293       744  
Provision charged to expense
    1,805       5,158       1,738       973       284       267       10,225  
 
                                         
Balance, end of year
  $ 1,317     $ 11,127     $ 805     $ 1,512     $ 471     $ 904     $ 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       471       904       9,019  
 
                                         
Total ending allowance balance
  $ 1,317     $ 11,127     $ 805     $ 1,512     $ 471     $ 904     $ 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  
 
                                         
Activity in the allowance for loan losses for the three month period ended March 31, 2010 is summarized as follows:
         
    March 31, 2010  
    (Dollars in thousands)  
Balance at the beginning of period
  $ 18,792  
Provision for loan losses
    2,109  
Loans charged-off
    (1,851 )
Recoveries on loans previously charged-off
    133  
 
     
Balance at the end of the period
  $ 19,183  
 
     
Delinquencies
Delinquencies are a sign of weakness in credit quality. Lending staff at the Corporation monitor the financial performance and delinquency of borrowers in their portfolios. Lenders are responsible for managing delinquencies by following up with their borrowers and making arrangement 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 note. For residential, home equity and consumer loans, the Corporation considers the borrower delinquent if they are in arrears two or more monthly payments. The following sequence is followed in managing delinquent accounts:
15-30 days past due- a collection notice is sent reminding the customer of past due status and the urgency of bringing the account current.

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45 days past due- a default letter is sent declaring the loan in default and advising the customer 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 March 31, 2011 there was $38,831 in total past due loans or 4.79% 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 March 31, 2011 and December 31, 2010 by loan segment is as follows:
Age Analysis of Past Due Loans
as of March 31, 2011
                                                         
                                                    Recorded  
    30-59 Days     60-89 Days     Greater than                             Investment >  
(Dollars in thousands)   Past Due     Past Due     90 Days     Total Past Due     Current     Total Loans     90 Days and Accruing  
Commercial
  $ 41     $ 484     $ 805     $ 1,330     $ 65,294     $ 66,624     $  
Commercial Real Estate
    3,973       2,474       19,688       26,135       353,073       379,208        
Residential
    910       1,154       6,025       8,089       62,076       70,165       331  
Home Equity Loans
    1,222       50       923       2,195       128,924       131,119        
Indirect
    519       114       115       748       149,448       150,196          
Consumer
    310       6       18       334       12,983       13,317        
 
                                         
Total
  $ 6,975     $ 4,282     $ 27,574     $ 38,831     $ 771,798     $ 810,629     $ 331  
 
                                         
Age Analysis of Past Due Loans
as of December 31, 2010
                                                         
                                                    Recorded  
    30-59 Days     60-89 Days     Greater than                             Investment >  
(Dollars in thousands)   Past Due     Past Due     90 Days     Total Past Due     Current     Total Loans     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. Information regarding impaired loans as of March 31, 2011 and December 31, 2010 is as follows:

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    Recorded     Unpaid Principal     Related     Average Recorded     Interest Income  
At March 31, 2011   Investment     Balance     Allowance     Balance     Recognized  
(Dollars in thousands)                                        
With no related allowance recorded:
                                       
Commercial
  $ 259     $ 259     $     $ 534     $  
Commercial Real Estate
    6,934       9,098             4,755       195  
Residential
    2,185       2,366             2,187       3  
Home Equity Loans
                             
Indirect
                             
Consumer
                             
With allowance recorded:
                                       
Commercial
    768       1,416       199       662        
Commercial Real Estate
    31,916       36,175       7,508       29,602       13  
Residential
    376       376       26       377        
Home Equity Loans
                             
Indirect
                             
Consumer
                             
 
                             
Total
  $ 42,438     $ 49,690     $ 7,733     $ 38,117     $ 211  
 
                             
                                         
    Recorded     Unpaid Principal     Related     Average Recorded     Interest Income  
At December 31, 2010   Investment     Balance     Allowance     Balance     Recognized  
(Dollars in thousands)                                        
With no related allowance recorded:
                                       
Commercial
  $ 549     $ 549     $     $ 600     $ 16  
Commercial Real Estate
    6,393       10,367             8,643       133  
Residential
    4,031       3,432             2,666        
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       6  
Residential
    451       1,416       46       102        
Home Equity Loans
                             
Indirect
                             
Consumer
                             
 
                             
Total
  $ 44,668     $ 52,679     $ 7,117     $ 43,100     $ 155  
 
                             

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Nonaccrual loans at March 31, 2011 were $37,808, compared to $41,831 at December 31, 2010.
Loans On NonAccrual Status
                 
    March 31, 2011     December 31,2010  
    (Dollars in thousands)  
Commercial
  $ 1,288     $ 1,333  
Commercial Real Estate
    24,904       25,941  
Residential
    8,417       11,052  
Home Equity Loans
    2,213       2,372  
Indirect
    664       667  
Consumer
    322       466  
 
           
Total Nonaccrual Loans
  $ 37,808     $ 41,831  
 
           
Percentage of nonaccrual loans to portfolio loans
    4.66 %     5.15 %
Percentage of nonaccrual loans to total assets
    3.22 %     3.63 %
Troubled Debt Restructuring
     A restructuring of a debt constitutes a troubled debt restructuring 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 structuring applies in a particular instance. As of March 31, 2011, the Corporation had two loans that were classified as troubled debt restructurings which totaled $1,027. As of December 31, 2010, the Corporation had one loan that was classified as a troubled debt restructuring in the amount of $636. The loans have made timely payments of principal and interest per the modified agreement throughout 2011.
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 March 31, 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 is 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.

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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 March 31, 2011 and December 31, 2010:
                                                         
            Commercial Real             Home Equity                    
    Commercial     Estate     Residential*     Loans     Indirect     Consumer     Total  
Commercial Credit Exposure   March 31, 2011  
                      (Dollars in thousands)                      
Loans graded by internal credit risk grade:
                                                       
Grade 1 - Minimal
  $ 3,166     $     $     $     $     $     $ 3,166  
Grade 2 - Modest
                                         
Grade 3 - Better than average
    155       2,970                               3,125  
Grade 4 - Average
    8,206       53,347       264                         61,817  
Grade 5 - Acceptable
    51,125       255,418       4,054                         310,597  
 
                                         
Total Pass Credits
    62,652       311,735       4,318                         378,705  
Grade 6 - Special mention
    2,273       16,178       367                         18,818  
Grade 7 - Substandard
    1,699       51,295       2,291                         55,285  
Grade 8 - Doubtful
                                         
Grade 9 - Loss
                                         
 
                                         
Total loans internally credit risk graded
    66,624       379,208       6,976                         452,808  
Loans not monitored by internal risk grade:
                                                       
 
                                                 
Current loans not internally risk graded
                56,593       128,924       149,448       12,983       347,948  
30-59 days past due loans not internally risk graded
                910       1,222       519       310       2,961  
60-89 days past due loans not internally risk graded
                491       50       114       6       661  
90+ days past due loans not internally risk graded
                5,195       923       115       18       6,251  
 
                                         
Total loans not internally credit risk graded
                63,189       131,119       150,196       13,317       357,821  
 
                                         
Total loans internally and not internally credit risk graded
  $ 66,624     $ 379,208     $ 70,165     $ 131,119     $ 150,196     $ 13,317     $ 810,629  
 
                                         
                                                         
            Commercial Real             Home Equity                    
    Commercial     Estate     Residential*     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 include conventional 1-4 family residential property loans and conventional 1-4 family residential property loans used to finance the cost of construction when upon completion of construction the loan converts into a permanent mortgage.
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 delinquent loan table. Additionally, a good indicator of repayment ability is a borrower’s credit history. A borrower’s credit history is evaluated though the use of credit reports and/or an automated underwriting system. A borrower’s credit score is an indication of a person’s creditworthiness that is used to access the likelihood that a borrower will repay their debts. A credit score is generally based upon a person’s past credit history and is a number between 300 and 850 — the higher the number, the more creditworthy the person is deemed to be.

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Below is a table that shows the weighted average credit scores for residential, home equity, indirect and consumer loans for the three and twelve months ended March 31, 2011 and December 31, 2010.
                 
Consumer Credit Score Migration   March 31, 2011     December 31, 2010  
Total residential
    703       701  
Total home equity loans
    750       750  
Total loans to individuals
    725       728  
Total indirect
    766       771  
Total revolving lines
    713       713  
 
(7) Deposits
Deposit balances at March 31, 2011 and December 31, 2010 are summarized as follows:
                 
    March 31, 2011     December 31, 2010  
    (Dollars in thousands)  
Demand and other noninterest-bearing
  $ 119,704     $ 115,476  
Interest checking
    150,671       134,375  
Savings
    95,984       91,882  
Money market accounts
    101,757       92,177  
Consumer time deposits
    471,728       464,860  
Public time deposits
    61,255       79,756  
 
           
Total deposits
  $ 1,001,099     $ 978,526  
 
           
The aggregate amount of certificates of deposit in denominations of $100,000 or more amounted to $232,520 and $240,127 at March 31, 2011 and December 31, 2010, respectively.
The maturity distribution of certificates of deposit as of March 31, 2011 follows:
                                         
    Within     After 12 months but     After 36 months but              
    12 months     within 36 months     within 60 months     After 5 years     Total  
                (Dollars in thousands)              
Consumer time deposits
  $ 341,497     $ 98,337     $ 31,894     $     $ 471,728  
Public time deposits
    54,511       4,234       2,010       500       61,255  
 
                             
Total time deposits
  $ 396,008     $ 102,571     $ 33,904     $ 500     $ 532,983  
 
                             
(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 March 31, 2011, the Bank had pledged approximately $88,651 in qualifying home equity lines of credit, resulting in an available line of credit of approximately $44,325. No amounts were outstanding at March 31, 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 March 31, 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 March 31, 2011 and December 31, 2010 were $580 and $932, respectively. The interest rate paid on these borrowings was 0.25% at March 31, 2011 and 0.25% at December 31, 2010. No Federal Funds were purchased as of March 31, 2011 and December 31, 2010.
(9) Federal Home Loan Bank Advances
Federal Home Loan Bank advances amounted to $42,500 and $42,501 at March 31, 2011 and December 31, 2010, respectively. All advances are bullet maturities with no call features. At March 31, 2011, collateral pledged for FHLB advances consisted of qualified real estate mortgage loans and investment securities of $56,063 and $26,695, respectively. The maximum borrowing capacity of the Bank at March 31, 2011 was $48,819 with unused collateral borrowing capacity of $4,782. The Bank maintains a $40,000 cash management line of credit (CMA) with the FHLB.

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Maturities of FHLB advances outstanding at March 31, 2011 and December 31, 2010 are as follows.
                 
    March 31, 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 March 2012, fixed rate 2.37%
    15,000       15,000  
Maturities January 2014 though August 2014, with fixed rates ranging from 2.06% to 3.55%
    15,037       10,040  
Maturities January 2015 through July 2015, with fixed rates ranging from 2.00% to 4.76%
    12,463       2,461  
 
           
Total FHLB advances
  $ 42,500     $ 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 preferred securities to outside investors and invested the proceeds in junior subordinated debentures issued by the Corporation. The Corporation used the proceeds from the debentures to fund the cash portion of the Morgan Bancorp, Inc. acquisition. Trust I and Trust II are wholly-owned unconsolidated subsidiaries of the Corporation. The Corporation’s obligations under the transaction documents, taken together, have the effect of providing a full guarantee by the Corporation, on a subordinated basis, of the payment obligation of the Trusts.
The subordinated notes mature in 2037. Trust I bears a floating interest rate (current three-month LIBOR plus 148 basis points). Trust II bears a fixed rate of 6.64% through June 15, 2017, and then becomes a floating interest rate (current three-month LIBOR plus 148 basis points). Interest on the notes is payable quarterly. The interest rates in effect as of the last determination date in 2010 were 1.77% and 6.64% for Trust I and Trust II, respectively. At March 31, 2011 and December 31, 2010, accrued interest payable for Trust I was $6 and $6 and for Trust II was $24 and $30, respectively.
The subordinated notes are redeemable in whole or in part, without penalty, at the Corporation’s option on or after June 15, 2012 and mature on June 15, 2037. The notes are junior in right of payment to the prior payment in full of all Senior Indebtedness of the Corporation, whether outstanding at the date of the indenture governing the notes or thereafter incurred. At March 31, 2011, the balance of the subordinated notes 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 currently non-pooled trust preferred securities to exchange up to $2,125 in principal amount of the securities issued by Trust I and $2,125 in principal amount of the securities issued by Trust II for up to 525,000 newly issued shares of the Corporation’s common stock. The Corporation issued 462,234 shares of common stock at a volume-weighted average price of $4.41 per share in exchange for the $4,250 in aggregate principal amount of tendered Trust I and Trust II trust preferred securities and recorded a gain on extinguishment of debt of $2,210.
(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

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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 March 31, 2011 follows:
         
    Amount  
    (Dollars in thousands)  
Commitments to extend credit
  $ 71,895  
Home equity lines of credit
    77,492  
Standby letters of credit
    8,407  
 
     
Total
  $ 157,794  
 
     
(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 March 31, 2011 and December 31, 2010.
              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.

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Estimates of fair value are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Bank has a substantial Investment and Trust Services Division that contributes net fee income annually. The Investment and Trust Services Division is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial instruments include property, plant and equipment, goodwill and deferred tax liabilities. In addition, it is not practicable for the Corporation to estimate the tax ramifications related to the realization of the unrealized gains and losses and they have not been reflected in any of the estimates of fair value. The impact of these tax ramifications can have a significant effect on estimates of fair value.
The estimated fair values of the Corporation’s financial instruments at March 31, 2011 and December 31, 2010 are summarized as follows:
                                 
    March 31, 2011     December 31, 2010  
    Carrying     Estimated Fair     Carrying     Estimated Fair  
    Value     Value     Value     Value  
    (Dollars in thousands)  
Financial assets
                               
Cash and due from banks, Federal funds sold, short-term investments and interest-bearing deposits in other banks
  $ 64,741     $ 64,741     $ 48,568     $ 48,568  
Securities
    235,563       235,563       221,725       221,725  
Portfolio loans, net
    793,314       789,590       796,443       801,585  
Loans held for sale
    5,261       5,261       5,105       5,105  
Accrued interest receivable
    3,788       3,788       3,519       3,519  
Financial liabilities
                               
Deposits:
                               
Demand, savings and money market
    468,116       468,116       433,910       433,910  
Certificates of deposit
    532,983       539,788       544,616       551,832  
 
                       
Total deposits
    1,001,099       1,007,904       978,526       985,742  
 
                       
Short-term borrowings
    580       580       932       932  
Federal Home Loan Bank advances
    42,500       43,746       42,501       43,613  
Junior subordinated debentures
    16,238       15,646       16,238       15,746  
Accrued interest payable
    1,450       1,450       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 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):

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                    Significant        
            Quoted Prices in     Other        
            Active Markets     Observable     Significant  
    Fair Value as of     for Identical     Inputs     Unobservable Inputs  
Description   March 31, 2011     Assets (Level 1)     (Level 2)     (Level 3)  
 
(Dollars in thousands)                                
Securities available for sale:
                               
U.S. Government agencies and corporations
  $ 58,471     $     $ 58,471     $  
Mortgage backed securities
    110,058             110,058        
Collateralized mortgage obligations
    41,899             41,899        
State and political subdivisions
    25,135             25,135        
 
                       
Total
  $ 235,563     $     $ 235,563     $  
 
                       
                                 
                    Significant        
            Quoted Prices in     Other     Significant  
    Fair Value as of     Active Markets     Observable     Unobservable  
    December 31,     for Identical     Inputs     Inputs  
Description   2010     Assets (Level 1)     (Level 2)     (Level 3)  
 
(Dollars in thousands)                                
Trading Securities
  $     $             $  
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 quarter ended March 31, 2011 and year the ended December 31, 2010. 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 table presents the balances of assets and liabilities measured at fair value on a nonrecurring basis at March 31, 2011 and December 31, 2010:
                                 
            Internal              
            Models     Internal        
    Quoted     with     Models with        
    Market     Significant     Significant        
    Prices in     Observable     Unobservable        
    Active     Market     Market        
    Markets     Parameters     Parameters        
March 31, 2011   (Level 1)     (Level 2)     (Level 3)     Total  
(Dollars in thousands)                                
Impaired and nonaccrual loans
  $     $     $ 42,438     $ 42,438  
Other real estate
                3,348       3,348  
Mortgage servicing rights
                891       891  
 
                       
Total assets at fair value on a nonrecurring basis
  $     $     $ 46,677     $ 46,677  
 
                       
                                 
            Internal              
            Models     Internal        
    Quoted     with     Models with        
    Market     Significant     Significant        
    Prices in     Observable     Unobservable        
    Active     Market     Market        
    Markets     Parameters     Parameters        
December 31, 2010   (Level 1)     (Level 2)     (Level 3)     Total  
(Dollars in thousands)                                
Impaired and nonaccrual loans
  $     $     $ 44,668     $ 44,668  
Other real estate
                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

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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 in the on a quarterly basis.
Impaired and Nonaccrual 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).
(13) Share-Based Compensation
A broad-based stock option incentive plan, the 2006 Stock Incentive Plan, was adopted by the Corporation’s shareholders on April 18, 2006. Awards granted under this Plan as of March 31, 2011 were 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 have been made from 2005 to 2007.
     Stock Options
The expense recorded for stock options was $0 and $6 for the first quarter of March 31, 2011 and March 31, 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 March 31, 2011 were as follows:
                                 
    Outstanding     Exercisable  
            Weighted                
            Average                
            Remaining             Weighted  
            Contractual             Average  
    Number     Life (Years)     Number     Exercise Price  
     
Range of Exercise Prices
                               
$5.34-$5.34
    2,500       8.13       833     $ 5.34  
$14.47-$15.34
    82,000       6.85       82,000       14.47  
$15.35-$16.50
    52,500       5.96       52,500       15.78  
$16.51-$19.10
    30,000       4.84       30,000       19.10  
$19.11-$19.17
    30,000       3.84       30,000       19.17  
 
                           
Outstanding at end of period
    197,000       5.87       195,333     $ 16.22  
 
                           
A summary of the status of stock options at March 31, 2011 and March 31, 2010 and changes during the three months then ended is presented in the table below:

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    2011     2010  
            Weighted             Weighted  
            Average             Average  
            Exercise             Exercise  
            Price per             Price per  
    Options     Share     Options     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
    195,333     $ 16.22       161,163     $ 16.60  
 
                       
There were no options exercised during the first quarter of 2011 therefore the total intrinsic value of options exercised was $0. The total intrinsic value of all options outstanding for the first quarter of 2011 was $0.
A summary of the status of nonvested stock options at March 31, 2011 is presented in the table below:
                 
            Weighted  
            Average  
    Nonvested     Exercise Price  
    Shares     per share  
Nonvested at January 1, 2011
    29,004     $ 13.95  
Granted
           
Vested
    27,337       14.47  
Forfeited or expired
           
Nonvested at March 31, 2011
    1,667       5.34  
     Restricted Shares
During the first quarter of 2011, the Corporation issued 40,000 shares of long-term restricted stock 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 three months ended March 31, 2011 and 2010 was $44 and $7, 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 March 31, 2011 is presented in the table below:
                 
            Weighted  
    Nonvested     Average Grant  
    Shares     Date Fair Value  
Nonvested at January 1, 2011
    86,852     $ 4.42  
Granted
    40,000       5.28  
Vested
    22,500       4.35  
Forfeited or expired
           
Nonvested at March 31, 2011
    104,352       4.76  

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     Stock Appreciation Rights (“SAR”)
In 2006, the Corporation issued an aggregate of 30,000 stock appreciation rights (“SAR”) at $19.00 per share, 15,500 of which have expired due to employee terminations. The SAR 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 SAR shall expire at the end of the stated term which is decided at the date of grant and shall not exceed ten years. The SAR issued in 2006 will expire in January 2016. The expense recorded for SAR for the first quarter of 2011 and 2010 was $0.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following commentary presents a discussion and analysis of the Corporation’s financial condition and results of operations by its management (“Management”). This Management’s Discussion and Analysis (“MD&A”) section discusses the financial condition and results of operations of the Corporation for the three months ended March 31, 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 $1,130 for the first quarter of 2011. Net income available to common shareholders was $811 or $0.10 per diluted common share. This compares to net income available to common shareholders of $1,012 or $0.14 per diluted common share for the first quarter of 2010. Earnings per diluted common share for 2011 reflect the issuance of common shares in exchange for a portion of the Corporation’s outstanding trust preferred securities. Total revenues, which include net interest income and noninterest income, increased 2.05% for the first quarter of 2011 compared to the same period of 2010.
For the first quarter 2011, net interest income totaled $9,614 compared to $9,779 for the first quarter of 2010. Net interest income on a fully taxable equivalent (FTE) basis for the first quarter of 2011 was $9,739, a 1.67% decrease compared with $9,904 for the first quarter of 2010. Net interest income decreased $165 compared to one year ago mainly due to a decline in the security portfolio which resulted in an overall decrease of 6 basis points in the net interest margin (FTE) for the first quarter 2011 to 3.63%, from 3.69% one year ago.
The provision for loan losses was $2,100 for the quarter ended March 31, 2011 compared to $2,109 for March 31, 2010.
Noninterest income which is traditionally weak in the first quarter totaled $3,071 compared to $2,651 for the first quarter of 2010. While the first quarter included a gain on the sale of securities totaling $412, other fees which include ATM fees and merchant/debit card fees showed improvement year over year. Trust income, gain on the sale of mortgage loans and service charges on deposits were down from a year ago, the latter being negatively impacted by new federal regulations regarding certain bank overdraft fees and charges. Noninterest expense was $9,189 for the first quarter of 2011, compared to $8,693 for the first quarter of 2010, an increase of $496, or 5.71%. The efficiency ratio, which is the measure of cost to generate revenue, increased from 69.24% in the first quarter of 2010 to 71.73% in the first quarter of 2011.
Noninterest expense was $9,189 for the first quarter of 2011, compared to $8,693 for the first quarter of 2010. The increase was driven by a $509 increase in other real estate owned expenses which primarily resulted from the further write-down in the valuation of properties obtained through loan foreclosure proceedings given the current residential and commercial real estate markets, along with higher legal and loan expenses associated with resolving problem loans. Excluding these costs, other noninterest expenses declined from the same period one year ago.
During the first quarter of 2011, loan demand remained relatively weak as total portfolio loans ended the quarter at $810,629, a 2.28% increase compared to $812,579 at December 31, 2010. Total assets for the first quarter ended at $1,175,378 compared to $1,152,537 at the end of 2010. Total deposits grew to $1,001,099 at the end of the first quarter of 2011, up from $978,526 at December 31, 2010. The growth in deposits came in the form of core deposits which improved liquidity while reducing costs.
In addition to the effect of the overall economy and the level of unemployment, a significant factor impacting asset quality has been the lower market valuation of the underlying collateral, primarily in construction and development

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and commercial real estate loans and the need to provide additional allowances due to these lower valuations. Given the current economic conditions, the Corporation continues to work through asset quality challenges.The Corporation’s non-performing loans totaled $37,808, or 4.66 percent of total loans, an improvement from $41,830, or 5.15 percent, at December 31, 2010.
The allowance for possible loan losses was $17,315 at March 31, 2011 compared to $16,136 at December 31, 2010 equaling 2.14 percent of total loans compared to 1.99 percent at December 31, 2010. Annualized net charge-offs to average loans for the quarter ending March 31, 2011 was 0.46% compared to 2.48% at 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 March 31, 2011 and 2010. Rates are computed on a tax equivalent basis and nonaccrual loans are included in the average loan balances.
                                                 
    Three Months Ended March 31,  
    March 31, 2011     March 31, 2010  
    Average                     Average              
    Balance     Interest     Rate     Balance     Interest     Rate  
    (Dollars in thousands)  
Assets:
                                               
U.S. Govt agencies and corporations
  $ 199,582     $ 1,477       3.00 %   $ 227,600     $ 2,185       3.89 %
State and political subdivisions
    24,410       369       6.13       23,178       355       6.22  
Federal funds sold and short-term investments
    43,312       14       0.13       32,687       9       0.11  
Restricted stock
    5,741       72       5.09       5,532       61       4.47  
Commercial loans
    448,182       5,837       5.28       447,470       6,041       5.48  
Real estate mortgage loans
    64,662       914       5.73       76,764       1,032       5.45  
Home equity lines of credit
    109,354       1,067       3.96       108,697       1,069       3.99  
Installment loans
    193,837       2,710       5.67       166,165       2,666       6.51  
 
                                   
Total Earning Assets
  $ 1,089,080     $ 12,460       4.64 %   $ 1,088,093     $ 13,418       5.00 %
 
                                   
Allowance for loan loss
    (16,477 )                     (19,150 )                
Cash and due from banks
    17,132                       18,242                  
Bank owned life insurance
    17,206                       16,495                  
Other assets
    53,910                       56,775                  
 
                                           
 
                                               
Total Assets
  $ 1,160,851                     $ 1,160,455                  
 
                                           
Liabilities and Shareholders’ Equity
                                               
Consumer time deposits
  $ 468,893     $ 2,012       1.74 %   $ 478,344     $ 2,624       2.23 %
Public time deposits
    66,688       76       0.46       84,851       171       0.82  
Money market accounts
    97,954       85       0.35       86,946       78       0.36  
Savings deposits
    93,064       38       0.17       83,142       40       0.19  
Interest-bearing demand
    143,797       71       0.20       135,110       67       0.20  
Short-term borrowings
    905       1       0.25       1,597       1       0.23  
FHLB advances
    42,500       267       2.54       44,192       318       2.91  
Trust preferred securities
    16,321       171       4.24       20,727       215       4.21  
 
                                   
Total Interest-Bearing Liabilities
  $ 930,122     $ 2,721       1.19 %   $ 934,909     $ 3,514       1.52 %
 
                                   
Noninterest-bearing deposits
    116,062                       111,250                  
Other liabilities
    4,589                       9,270                  
Shareholders’ Equity
    110,078                       105,026                  
 
                                           
Total Liabilities and Shareholders’ Equity
  $ 1,160,851                     $ 1,160,455                  
 
                                           
Net interest Income (FTE)
          $ 9,739       3.63 %           $ 9,904       3.69 %
Taxable Equivalent Adjustment
            (125 )     (0.05 )             (125 )     (0.05 )
 
                                       
Net Interest Income Per Financial Statements
          $ 9,614                     $ 9,779          
 
                                           
Net Yield on Earning Assets
                    3.58 %                     3.64 %
 
                                           

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Results of Operations
Three Months Ended March 31, 2011 versus Three Months Ended March 31, 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 75.79% of the Corporation’s revenues for the three months ended March 31, 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, before provision for loan losses, was $9,614 for the first quarter of 2011 compared to $9,779 during the same quarter of 2010. Adjusting for tax-exempt income, net interest income FTE, before provision for loan losses, for the first quarter of 2011 and 2010 was $9,739 and $9,904, respectively. The net interest margin FTE, determined by dividing tax equivalent net interest income by average earning assets, was 3.63% for the three months ended March 31, 2011 compared to 3.69% for the three months ended March 31, 2010.
Average earning assets for the first quarter of 2011 were $1,089,080. This was a slight increase of $987, or .091% compared to the same quarter last year. The prolonged period of lower market interest rates impacted the yield on average earning assets, which resulted in 4.64% in the first quarter of 2011 compared to 5.00% for the same period a year ago. The yield on average loans during the first quarter of 2011 was 5.23%, which was 26 basis points lower than the yield on average loans during the first quarter of 2011 at 5.49%. Interest income from securities was $1,846 (FTE) for the three months ended March 31, 2011, compared to $2,540 during the first quarter of 2010. The yield on average securities was 3.34% and 4.12% for these periods, respectively.
The cost of interest-bearing liabilities was 1.19% during the first quarter of 2011 compared to 1.52% during the same period in 2010. Total average interest-bearing liabilities for the quarter ended March 31, 2011 slightly decreased $4,787, or 0.51%, compared to March 31, 2010. This decrease is due to an improved deposit mix with noninterest bearing accounts of $116,062 increasing by 4.33% when compared to a year ago. Average core deposits for the quarter ended March 31, 2011 increased $6,815, or 0.70%, compared to the same period of 2010. The average cost of trust preferred securities was 4.24% for the first quarter of 2011, compared to 4.21% for the first quarter of 2010. One half of the outstanding trust preferred securities pays dividends at a fixed rate of 6.64% and the other half pays dividends at LIBOR plus 1.48%.
Net interest income may also be analyzed by comparing the volume and rate components of interest income and interest expense. Table 2 is an analysis of the changes in interest income and expense between the quarters ended March 31, 2011 and March 31, 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 March 31,  
    Increase (Decrease) in Interest Income/Expense  
            in 2011 over 2010        
    Volume     Rate     Total  
            (Dollars in thousands)          
U.S. Govt agencies and corporations
  $ (207 )   $ (501 )   $ (708 )
State and political subdivisions
    19       (5 )     14  
Federal funds sold and short-term investments
    3       2       5  
Restricted stock
    3       8       11  
Commercial loans
    9       (213 )     (204 )
Real estate mortgage loans
    (171 )     53       (118 )
Home equity lines of credit
    6       (8 )     (2 )
Installment loans
    387       (343 )     44  
 
                 
Total Interest Income
    49       (1,007 )     (958 )
 
                 
Consumer time deposits
    (41 )     (571 )     (612 )
Public time deposits
    (21 )     (74 )     (95 )
Money market accounts
    10       (3 )     7  
Savings deposits
    4       (6 )     (2 )
Interest bearing demand
    4             4  
Short-term borrowings
                 
FHLB advances
    (11 )     (40 )     (51 )
Trust preferred securities
    (46 )     2       (44 )
 
                 
Total Interest Expense
    (101 )     (692 )     (793 )
 
                 
Net Interest Income (FTE)
  $ 150     $ (315 )   $ (165 )
 
                 
Net interest income (FTE) for the first quarter 2011 and 2010 was $9,739 and $9,904, respectively. Interest income (FTE) for the first quarter of 2011 decreased $958 in comparison to the same period in 2010. This decrease is attributable to a $1,007 decrease due to rate and an increase of $49 due to volume. Interest income on securities of U.S. Government agencies and corporations decreased $708, mainly as a result of the reinvestment of funds in shorter-term U.S. Government agencies and seasoned mortgage-backed securities which have less extension risk given the current interest rate environment. Interest income on commercial loans decreased $204, primarily due to lower market interest rates. The $118 decrease in interest income on real estate mortgage loans was primarily attributable to the refinancing in the existing seasoned mortgage portfolio given the low interest rate environment and the Corporation’s practice of selling new mortgage production into the secondary market. The $612 and $95 decreases in consumer time deposits and public time deposits, respectively, were due primarily to lower market interest rates. Total interest expense decreased $793, with the decrease being attributable to a $692 decrease due to rate and a decrease due to volume of $101. Overall, the total decline in net interest income (FTE) of $165 was mainly attributable to an increase in volume of $150 offset by a $315 reduction due to rate which is the difference between interest income and interest expense.

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     Noninterest Income
Table 3: Details on Noninterest Income
                 
    Three Months Ended March 31,  
    2011     2010  
    (Dollars in thousands)  
Investment and trust services
  $ 403     $ 445  
Deposit service charges
    916       939  
Electronic banking fees
    906       794  
Income from bank owned life insurance
    174       171  
Other income
    79       93  
 
           
Total fees and other income
    2,478       2,442  
 
           
Gain on sale of securities
    412       38  
Gain on sale of loans
    179       192  
Gains (losses) on sale of other assets
    2       (21 )
 
           
Total noninterest income
  $ 3,071     $ 2,651  
 
           
Three Months Ended March 31, 2011 versus Three Months Ended March 31, 2010 Noninterest Income Comparison
Total fees and other income for the three months ended March 31, 2011 was $2,478, an increase of $36, or 1.47%, over the same period 2010. Income earned on investment and trust services declined $42 compared to the prior period as a result of the discontinuation of the Corporation’s brokerage division which occurred during the third quarter of 2010. Deposit service charges decreased by $23 when compared to a year ago and will continue to be impacted by the economic environment and new regulations regarding overdrafts. Electronic banking fees increased by $112 when compared to a year ago.
Total net gains recorded during the first quarter of 2011 increased $384 over the first quarter of 2010. This increase was mainly attributable to the $412 gain on sale of securities. Gains on the sale of loans decreased $13 primarily as a result of the lower volume of mortgage loan sales during the first quarter. During the first quarter of 2011, a total of $9,722 of mortgage loans were sold in the secondary market compared to $13,532 for first quarter 2010, a decrease of 28.16%.

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     Noninterest Expense
Table 4: Details on Noninterest Expense
                 
    Three Months Ended March 31,  
    2011     2010  
    (Dollars in thousands)  
Salaries and employee benefits
  $ 4,091     $ 3,918  
Furniture and equipment
    680       933  
Net occupancy
    612       615  
Outside services
    486       553  
Marketing and public relations
    271       246  
Supplies, postage and freight
    272       342  
Telecommunications
    215       212  
Ohio Franchise tax
    298       281  
FDIC Assessments
    574       528  
Other real estate owned
    590       81  
Electronic banking expenses
    209       184  
Loan and Collection Expense
    442       323  
Other expense
    449       477  
 
           
Total noninterest expense
  $ 9,189     $ 8,693  
 
           
Three Months Ended March 31, 2011 versus Three Months Ended March 31, 2010 Noninterest Expense Comparison
Noninterest expense for the first quarter of 2011 increased $496, or 5.71%, compared to the same period of 2010. Other real estate costs increased $509 for the first quarter of 2011 compared to 2010, mainly due to higher costs associated with foreclosure proceedings and valuation allowances recorded for these properties. Loan and collection expense increased $119 when compared to the prior period. This is mainly attributable to the Corporation’s expanded efforts related to workouts of its problem loans. Offsetting these increases was a decline in furniture and equipment expense, which decreased $253 compared to the same period last year, mainly as a result of the consolidation of data servicing centers during the first quarter of 2010.
     Income taxes
Three Months Ended March 31, 2011 versus Three Months Ended March 31, 2010 Income Taxes Comparison
The Corporation recognized income tax expense of $266 and $297 for the first quarter of 2011 and 2010, respectively. Included in net income for the three months ended March 31, 2011 was $413 of nontaxable income, including $142 related to life insurance policies and $271 of tax-exempt investment and loan interest income. The new market tax credit generated by North Coast Community Development Corporation, a wholly-owned subsidiary of the Bank, also had a significant impact on income tax expense and contributes to a lower effective tax rate for the Corporation. After considering the tax-exempt income and relatively small nondeductible expenses, income subject to tax is significantly less than income before income tax expense.
Financial Condition
     Overview
The Corporation’s assets at March 31, 2011 were $1,175,378 compared to $1,152,537 at December 31, 2010. This is an increase of $22,841, or 1.98%. Total securities increased $13,838, or 6.24%, 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. Portfolio loans decreased $1,950, or 0.24%, from December 31, 2010. Total deposits at March 31, 2011 were $1,001,099 compared to $978,526 at December 31, 2010. The growth in deposits came in the form of core deposits which generally tends to improve liquidity while reducing costs.

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     Securities
The composition of the Corporation’s securities portfolio at March 31, 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. Currently, the portfolio is comprised of 97.62% available for sale securities and 2.38% restricted stock. Available for sale securities are comprised of 24.82% U.S. Government agencies, 46.72% U.S. agency mortgage backed securities, 17.79% U.S. agency collateralized mortgage obligations and 10.67% municipal securities. At March 31, 2011 the available for sale securities had a net temporary unrealized gain of $4,975, representing 2.16% 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 5 provides detail by loan segment.
Table 5: Details on Loan Balances
                 
    March 31, 2011     December 31, 2010  
    (Dollars in thousands)  
Commercial real estate
  $ 379,208     $ 375,803  
Commercial
    66,624       65,662  
Real estate mortgage
    70,165       74,685  
Home equity
    131,119       132,536  
Indirect
    150,196       150,031  
Consumer
    13,317       13,862  
 
           
Total Loans
    810,629       812,579  
Allowance for loan losses
    (17,315 )     (16,136 )
 
           
 
Net Loans
  $ 793,314     $ 796,443  
 
           
As the availability of quality loan opportunities remain weak throughout the financial industry, the Corporation managed to marginally increase its commercial real estate and commercial loan portfolios during the first quarter of 2011. Commercial real estate loans increased by $3,405, or 0.91%, compared to December 31, 2010 and commercial loans increased by $962, or 1.46%, compared to December 31, 2010. The decline of $4,520 in real estate mortgages is mainly attributable to refinancing in the existing seasoned mortgage portfolio given the low interest rate environment and the Corporation’s practice of selling new mortgage production into the secondary market. Home equity loans declined $1,417 or 1.07%, compared to December 31, 2010 and indirect and consumer loans did not change significantly compared to December 31, 2010.
Total portfolio loans at March 31, 2011 were $810,629. This is a decrease of $1,950 from December 31, 2010. At March 31, 2011, commercial and commercial real estate loans represented 55.00% of total portfolio loans. Real estate mortgages and home equity loans comprise 8.56% and 16.18% of total portfolio loans, respectively. Indirect and consumer loans were 20.17% 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 $5,261 at March 31, 2011. Mortgage loans held for sale accounted for the majority of the loans held for sale. 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:

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Table 6: Cash Flow and Interest Rate Information for Loans:
         
    March 31, 2011  
Due in one year or less
  $ 249,998  
Due after one year but within five years
    286,872  
Due after five years
    273,759  
 
     
Totals
  $ 810,629  
 
     
 
Due after one year with a predetermined fixed interest rate
  $ 220,919  
 
     
Due after one year with a floating interest rate
    339,712  
 
     
Totals
  $ 560,631  
 
     
     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 7 presents the detailed activity in the allowance for loan losses and related charge-off activity for the three month periods ended March 31, 2011 and 2010.

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Table 7: Analysis of Allowance for Loan Losses
                 
    Three Months Ended  
    March 31, 2011     March 31, 2010  
    (Dollars in thousands)  
Balance at beginning of period
  $ 16,136     $ 18,792  
Charge-offs:
               
Commercial real estate
    230       1,018  
Commercial & industrial
          40  
Real estate mortgage
    273        
Home equity lines of credit
    345       429  
Indirect installment
    195       265  
Direct Installment
    33       49  
Overdrafts
    36       50  
 
           
Total charge-offs
    1,112       1,851  
 
           
Recoveries:
               
Commercial real estate
    102       1  
Commercial & industrial
    31       1  
Real estate mortgage
    4       1  
Home equity lines of credit
    1        
Indirect installment
    25       103  
Direct Installment
    9       6  
Overdrafts
    19       21  
Total Recoveries
    191       133  
 
           
Net Charge-offs
    921       1,718  
 
           
 
Provision for loan losses
    2,100       2,109  
 
Balance at end of period
  $ 17,315     $ 19,183  
 
           
 
Loans outstanding at end of period
  $ 810,629     $ 792,585  
 
           
Allowance for loan losses as a percent of loans outstanding at the end of the period
    2.14 %     2.42 %
 
Average Loans Outstanding
  $ 810,971     $ 796,040  
 
           
 
Annualized ratio to average loans:
               
Net Charge-offs
    0.46 %     0.88 %
Provision for loan losses
    1.05 %     1.07 %
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 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.

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The allowance for loan losses at March 31, 2011 was $17,315, or 2.14%, of outstanding loans, compared to $19,183, or 2.42%, of portfolio loans at March 31, 2010 and $16,136, or 1.99%, of outstanding loans at December 31, 2010. The allowance for loan losses was 45.80% and 44.71% of nonperforming loans at March 31, 2011 and March 31, 2010, respectively.
The provision for loan losses for the quarter ended March 31, 2011 was $2,100 compared to provision for loan losses of $2,109 one year ago. Net charge-offs for the three months ended March 31, 2011 were $921, compared to $1,718 for the three months ended March 31, 2010. Annualized net charge-offs as a percent of average loans for the first quarter of 2011 was 0.46% compared to 0.88% for the same period in 2010. The provision for loan losses for the three month period ended March 31, 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 resulting allowance for loan losses is, in the opinion of Management, sufficient given its analysis of the information available about the portfolio at March 31, 2011. The Corporation continues to aggressively address potential problem loans, and underwriting standards continue to be adjusted in response to trends and asset review findings.
     Deposits
Table 8: Deposits and Borrowings
                                 
    Average Balances Outstanding     Average Rates Paid  
            For the three months ended        
    March 31, 2011     December 31, 2010     March 31, 2011     December 31, 2010  
    (Dollars in thousands)                  
Demand deposits
  $ 116,062     $ 112,810       0.00 %     0.00 %
Interest checking
    143,797       141,974       0.20       0.17 %
Savings deposits
    93,064       89,982       0.17       0.17 %
Money Market Accounts
    97,954       93,502       0.35       0.41 %
Consumer time deposits
    468,893       464,924       1.74       1.81 %
Public time deposits
    66,688       80,990       0.46       0.54 %
 
                       
Total Deposits
    986,458       984,182       0.94       0.98 %
Short-term borrowings
    905       1,852       0.25       0.25 %
FHLB borrowings
    42,500       42,501       2.54       2.98 %
Junior subordinated debentures
    16,321       16,322       4.24       3.18 %
 
                       
Total borrowings
    59,726       60,675       2.97       2.95 %
 
                       
Total funding
  $ 1,046,184     $ 1,044,857       1.19 %     1.23 %
 
                       
Average deposits for the three months ended March 31, 2011 were $986,458 compared to average deposits of $984,182 for the three months ended December 31, 2010. Average public time deposits decreased $14,302 over the three month period between December 31, 2010 and March 31, 2011 primarily as a result of lower market interest rates during the first quarter of 2011. Deposit accounts and the generation of deposit accounts continue to be the primary source of funds for the Corporation. As indicated in the table above, growth in transaction core deposits has reduced the Corporation’s reliance on 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.
Substantially all of the Bank’s deposits are insured up to applicable limits by the FDIC. Accordingly, the Bank is subject to deposit insurance premium assessments by the FDIC. On July 21, 2010, the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) into law. The Dodd-Frank Act established a minimum designated reserve ratio (DRR) of 1.35 percent of estimated insured deposits, mandates the FDIC adopt a restoration plan should the fund balance fall below 1.35 percent, and provide dividends to the industry should the fund balance exceed 1.50 percent.
The following table summarizes total consumer and public time deposits greater than or equal to $100,000 as of March 31, 2011 by remaining maturity:

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Table 9: Consumer and Public Time Deposits Greater Than $100,000
         
March 31, 2011  
    (Dollars in thousands)  
Less than 3 months
  $ 39,015  
3 to 6 months
    52,946  
6 to 12 months
    91,526  
Over 12 months
    49,033  
 
     
Total
  $ 232,520  
 
     
     Borrowings
The Corporation utilizes both short-term and long-term borrowings to assist in the growth of earning assets. For the Corporation, short-term borrowings include federal funds purchased and repurchase agreements. As of March 31, 2011, the Corporation had $580 of short-term borrowings. There were no federal funds purchased at March 31, 2011. Long-term borrowings for the Corporation consist of Federal Home Loan Bank advances of $42,500 and junior subordinated debentures 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 continues to maintain an appropriate capital position. Total shareholders’ equity was $110,049 at March 31, 2011. This is an increase of 0.53% over December 31, 2010. For the three months ended March 31, 2011, total shareholders’ equity was increased by net income of $1,130 as well as $44 for share-based compensation. Factors decreasing shareholders’ equity were a $195 decrease in accumulated other comprehensive gain resulting from a decrease in the fair value of available for sale securities, cash dividends payable to common shareholders in the amount of $79 and cash dividends payable to preferred shareholders in the amount of $315. The Corporation held 328,194 shares of common stock as treasury stock at March 31, 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 March 31, 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 shares, are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions. As of March 31, 2011, the Corporation had repurchased an aggregate of 202,500 shares under this program.

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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 may be promulgated under the Act);
 
    persisting volatility and limited credit availability in the financial markets, particularly if limitations on the Corporation’s ability to raise funding to the extent required by banking regulators or otherwise; initiatives undertaken by the U.S. government do not have the intended effect on the financial markets;
 
    limitations on the Corporation’s ability to return capital to shareholders and dilution of the Corporation’s common shares that may result from the terms of the Capital Purchase Program (“CPP”), pursuant to which the Corporation issued securities to the United States Department of the Treasury (the “U.S. Treasury”);
 
    limitations on the Corporation’s ability to pay dividends;
 
    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, continued disruption in the fixed income markets and adverse capital market conditions;
 
    continued disruption in the housing markets and related conditions in the financial markets; and
 
    changes in general economic conditions and competition in the geographic and business areas in which the Corporation conducts its operations, particularly in light of the recent consolidation of competing financial institutions; as well as the risks and uncertainties described from time to time in the Corporation’s reports as filed with the Securities and Exchange Commission.
Critical Accounting Policies and Estimates
The Corporation’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The Corporation follows general practices within the banking industry and application of these principles requires Management to make assumptions, estimates and judgments that affect the

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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 Corporation’s future profitability, as well as potential changes in tax laws that could impact the deductibility of certain income and expense items. Since financial results could be significantly different than these estimates, future adjustments may be necessary to tax expense and related balance sheet accounts.

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Goodwill
The goodwill impairment test is a two-step process that requires Management to make judgments in determining what assumptions to use in the calculation. The first step in impairment testing is to estimate the fair value based on valuation techniques including a discounted cash flow model with revenue and profit forecasts and comparing those estimated fair values with the carrying values, which includes the allocated goodwill. If the carrying value exceeds its fair value, goodwill impairment may be indicated and a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of an “implied fair value” of goodwill requires the Corporation to allocate fair value to the assets and liabilities. Any unallocated fair value represents the “implied fair value” of goodwill, which is compared to its corresponding carrying value. An impairment loss would be recognized as a charge to earnings to the extent the carrying amount of the goodwill exceeds the implied fair value of the goodwill. See Note 4 (Goodwill and Intangible Assets) for further detail.
New Accounting Pronouncements
Management is not aware of any proposed regulations or current recommendations by the Financial Accounting Standards Board or by regulatory authorities, which, if they were implemented, would have a material effect on the liquidity, capital resources, or operations of the Corporation.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
RISK ELEMENTS
Risk management is an essential aspect in operating a financial services company successfully and effectively. The most prominent risk exposures, for a financial services company, are credit, operational, interest rate, market, and liquidity risk. Credit risk involves the risk of uncollectible interest and principal balance on a loan when it is due. Fraud, legal and compliance issues, processing errors, technology and the related disaster recovery, and breaches in business continuation and internal controls are types of operational risks. Changes in interest rates affecting net interest income are considered interest rate risks. Market risk is the risk that a financial institution’s earnings and capital or its ability to meet its business objectives are adversely affected by movements in market rates or prices. Such movements include fluctuations in interest rates, foreign exchange rates, equity prices that affect the changes in value of available-for-sale securities, credit spreads, and commodity prices. The inability to fund obligations due to investors, borrowers, or depositors is liquidity risk. For the Corporation, the dominant risks are market, credit and liquidity risk.
     Credit Risk Management
Uniform underwriting criteria, ongoing risk monitoring and review processes, and well-defined, centralized credit policies dictate the management of credit risk for the Corporation. As such, credit risk is managed through the Bank’s allowance for loan loss policy which requires the loan officer, lending officers, and the loan review committee to manage loan quality. The Corporation’s credit policies are reviewed and modified on an ongoing basis in order to remain suitable for the management of credit risks within the loan portfolio as conditions change. The Corporation uses a loan rating system to properly classify and assess the credit quality of individual commercial loan transactions. The loan rating system is used to determine the adequacy of the allowance for loan losses for regulatory reporting purposes and to assist in the determination of the frequency of review for credit exposures.
     Nonperforming Assets
Total nonperforming assets consist of nonperforming loans 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 4.66% at March 31, 2011. This is the result of managements continued focus on asset quality. Nonperforming loans at March 31, 2011 were $37,808 as compared to $41,830 at December 31, 2010, a decrease of $4,022. Of this total, commercial real estate loans were $24,904 or 65.87% of total nonperforming loans compared to $25,941 or 62.01% 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 $3,348 as of March 31, 2011 compared to $3,119 at December 31, 2010. The $3,348 is comprised of $2,603 in 1-4 family residential properties and $745 in non-farm non-residential properties. This compares to $1,935 in 1-4 family residential properties and $1,184 in non-farm non-residential properties as of December 31, 2010.
Table 10 sets forth nonperforming assets at March 31, 2011 and December 31, 2010.

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Table 10: Nonperforming Assets
                 
    March 31, 2011     December 31, 2010  
    (Dollars in thousands)  
Commercial loans
  $ 26,192     $ 28,613  
Real estate mortgage
    8,417       8,853  
Home equity lines of credit
    2,213       2,398  
Installment loans
    986       1,967  
 
           
Total nonperforming loans
    37,808       41,831  
 
           
Other foreclosed assets
    3,348       3,119  
 
           
Total nonperforming assets
  $ 41,156     $ 44,950  
Loans 90 days past due accruing interest
  $ 331     $  
Total nonperforming loans to total portfolio loans
    4.66 %     5.15 %
     
Allowance for loan losses to nonperforming assets
    42.07 %     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 March 31, 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 $638, or 1.65%, and in a -200 basis point shock, net interest income would decrease $2,329, or 6.02%. 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 bank’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 bank’s interest rate risk exposure. At March 31, 2011, this analysis indicated that a +200 basis point change in rates would reduce the value of the Corporation’s equity by 14.40% while a -200 basis point change in rates would increase the value of the Corporation’s equity by 6.10%.
     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 for credit, deposit withdrawals and investment opportunities. The Corporation relies on a large, stable core deposit base and a diversified base of wholesale funding sources to manage liquidity risk.

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The Corporation’s primary source of liquidity is its core deposit base, raised though its retail branch system, along with unencumbered, or unpledged, investment securities. The Corporation also has available unused wholesale sources of liquidity, including advances from the Federal Home Loan Bank of Cincinnati, borrowings through the discount window at the Federal Reserve Bank of Cleveland and access to certificates of deposit issued through brokers. Liquidity is also provided by unencumbered, or unpledged, investment securities that totaled $102,142 at March 31, 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 March 31, 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 March 31, 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 March 31, 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. The case has been fully briefed and the parties are awaiting a decision from the Sixth Circuit Court of Appeals regarding the continuing preliminary injunction. Once the Sixth Circuit makes its decision, the case will be remanded to the District Court for dispositive motions and, if necessary, a trial on the merits.

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Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 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 March 31, 2011, the Corporation had repurchased an aggregate of 202,500 shares under this program.
Item 6. Exhibits.
  (a)   The exhibits to this Form 10-Q are referenced in the Exhibit Index attached hereto.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  LNB BANCORP, INC.
(Registrant)
 
 
Date: May 12, 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.

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