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

• changes in political conditions or the legislative or regulatory environment;

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

• 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;

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

Critical Accounting Policies and Estimates The Corporation's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The Corporation follows general practices within the banking industry and application of these principles requires Management to make assumptions, estimates and judgments that affect the financial statements and accompanying notes. These assumptions, estimates and judgments are based on information available as of the date of the financial statements.
The most significant accounting policies followed by the Corporation are presented in Note 1 to the Consolidated Financial Statements contained within this Form 10-Q. These policies are fundamental to the understanding of results of operation and financial conditions.
The accounting policies considered to be critical by Management 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 collectibility 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 SFAS No. 5 "Accounting for Contingencies", or SFAS No. 114, "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 SFAS No. 109 "Accounting for Income Taxes". SFAS No. 109 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.
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. Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements contained within this Form 10-Q.
Summary of Earnings (Dollars in thousands except per share data) The Corporation reported net income of $1,823, or $.25 per diluted share, for the third quarter of 2008 and net income of $2,135, or $.29 per diluted share, for the nine months ended September 30, 2008. This compares to net income of $1,673 or $0.23 per diluted share, for the third quarter of 2007 and net income of $3,844, or $0.56 per diluted share, for the nine months ended September 30, 2007.
The unstable interest rate environment and ever-weakening economy, which began in 2007, has evolved into the worst financial crisis since the Great Depression during the third quarter of 2008. During the third quarter of 2008, the financial crisis brought financial markets under extreme strain, liquidity shortages among our nation's largest banks, and rumors of bank failures. While the Corporation has avoided sub-prime mortgages and risky equity investments, the unstable interest rate environment and asset quality issues each continue to pose a challenge. Despite these extreme financial challenges, the Corporation has increased net interest income on a linked-quarter basis for the past two quarters, as well as increased net interest income in comparison to the same quarter last year. Net interest income for the third quarter of 2008 was $8,229, compared to $7,828 for the third quarter of 2007. On a linked-quarter basis, net interest income during the third quarter of 2008 was $90 above the prior quarter. This has been accomplished by balancing the ability to provide fair and equitable interest rates to customers, both on loans and deposits, and at the same time continuing to maintain a healthy balance sheet for shareholders.

Deposit service charges and other fees also continued to remain strong during the third quarter of 2008 and increased in comparison to the third quarter of 2007. Service charges and fees for the third quarter of 2008 were $1,962 compared to $1,844 for the third quarter of 2007.
Noninterest expense continues to be monitored and managed closely by the Corporation. As with net interest income, the uncertainty of the economy has affected noninterest expense in the form of increased utility expense, operating expense and expense associated with the reduction of other real estate owned values. The Corporation continues to see improvement, through careful planning and streamlining of efficiencies, primarily in the reduction of salary and employee benefit expense.
Results of Operations
Net Interest Income
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 72.27% of the revenues for the three months ended September 30, 2008. 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 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.
Three Months Ended September 30, 2008 versus Three Months Ended September 30, 2007
Net interest income, before provision for loan losses, was $8,229 for the third quarter 2008 as compared to $7,828 during the same quarter 2007. Adjusting for tax-exempt income, consolidated net interest income, before provision for loan losses, for the third quarter 2008 and 2007 was $8,342 and $7,927, respectively. The net interest margin, determined by dividing tax equivalent net interest income by average earning assets, was 3.24% for the three months ended September 30, 2008 compared to 3.31% for the three months ended September 30, 2007.
Average earning assets for the third quarter of 2008 were $1,010,388. This was an increase of $72,451, or 7.72%, over the same quarter last year. The effect of the unstable interest rate environment, especially in the third quarter of 2008, has greatly impacted the yield generated by earning assets throughout the entire banking industry. The Corporation has worked diligently to increase the level of earning assets and minimize the impact of the unstable interest rate environment. Interest income on earning assets was $14,498 for the third quarter of 2008, compared to $15,970 for the third quarter of 2007. The yield on average earning assets was 5.71% in the third quarter of 2008 as compared to 6.76% for the same period last year.
Interest income from loans was $11,997 for the third quarter of 2008, and $13,466 for the third quarter of 2007. Average portfolio loans during these periods were $790,746 and $737,853, respectively. The yield on average loans during the third quarter of 2008 was 6.04%. This was 128 basis points lower than that of the third quarter of 2007 at 7.32%. Interest income from securities was $2,501 (FTE) for the three months ended September 30, 2008. This compares to $2,504 during the third quarter of 2007. The yield on average securities was 4.53% and 5.02% for these periods, respectively.

Interest expense on interest-bearing liabilities was $6,156 for the quarter ending September 30, 2008 and $8,043 for the quarter ending September 30, 2007. Total average interest-bearing liabilities during the third quarter of 2008 were $907,753, compared to $841,952 during the same period in 2007. The cost of interest-bearing liabilities was 2.70% during the third quarter as compared to 3.79% during the same period of 2007.
Interest expense from deposits for the third quarter was $5,135 in 2008 and $6,706 in 2007. Average interest-bearing deposits during the third quarter of 2008 increased $49,079 over the third quarter 2007. The cost of average deposits was 2.61% for the third quarter of 2008 as compared to 3.66% for the third quarter of 2007. The Corporation was much less reliant on brokered time deposits during the third quarter of 2008. Average brokered time deposits were $8,477 as compared to $23,725 during the third quarter of 2007. During these same time periods, average consumer time deposits increased $90,091, while average money market accounts decreased $27,342.
Nine Months Ended September 30, 2008 versus Nine Months Ended September 30, 2007
Net interest income, before provision for loan losses, for the first nine months of 2008 was $23,888 as compared to $21,855 for the same period in 2007. Adjusting for tax-exempt income, consolidated net interest income, before provision for loan losses, for the first nine months of 2008 and 2007 was $24,202 and $22,137, respectively. The net interest margin was 3.20% for the nine months ended September 30, 2008 compared to 3.39% for the nine months ended September 30, 2007.
Interest income produced by earning assets during the first nine months of 2008 was $44,256. This compares to interest income from earning assets of $43,187 during the first nine months of 2007. Average earning assets increased $133,773, or 15.51%, to $996,256 for the first nine months of 2008 as compared to $862,483 for the first nine months of 2007. The yield on average earning assets was 5.93% for the first nine months of 2008 as compared to 6.69% for the same period last year, or a decrease of 76 basis points.
Interest income from loans was $36,583 for the first nine months of 2008, and $36,695 for the first nine months of 2007. The yield on loans for the first nine months of 2008 and 2007 was 6.32% and 7.19%, respectively. Average loans increased $89,978, or 13.18%, over the same period 2007. The Morgan Bancorp, Inc. acquisition, which was completed on May 10, 2007, contributed approximately $92,042 in loans, primarily indirect auto loans of $52,305, and commercial loans of $26,146. Average installment loans (primarily indirect auto loans) increased $36,063 and average commercial loans increased $41,564 when comparing the first nine months of 2008 to the first nine months of 2007.
Interest expense was $20,054 for the first nine months of 2008 compared to $21,050 for the first nine months of 2007. Average interest-bearing liabilities increased $128,895, or 16.88%, to $892,640 for the first nine months of 2008 as compared to $763,745 for the first nine months of 2007. Interest expense from deposits for the first nine months of the year was $17,041 in 2008 and $18,436 in 2007. Average interest-bearing deposits for the first nine months of 2008 increased $91,134 over the same period in 2007. The cost of deposits for the first nine months of 2008 decreased 68 basis points in comparison to the first nine months of 2007. During the nine month period ending September 30, 2008, average brokered time deposits decreased $25,122 while average consumer time deposits increased $108,959 in comparison to the same period in 2007. The Corporation believes that this was primarily due to consumer apprehension relative to economic conditions and concerns regarding potential large bank failures in the area.

Table 1 displays the components of net interest income for the three and nine months ended September 30, 2008 and 2007. Rates are computed on a tax equivalent basis and nonaccrual loans are included in the average loan balances. Table 1: Condensed Consolidated Average Balance Sheets Interest, Rate, and Rate/ Volume differentials are stated on a Fully-Tax Equivalent (FTE) Basis.

                                                          Three Months Ended September 30,
                                              2008                                               2007
                             Average                                            Average
                             Balance          Interest          Rate            Balance          Interest          Rate
                                                               (Dollars in thousands)
Assets:
U.S. Govt agencies
and corporations           $   183,073        $   2,070           4.50 %      $   181,369        $   2,226           4.87 %
State and political
subdivisions                    19,822              293           5.88 %           14,757              227           6.10 %
Federal funds sold
and short-term
investments                     16,747              138           3.28 %            3,958               51           5.11 %
Commercial loans               437,597            6,991           6.36 %          411,647            7,939           7.65 %
Real estate mortgage
loans                           98,924            1,495           6.01 %          102,556            1,581           6.12 %
Home equity lines of
credit                          92,926            1,045           4.47 %           77,885            1,514           7.71 %
Installment loans              161,299            2,466           6.08 %          145,765            2,432           6.62 %

Total Earning Assets       $ 1,010,388        $  14,498           5.71 %      $   937,937        $  15,970           6.76 %

Allowance for loan
loss                           (11,888 )                                           (8,071 )
Cash and due from
banks                           19,160                                             20,479
Bank owned life
insurance                       15,412                                             15,203
Other assets                    49,797                                             54,210

Total Assets               $ 1,082,869                                        $ 1,019,758

Liabilities and
Shareholders' Equity
Interest-bearing
demand                     $   124,928        $     265           0.84 %      $   113,358        $     356           1.25 %
Savings deposits                83,137              133           0.64 %           82,189              156           0.75 %
Money market accounts          108,528              459           1.68 %          135,870            1,269           3.71 %
Consumer time
deposits                       398,462            3,609           3.60 %          308,371            3,682           4.74 %
Brokered time
deposits                         8,477               98           4.60 %           23,725              319           5.33 %
Public time deposits            59,732              571           3.80 %           70,672              924           5.19 %
Short-term borrowings           32,918               93           1.12 %           32,142              347           4.28 %
FHLB advances                   70,813              646           3.63 %           54,928              635           4.59 %
Trust preferred                 20,758              282           5.40 %           20,697              355           6.80 %

Total
Interest-Bearing
Liabilities                $   907,753        $   6,156           2.70 %      $   841,952        $   8,043           3.79 %

Noninterest-bearing
deposits                        87,358                                             86,393
Other liabilities                8,466                                              9,449
Shareholders' Equity            79,292                                             81,964

Total Liabilities and
Shareholders' Equity       $ 1,082,869                                        $ 1,019,758

Net interest Income
(FTE)                                         $   8,342           3.28 %                         $   7,927           3.35 %
Taxable Equivalent
Adjustment                                         (113 )        -0.04 %                               (99 )        -0.04 %

Net Interest Income
Per Financial
Statements                                    $   8,229                                          $   7,828

Net Yield on Earning
Assets                                                            3.24 %                                             3.31 %

                                                         Nine Months Ended September 30,
                                              2008                                              2007
                             Average                                           Average
                             Balance          Interest          Rate           Balance         Interest          Rate
                                                              (Dollars in thousands)
Assets:
U.S. Govt agencies
and corporations           $   195,431        $   6,533           4.47 %      $ 155,646        $   5,514           4.74 %
State and political
subdivisions                    17,766              795           5.98 %         13,905              640           6.15 %
Federal funds sold
and short-term
investments                     10,384              345           4.44 %         10,235              338           4.42 %
Commercial loans               435,456           21,309           6.54 %        393,892           22,123           7.51 %
Real estate mortgage
loans                           99,143            4,470           6.02 %         99,577            4,572           6.14 %
Home equity lines of
credit                          86,963            3,222           4.95 %         74,178            4,323           7.79 %
Installment loans              151,113            7,582           6.70 %        115,050            5,677           6.60 %

Total Earning Assets       $   996,256        $  44,256           5.93 %      $ 862,483        $  43,187           6.69 %

Allowance for loan
loss                            (9,240 )                                         (7,748 )
Cash and due from
banks                           20,749                                           21,479
Bank owned life
insurance                       15,559                                           15,023
Other assets                    47,300                                           41,306

Total Assets               $ 1,070,624                                        $ 932,543


Liabilities and
Shareholders' Equity
Interest-bearing
demand                     $   122,840        $     836           0.91 %      $ 100,330        $     840           1.12 %
Savings deposits                83,145              406           0.65 %         80,370              325           0.54 %
Money market accounts          116,624            1,780           2.04 %        126,166            3,477           3.68 %
Consumer time
deposits                       382,202           11,599           4.05 %        273,243            9,573           4.68 %
Brokered time
deposits                        14,365              562           5.23 %         39,487            1,531           5.18 %
Public time deposits            60,047            1,858           4.13 %         68,493            2,697           5.26 %
Short-term borrowings           29,286              354           1.61 %         25,431              812           4.27 %
FHLB advances                   63,347            1,769           3.73 %         39,232            1,235           4.21 %
Trust preferred
securities                      20,784              890           5.72 %         10,993              560           6.81 %

Total
Interest-Bearing
Liabilities                $   892,640        $  20,054           3.00 %      $ 763,745        $  21,050           3.68 %

Noninterest-bearing
deposits                        86,396                                           83,717
Other liabilities                9,576                                            8,626
Shareholders' Equity            82,012                                           76,455

Total Liabilities and
Shareholders' Equity       $ 1,070,624                                        $ 932,543

Net interest Income
(FTE)                                         $  24,202           3.24 %                       $  22,137           3.43 %
Taxable Equivalent
Adjustment                                         (314 )        -0.04 %                            (282 )        -0.04 %

Net Interest Income
Per Financial
Statements                                    $  23,888                                        $  21,855

Net Yield on Earning
Assets                                                            3.20 %                                           3.39 %

   Rate/Volume
Net interest income may also be analyzed by comparing the volume and rate
components of interest income and interest expense. Table 2 is an analysis of
the changes in interest income and expense between the quarters ended
September 30, 2008 and September 30, 2007. Changes that are not due solely to
either a change in volume or a change in rate have been allocated proportionally
to both changes due to volume and rate. The table is presented on a fully
tax-equivalent basis.
Table 2: Rate/Volume Analysis of Net Interest Income (FTE)
. . .