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

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

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.
Table of Contents

Part I — Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets March 31, 2011 (unaudited) and December 31, 2010			3
Consolidated Statements of Income (unaudited) for the three months ended March 31, 2011 and March 31, 2010			4
Consolidated Statements of Shareholders’ Equity (unaudited) for the three months ended March 31, 2011 and March 31, 2010			5
Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2011 and March 31, 2010			6
Notes to the Consolidated Financial Statements (unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures about Market Risk			43
Item 4. Controls and Procedures			45
Part II — Other Information			45
Item 1. Legal Proceedings			45
Item 1A. Risk Factors			46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 6. Exhibits			46
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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.

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

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

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

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,

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

installment loans, and on an individual loan basis for commercial loans that are graded substandard or below. Factors considered by Management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis. If a loan is impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

     Allowance for Loan Losses

The allowance for loan losses is Management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. Management’s determination of the allowance, and the resulting provision, is based on judgments and assumptions, including general economic conditions, loan portfolio composition, loan loss experience, Management’s evaluation of credit risk relating to pools of loans and individual borrowers, sensitivity analysis and expected loss models, value of underlying collateral, and observations of internal loan review staff or banking regulators.

The provision for loan losses is determined based on Management’s evaluation of the loan portfolio and the adequacy of the allowance for loan losses under current economic conditions and such other factors which, in Management’s judgment, deserve current recognition. Additional information can be found in Note 6 (Loans and Allowance for Loan Losses).

     Servicing

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

     Bank Premises and Equipment

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

     Goodwill and Core Deposit Intangibles

Intangible assets arise from acquisitions and include goodwill and core deposit intangibles. Goodwill is the excess of purchase price over the fair value of identified net assets in acquisitions. Core deposit intangibles represent the value of depositor relationships purchased. Goodwill is tested at least annually for impairment or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Corporation tests for goodwill impairment annually as of November 30^th of each year. Core deposit intangible assets are amortized using the straight-line method over ten years and are subject to annual impairment testing.

     Other Real Estate Owned

Other real estate (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.

     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

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.

(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.

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.

		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:

														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.

• 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			$	—