ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management's discussion and analysis focuses on the consolidated financial condition of the Company at March 31, 2012 as compared to December 31, 2011, and the consolidated results of operations for the three month period ended March 31, 2012 compared to the same period in 2011. The purpose of this discussion is to provide the reader with a more thorough understanding of the Consolidated Financial Statements. This discussion should be read in conjunction with the interim Consolidated Financial Statements and related footnotes.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report are not historical facts but rather are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipates", "plans", "expects", "believes", and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company's actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services. Other factors not currently anticipated may also materially and adversely affect the Company's results of operations, cash flows and financial position. There can be no assurance that future results will meet expectations. While the Company believes that the forward-looking statements in this report are reasonable, the reader should not place undue reliance on any forward-looking statement.

The Company does not undertake, and specifically disclaims any obligation, to publicly revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as may be required by applicable law.

FINANCIAL CONDITION

Total assets were $560.8 million at March 31, 2012, compared to $551.2 million at December 31, 2011, representing an increase of $9.6 million, or 1.7%. Cash and cash equivalents decreased $2.4 million, or 2.9%, during the three-month period ended March 31, 2012, primarily as a result of increases in loans. Securities decreased $400 thousand, or 0.3%, during the first three months of 2012 as bonds were called within the US government agency portfolio and monthly principal payments were received on mortgage-backed securities issued by government sponsored agencies. Net loans increased $7.0 million, or 2.2%, while deposits increased $6.7 million, or 1.5%, during the three-month period. Short-term borrowings of securities sold under repurchase agreement increased $4.6 million and Federal Home Loan Bank ("FHLB") advances decreased $2.2 million, during the period as advances matured and required amortized payments were made on outstanding advances at the FHLB.

Net loans increased $7.0 million, or 2.2%, during the three-month period ended March 31, 2012. Commercial loans including commercial real estate loans increased $4.5 million, or 2.3%, home equity lines increased $0.6 million, or 1.4%, real estate mortgage loans increased $1.3 million, or 2.0% and construction and land development loans increased $0.8 million, or 4.3% over December 31, 2011. Decreases were recognized in consumer installment loans of $46 thousand, or 0.7%. Consumers continued to refinance their mortgage loans for lower long-term rates. During the fourth quarter 2011 and first quarter 2012 the bank originated and retained fifteen year fixed rate mortgage loans for its portfolio.

The allowance for loan losses as a percentage of total loans was 1.28% at March 31, 2012, an increase from 1.26% at December 31, 2011. Outstanding loan balances increased 2.2% to $331 million at March 31, 2012 while net charge-offs of $42 thousand were offset by a provision of $206 thousand to the allowance for loan losses for the three-months ended March 31, 2012. Non-performing loans decreased $228 thousand or 6.5% from December 31, 2011.

                                      March 31,        December 31,       March 31,
    (Dollars in thousands)               2012              2011              2011
    Non-performing loans              $    3,261      $        3,489      $    3,913
    Other real estate                          5                  10              30
    Allowance for loan losses              4,246               4,082           4,028
    Total loans                          331,353             324,182         322,017
    Allowance: loans                        1.28 %              1.26 %          1.25 %
    Allowance: non-performing loans          1.3 x               1.2 x           1.0 x

The ratio of gross loans to deposits was 73.6% at March 31, 2012, compared to 73.1% at December 31, 2011. The increase in this ratio is the result of loan volume increases outpacing increases in deposits during the three-months ended March 31, 2012.

The Company had net unrealized gains of $2.1 million within its securities portfolio at March 31, 2012, compared to net unrealized gains of $2.2 million at December 31, 2011. The Company has no exposure to government-sponsored enterprise preferred stocks, collateralized debt obligations or trust preferred securities. The Company holds two issues of nonagency collateralized mortgage obligations that have paid down to $605 thousand outstanding from an original face value of $5.5 million. The Company has the ability and intent to hold the securities until the recovery of their cost and there is no significant evidence to support an adverse change in expected cash flows. Management has considered industry analyst reports, sector credit reports and the volatility within the bond market in concluding that the gross unrealized losses of $234 thousand within the total portfolio as of March 31, 2012, were primarily the result of customary and expected fluctuations in the bond market and not necessarily the expected cash flows of the individual securities. As a result, all security impairments detailed above on March 31, 2012, are considered temporary and no impairment loss relating to these securities has been recognized.

Short-term borrowings increased $4.6 million from December 31, 2011 and other borrowings decreased $2.2 million as the Company used cash from interest-earning deposits in other banks to repay required maturities and monthly payments on advances from the FHLB.

Deposits increased $6.7 million, or 1.5% from December 31, 2011 with non-interest bearing deposits increasing $1.4 million and interest-bearing deposit accounts increasing $5.3 million. By deposit type, increases were recognized in statement and passbook savings accounts and money market savings accounts for the period ended March 31, 2012.

Total shareholders' equity amounted to $49.9 million, or 8.9% of total assets, at March 31, 2012, compared to $49.4 million, or 9.0% of total assets, at December 31, 2011. The increase in shareholders' equity during the three-months ended March 31, 2012 was due to net income of $1.1 million. A decrease of $74 thousand in other comprehensive income and dividends declared of $0.5 million partially offset the above increases. The Company and its subsidiary bank met all regulatory capital requirements at March 31, 2012.

RESULTS OF OPERATIONS

Three months ended March 31, 2012 and 2011

For the quarter ended March 31, 2012, the Company recorded net income of $1.1 million or $0.39 per share, as compared to net income of $896 thousand, or $0.33 per share for the quarter ended March 31, 2011. The $159 thousand increase in net income for the quarter was a result of net interest income increasing $379 thousand and other noninterest income increasing $189 thousand. These gains were partially offset by an increase in noninterest expense of $426 thousand and an increase in the federal income tax provision of $57 thousand. Return on average assets and return on average equity were 0.77% and 8.46%, respectively, for the three-month period of 2012, compared to 0.80% and 7.67%, respectively for 2011.

Average Balance Sheets and Net Interest Margin Analysis



                                                         For the three months ended March 31,
                                                         2012                             2011
                                                Average          Average         Average        Average
(Dollars in thousands)                          balance           rate           balance         rate
ASSETS
Due from banks-interest bearing               $    66,744            0.23 %     $  23,321           0.30 %
Federal funds sold                                     62            0.01              90           0.11
Taxable securities                                113,254            2.59          73,941           3.26
Tax-exempt securities                              13,539            5.04          11,688           5.12
Loans                                             327,203            5.24         319,646           5.39

Total earning assets                              520,802            4.02 %       428,686           4.74 %
Other assets                                       31,605                          22,980

TOTAL ASSETS                                  $   552,407                       $ 451,666

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing demand deposits              $    60,132            0.09 %     $  52,341           0.08 %
Savings deposits                                  128,846            0.19          82,242           0.27
Time deposits                                     169,524            1.34         149,844           1.95
Other borrowed funds                               57,483            1.25          53,092           1.73

Total interest bearing liabilities                415,985            0.79 %       337,519           1.22 %
Non-interest bearing demand deposits               84,471                          65,147
Other liabilities                                   1,804                           1,613
Shareholders' Equity                               50,147                          47,387

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY    $   552,407                       $ 451,666

Taxable equivalent net interest spread                               3.22 %                         3.52 %
Taxable equivalent net interest margin                               3.38 %                         3.78 %

Interest income for the quarter ended March 31, 2012, was $5.1 million representing a $186 thousand increase, or a 4% improvement, compared to the same period in 2011. This increase was primarily due to average investment volume increasing $41 million for the quarter ended March 31, 2012 as compared to the first quarter 2011. Interest expense for the quarter ended March 31, 2012 was $819 thousand, a decrease of $193 thousand or 19%, from the same period in 2011. The decrease in interest expense occurred primarily due to a decrease of 0.39% in interest rates paid on interest-bearing deposits which decreased from 1.11% in 2011 to 0.72% in 2012 and a rate decrease of 0.48% on all other borrowings which declined from 1.73% in 2011 to 1.25% for the quarter ended March 31, 2012.

The provision for loan losses for the quarter ended March 31, 2012 was $206 thousand, compared to a $280 thousand provision for the same quarter in 2011. The provision for loan losses is determined based on management's calculation of the adequacy of the allowance for loan losses, which includes provisions for classified loans as well as for the remainder of the portfolio based on historical data, including past charge-offs and current economic trends.

Non-interest income for the quarter ended March 31, 2012, was $948 thousand, an increase of $189 thousand, or 25%, compared to the same quarter in 2011. Service charges on deposit accounts increased $63 thousand or 26% compared to the same quarter in 2011 reflecting the increase in fees generated from deposits acquired during October 2011. Debit card interchange income rose $56 thousand, or 41%, due to volume and as consumers increased their usage of the product. Fees from trust and brokerage services increased $1 thousand to $161 thousand for first quarter 2012 as compared to the same quarter in 2011. The gain on the sale of mortgage loans to the secondary market decreased to $56 thousand for the three month period ended March 31, 2012, from $70 thousand in the three-month period ended March 31, 2012. Secondary market mortgage interest rates reached new lows for the year; however, the Company originated and retained fifteen year fixed rate mortgages for its portfolio during the first quarter 2012.

Non-interest expenses for the quarter ended March 31, 2012 increased $426 thousand, or 14%, compared to the first quarter of 2011. Salaries and employee benefits increased $200 thousand, or 11%. Occupancy and equipment expenses increased $62 thousand in 2012 over the first quarter of 2011. Other expenses rose $101 thousand, or 23%, compared to the first quarter 2011. Increases in non-interest expense in salaries and employee benefits, occupancy and equipment and some other expenses are the direct result of acquiring two branches in Wooster, Ohio during fourth quarter 2011 which did not occur in first quarter 2011. A reduction in FDIC deposit premium expense for the quarter of $23 thousand reflected the change in the assessment calculation in bank assessments based on total assets less tangible capital.

Federal income tax expense increased $57 thousand, or 14%, for the quarter ended March 31, 2012 as compared to the first quarter of 2011. The provision for income taxes was $456 thousand (effective rate of 30.2%) for the quarter ended March 31, 2012, compared to $399 thousand (effective rate of 30.8%) for the quarter ended March 31, 2011. The increase in the expense resulted from improved income.

CAPITAL RESOURCES

The Board of Governors of the Federal Reserve System (the "Federal Reserve") has established risk-based capital guidelines that must be observed by financial holding companies and banks. Failure to meet specified minimum capital requirements could result in regulatory actions by the Federal Reserve or Ohio Division of Financial Institutions that could have a material effect on the Company's financial condition or results of operations. Management believes there were no material changes to capital resources as presented in the Company's annual report on Form 10-K for the year ended December 31, 2011, and as of March 31, 2012 the Company and the Bank meet all capital adequacy requirements to which they are subject.

LIQUIDITY

Liquidity refers to the Company's ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, pay operating expenses and meet other obligations. The Company's primary sources of liquidity are cash and cash equivalents, which totaled $80 million at March 31, 2012, a decrease of $2 million from $82 million at December 31, 2011. Net income, securities available-for-sale, and loan repayments also serve as sources of liquidity. Cash and cash equivalents and estimated principal cash flow and maturities on investments maturing within one year represent 20% of total assets as of March 31, 2012 compared to 21% of total assets at year-end 2011. Other sources of liquidity include, but are not limited to, purchase of federal funds, advances from the FHLB, adjustments of interest rates to attract deposits, and borrowing at the Federal Reserve discount window. Management believes that its sources of liquidity are adequate to meet cash flow obligations for the foreseeable future.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have any off-balance sheet arrangements (as such term is defined in applicable Securities and Exchange Commission (the "Commission") rules) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.