1
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-13203
LNB Bancorp, Inc.
(Exact name of the registrant as specified on its charter)
Ohio 34-1406303
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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,
and (2) has been subject to such requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at May 13, 2003: 6,603,211 shares
Class of Common Stock: $1.00 par value
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LNB Bancorp, Inc.
Quarterly Report on Form 10-Q
Quarter Ended March 31, 2003
Part I - Financial Information
Item 1 - Financial Statements
Interim financial information required by Rule 10-01 of
Regulation S-X is included in this Form 10-Q as referenced below:
Page Number(s)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 5
Condensed Consolidated Statements of Cash Flows 7
Notes to Condensed Consolidated Financial Statements 10
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations 15
Item 3 - Quantitative and Qualitative Disclosures
about Market Risk 21
Item 4 - Controls and Procedures
Part II - Other Information
Item 1 - Legal Proceedings 22
Item 2 - Changes in Securities 22
Item 3 - Defaults upon Senior Securities 22
Item 4 - Submission of matters to a Vote of
Security Holders 22
Item 5 - Other Information 22
Item 6 - Exhibits and Reports on Form 8-K 22
Signatures 23
Certifications 24
Exhibit Index 28
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FORM 10-Q LNB BANCORP, INC.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MARCH 31, DECEMBER 31,
CONDENSED CONSOLIDATED BALANCE SHEETS 2003 2002
------------- --------------
(Unaudited) (See Note 1)
ASSETS:
Cash and due from banks $ 25,527,000 $ 23,608,000
Federal funds sold and
short-term investments 3,235,000 3,224,000
Securities:
Available for sale, at fair value 146,005,000 137,909,000
Held to maturity, at cost (fair
value $5,539,000 and $10,903,000,
respectively) 5,312,000 10,648,000
Federal Home Loan Bank, Federal Reserve
Bank and other equity stock, at cost 3,772,000 3,738,000
-------------- --------------
Total securities 155,089,000 152,295,000
-------------- --------------
Loans:
Portfolio loans 500,385,000 500,551,000
Loans available for sale 11,094,000 8,999,000
-------------- --------------
Total loans 511,479,000 509,550,000
Reserve for loan losses (6,703,000) (6,653,000)
-------------- --------------
Net loans 504,776,000 502,897,000
-------------- --------------
Bank owned life insurance 12,115,000 11,930,000
Bank premises and equipment, net 10,573,000 10,748,000
Intangible assets 3,329,000 3,358,000
Accrued interest receivable 3,106,000 3,045,000
Other assets 4,298,000 4,272,000
Foreclosed assets -0- 22,000
-------------- --------------
TOTAL ASSETS $722,048,000 $715,399,000
============== ==============
STATEMENT CONTINUED ON NEXT PAGE
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STATEMENT CONTINUED FROM PREVIOUS PAGE
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand and other noninterest-bearing
deposits $ 87,054,000 $ 80,879,000
Savings, Market Access and passbook
accounts 276,540,000 280,616,000
Certificates of deposit 215,261,000 204,632,000
-------------- --------------
Total deposits 578,855,000 566,127,000
-------------- --------------
Securities sold under repurchase
agreements and other short-term
borrowings 16,839,000 26,866,000
Federal Home Loan Bank advances 52,425,000 48,925,000
Accrued interest payable 983,000 983,000
Accrued taxes, expenses, and
other liabilities 5,574,000 5,885,000
-------------- --------------
TOTAL LIABILITIES 654,676,000 648,786,000
-------------- --------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value: Shares
authorized 1,000,000, and shares
outstanding, none
Common stock $1.00 par: Shares authorized
15,000,000, Shares issued 6,752,988 and
4,501,232, respectively and Shares
outstanding 6,603,211 and 4,401,232,
respectively 6,753,000 4,501,000
Additional capital 26,086,000 28,319,000
Retained earnings 36,701,000 35,639,000
Accumulated other comprehensive income 726,000 1,054,000
Treasury stock at cost, 149,777 and
100,000 shares, respectively (2,894,000) (2,900,000)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 67,372,000 66,613,000
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $722,048,000 $715,399,000
============== ==============
See notes to unaudited condensed consolidated financial statements.
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FORM 10-Q LNB BANCORP, INC.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THREE MONTHS ENDED
CONDENSED CONSOLIDATED STATEMENTS MARCH 31,
OF INCOME (UNAUDITED) ----------------------------
2003 2002
INTEREST INCOME: ----------------------------
Interest and fees on loans $ 8,202,000 $ 8,372,000
Interest and dividends on securities:
U.S. Treasury securities -0- 6,000
U.S. Government agencies and corporations 1,238,000 1,535,000
States and political subdivisions 155,000 134,000
Other debt and equity securities 79,000 123,000
Interest on Federal funds sold and other
interest-bearing instruments 12,000 19,000
------------- ------------
TOTAL INTEREST INCOME 9,686,000 10,189,000
------------- ------------
INTEREST EXPENSE:
Interest on Deposits:
Time certificates of $100,000 and over 375,000 298,000
Other deposits 1,676,000 2,276,000
Interest on securities sold under
repurchase agreements and other
short-term borrowings 68,000 151,000
Interest on Federal Home Loan Bank
advances 407,000 381,000
------------- ------------
TOTAL INTEREST EXPENSE 2,526,000 3,106,000
------------- ------------
NET INTEREST INCOME 7,160,000 7,083,000
Provision for loan losses 564,000 600,000
NET INTEREST INCOME AFTER PROVISION ------------- ------------
FOR LOAN LOSSES 6,596,000 6,483,000
------------- ------------
NONINTEREST INCOME:
Investment and Trust Services Division income 454,000 575,000
Service charges on deposit accounts 946,000 916,000
Other service charges, exchanges and fees 787,000 731,000
Gains from sales of securities 203,000 275,000
Other operating income 116,000 141,000
------------- ------------
TOTAL NONINTEREST INCOME 2,506,000 2,638,000
------------- ------------
STATEMENT CONTINUED ON NEXT PAGE
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STATEMENT CONTINUED FROM PREVIOUS PAGE
NONINTEREST EXPENSES:
Salaries and employee benefits 2,964,000 2,917,000
Net occupancy expense of premises 412,000 381,000
Furniture and equipment expenses 549,000 531,000
Supplies and postage 282,000 276,000
Ohio franchise tax 181,000 61,000
Credit card and merchant expenses 292,000 302,000
Other operating expenses 1,266,000 1,460,000
------------- ------------
TOTAL NONINTEREST EXPENSES 5,946,000 5,928,000
------------- ------------
INCOME BEFORE INCOME TAXES 3,156,000 3,193,000
INCOME TAXES 965,000 1,045,000
------------- ------------
NET INCOME $ 2,191,000 $ 2,148,000
============= ============
PER SHARE DATA:
BASIC EARNINGS PER SHARE $ .33 $ .32
======= =======
DILUTED EARNINGS PER SHARE $ .33 $ .32
======= =======
DIVIDENDS DECLARED PER SHARE $ .17 $ .16
======= =======
See notes to unaudited condensed consolidated financial statements.
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FORM 10-Q LNB BANCORP, INC.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THREE MONTHS ENDED
CONDENSED CONSOLIDATED STATEMENTS MARCH 31,
OF CASH FLOWS (UNAUDITED) ----------------------------
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES: ----------------------------
Interest received $ 9,827,000 $10,905,000
Other income received 2,161,000 1,983,000
Interest paid (2,526,000) (3,181,000)
Cash paid for salaries and
employee benefits (3,620,000) (2,796,000)
Net occupancy expense of premises paid (333,000) (305,000)
Furniture and equipment expenses paid (235,000) (215,000)
Cash paid for supplies and postage (282,000) (276,000)
Cash paid for other operating expenses (2,402,000) (1,911,000)
Federal income taxes paid -0- (250,000)
------------- -------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 2,590,000 3,954,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities
held to maturity 5,325,000 4,300,000
Proceeds from sales and maturities of
Securities available for sale 30,190,000 27,332,000
Proceeds from sales of loans 5,295,000 7,104,000
Purchases of securities held to maturity -0- (337,000)
Purchases of securities available
for sale (38,352,000) (26,287,000)
Increase in loans available for sale 1,269,000 3,471,000
Net (increase) in loans made to customers (9,215,000) (22,827,000)
Purchases of bank premises and equipment
and intangible assets (228,000) (117,000)
Proceeds from sales of bank premises and
Equipment 9,000 24,000
Purchases of BOLI -0- -0-
Proceeds from liquidation of other
foreclosed assets 22,000 33,000
Purchases of other foreclosed assets -0- (51,000)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (5,685,000) (7,355,000)
------------- -------------
STATEMENT CONTINUED ON NEXT PAGE
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STATEMENT CONTINUED FROM PREVIOUS PAGE
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase(decrease) in demand and
other noninterest-bearing deposits 6,175,000 (10,506,000)
Net increase (decrease) in savings and
passbook deposits (4,076,000) 11,370,000
Net increase in certificates of deposit 10,629,000 3,191,000
Net (decrease) in securities sold
under repurchase agreements and other
short-term borrowings (10,027,000) (27,407,000)
Proceeds from Federal Home Loan
Bank advances 75,500,000 22,330,000
Payment on Federal Home Loan
Bank advances (72,000,000) (2,300,000)
Cash paid in lieu of fractional shares
related to three-for-two stock split (13,000) -0-
Proceeds from exercise of stock options 19,000 -0-
(Purchase) Redemption of Treasury Stock 6,000 -0-
Dividends paid (1,188,000) (1,165,000)
------------- -------------
NET CASH (USED) BY FINANCING ACTIVITIES (5,025,000) (4,487,000)
NET INCREASE(DECREASE) IN CASH AND ------------- -------------
CASH EQUIVALENTS 1,930,000 (7,888,000)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 26,832,000 31,505,000
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $28,762,000 $23,617,000
============= =============
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RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
NET INCOME $2,191,000 $2,148,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of investments & loans (265,000) 307,000
Depreciation and amortization 393,000 392,000
Amortization of intangible assets 29,000 28,000
Amortization of premiums on investment
securities 280,000 41,000
Amortization of deferred loan fees
and costs, net (80,000) (58,000)
Provision for loan losses 564,000 600,000
Increase in CSV - BOLI (185,000) -0-
(Increase)Decrease in accrued interest
receivable (61,000) 617,000
(Increase) in other assets (26,000) (58,000)
(Decrease) in accrued interest payable -0- (75,000)
Increase (Decrease) in accrued taxes,
expenses and other liabilities (239,000) 352,000
Others, net (11,000) (340,000)
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $2,590,000 $3,954,000
============== ==============
See notes to unaudited condensed consolidated financial statements.
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FORM 10-Q LNB Bancorp, Inc.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTRODUCTION
The following areas of discussion pertain to the unaudited condensed
consolidated balance sheets of LNB Bancorp, Inc. (The Parent Company)
and its wholly-owned subsidiaries, Lorain National Bank (The Bank) and
Charleston Insurance Agency, Inc. and a 49% interest in Charleston Title
Insurance Agency, LLC., at March 31, 2003, compared to December 31, 2002 and
the related unaudited condensed consolidated statements of income and cash
flows for the three months ended March 31, 2003. The term "the Corporation"
refers to LNB Bancorp, Inc. and its wholly-owned subsidiaries. It is the
intent of this discussion to provide the reader with a more thorough
understanding of the unaudited condensed consolidated financial statements
and should be read in conjunction with those unaudited condensed consolidated
financial statements and the Corporation's December 31, 2002 Annual Report.
LNB Bancorp, Inc. is not aware of any trends, events, or uncertainties
that might have a material effect on the soundness of operations;
neither is LNB Bancorp, Inc. aware of any proposed recommendations by
regulatory authorities which would have a similar effect if implemented.
BASIS OF PRESENTATION
The unaudited condensed consolidated balance sheet as of March 31, 2003 and
the unaudited condensed consolidated statements of income and cash flows for
the three months ended March 31, 2003 and 2002 are prepared in accordance
with accounting principles generally accepted in the United States of
America. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. The above mentioned statements reflect all normal and recurring
adjustments which are, in the opinion of Management, necessary for a fair
presentation of the financial position and the results of operations for the
interim periods presented. All adjustments are normal and recurring in
nature.
The condensed consolidated balance sheet at December 31, 2002 has been taken
from the audited Financial Statements and condensed. The results of
operations for the three months ended March 31, 2003 are not necessarily
indicative of the operating results for the full year.
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All 2002 financial statements and related per-share amounts herein have been
restated to reflect the adoption of Statement of Financial Accounting
Standards (SFAS) No. 147 "Acquisitions of Certain Financial Institutions" and
SFAS No. 142 "Goodwill and Other Intangible Assets" as related to
intangibles. Per-share amounts have also been adjusted to reflect a two-
percent stock dividend on July 2, 2002, and a three-for two stock split on
March 14, 2003.
COMMON STOCK
On February 25, 2003, the Board of Directors of LNB Bancorp, Inc. declared a
three-for-two split of common stock. Shareholders received one additional
common share for every two shares owned on the stock-split record date of
March 10, 2003. Shareholders participating in the Bancorp's dividend
reinvestment plan, LNBB Direct (the Plan), were issued fractional shares.
Shareholders not participating in the Plan were issued cash in lieu of
fractional shares. For additional information see Form 8-K filed on February
25, 2003.
RESERVE FOR LOAN LOSSES
Because some loans may not be repaid in full, a reserve for loan losses is
recorded. This reserve is increased by provisions charged to earnings and is
reduced by loan charge-offs, net of recoveries. Estimating the risk of loss
on any loan is necessarily subjective. Accordingly, the reserve is
maintained by Management at a level considered adequate to cover loan losses
that are currently anticipated based on Management's evaluation of several
key factors including information about specific borrower situations, their
financial position and collateral values, current economic conditions,
changes in the mix and levels of the various types of loans, past charge-off
experience and other pertinent information. The reserve for loan losses is
based on estimates using currently available information, and ultimate losses
may vary from current estimates due to changes in circumstances. These
estimates are reviewed periodically and, as adjustments become necessary,
they are reported in earnings in the periods in which they become known.
While Management may periodically allocate portions of the reserve for
specific problem situations, the entire reserve is available for any charge-
offs that may occur. Charge-offs are made against the reserve for loan
losses when Management concludes that it is probable that all or a portion of
a loan is uncollectible. After a loan is charged-off, collection efforts
continue and future recoveries may occur.
A loan is considered impaired, based on current information and events, if it
is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on the
present value of the expected future cash flows discounted at the loans
initial effective interest rate, except that all collateral-dependent loans
are measured for impairment based on the fair value of the collateral. If
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the loan valuation is less than the recorded value of the loan, an impairment
reserve is established for the difference. The impairment reserve is
established by either an allocation of the reserve for loan losses or by a
provision for loan losses, depending upon the adequacy of the reserve for
loan losses.
RECLASSIFICATIONS
Certain 2002 amounts have been reclassified to conform to 2003 presentation.
2. EARNINGS PER SHARE
Earnings per share is calculated as follows:
For the Quarter ended March 31, 2003
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net Income $2,191,000
Basic EPS
Income available to
common shareholders $2,191,000 6,602,127 $ .33
=====
Effect of Dilutive Securities
Incentive Stock Options -0- 14,839
---------- ---------
Diluted EPS
Income available to common
shareholders + assumed
conversions $2,191,000 6,616,966 $ .33
========== ========= =====
For the Quarter ended March 31, 2002
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net Income $2,148,000
Basic EPS
Income available to
common shareholders $2,148,000 6,473,337 $ .32
=====
Effect of Dilutive Securities
Incentive Stock Options -0- 2,193
---------- ---------
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Diluted EPS
Income available to common
shareholders + assumed
conversions $2,148,000 6,475,530 $ .32
========== ========= =====
3. COMPREHENSIVE INCOME
The Corporation's comprehensive income for the quarters ended March 31, 2003
and 2002 are as follows:
For the quarters ended March 31,
2003 2002
--------------------------------
Net income $2,191,000 $2,148,000
Other comprehensive income:
Change in unrealized gain
(loss) on securities available
for sale, net of tax (benefit)
of $(169,000) and $(415,000) (328,000) (807,000)
------------ ------------
Comprehensive Income $1,863,000 $1,341,000
============ ============
For the quarters ended March 31,
2003 2002
--------------------------------
Disclosure of Reclassification Amount
Unrealized holding gains
arising during the period,
net of tax $ (462,000) $ (988,000)
Less reclassification adjustment
for gains included in the net
income, net of tax of $69,000
and $94,000 134,000 181,000
------------ ------------
Change in unrealized (loss)
on securities available for sale,
net of tax $ (328,000) $ (807,000)
============ ============
4. CRITICAL ACCOUNTING POLICIES
The Corporation maintains critical accounting policies for reserve for loan
losses, classification and evaluation of securities and a deferred tax asset
valuation allowance. Refer to notes 1,5,7 and 12 of Notes to Consolidated
Financial Statements for additional information incorporated by reference to
the 2002 Annual Report to Shareholders for the year ended December 31, 2002.
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5. STOCK OPTION PLANS
The FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure." SFAS No. 148 provides guidance on how to
transition from the intrinsic value method of accounting for stock-based
employee compensation under APB No. 25 to SFAS No. 123's fair value method
for accounting, if a company so elects. In accordance with the transitional
guidance of SFAS No. 148, the fair value method of accounting for stock
options should be applied prospectively to awards granted subsequent to
January 1, 2003. As permitted, options granted prior to January 1, 2003,
will continue to be accounted for under APB Opinion 25, and the pro forma
impact of accounting for these options at fair value will continue to be
disclosed in the notes to the consolidated financial statements.
The Corporation did not issue any stock options during the first quarter of
2003 or 2002. All stock options issued were 100% vested at March 31, 2003
and 2002, and therefore had compensation cost for the Corporation's stock-
based compensation plans been determined consistent with SFAS No. 123, net
income and net income per share would not have been impacted.
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PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION & RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 21A of the
Securities Exchange Act of 1934. Forward-looking statements which are based
on various assumptions (some of which are beyond the Corporation's control),
may be identified by reference to a future period or periods, or by the use
of forward-looking terminology, such as "may," "will," "believe," "expect,"
"estimate," "anticipate," "continue," or similar terms or variations on those
terms, or the negative of these terms. Actual results could differ
materially from those set forth in forward-looking statements, due to a
variety of factors, including, but not limited to, those related to the
economic environment, particularly in the market areas in which the Company
operates, competitive products and pricing, fiscal and monetary policies of
the U.S. Government, changes in government regulations affecting financial
institutions, including regulatory fees and capital requirements, changes in
prevailing interest rates, acquisitions and the integration of acquired
businesses, credit risk management, asset/liability management, the financial
and securities markets and the availability of and costs associated with
sources of liquidity.
The Corporation does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
FINANCIAL CONDITION
Total assets of the Corporation increased $6,649,000 during the first
quarter of 2003, to $722,048,000.
The total securities portfolio increased $2,794,000 ending the first quarter
of 2003 at $155,089,000. At March 31, 2003 gross unrealized gains (losses)
in the investment portfolio were approximately $1,913,000 and $(109,000),
respectively.
Loans increased $1,929,000 during the first quarter to $511,479,000
at March 31, 2003. This increase was a result of good loan demand in
our market. Commercial loan growth was particularly strong, showing a first
quarter increases of $11,026,000. Mortgage and consumer loans decreased by
$6,934,000 and $2,163,000, respectively, during the first quarter of 2003.
The consumer loan portfolio has decreased because of low automobile demand
while mortgages decreased due to refinancing.
The reserve for loan losses ended the quarter at $6,703,000 supported by a
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provision for loan losses of $564,000, recoveries of $85,000 and loan
charge-offs of $599,000. The reserve for loan losses as a percentage of
ending loans was 1.31% at March 31, 2003 and December 31, 2002. Corporate
management believes that the reserve for loan losses as a percentage of
ending loans at March 31, 2003 remains at an appropriate level. The ratio of
the reserve for loan losses to nonperforming assets decreased to 289.0% as of
March 31, 2002 from 352.9% at December 31, 2002. Corporate management
believes that the current level of the reserve for loan losses is adequate
based upon quantitative analysis of identified risks and analysis of
historical trends.
The level of nonperforming assets increased by $434,000 during the first
quarter of 2003. This increase is the result of an increase in nonaccrual
loans of $456,000 and a decrease in other foreclosed assets owned in the
amount of $22,000. The increase in nonaccrual loans is due to decreases in
nonaccrual principal balances of $499,000 which have been paid off or brought
current, loans charged-off in the amount of $258,000 and liquidations of
nonaccrual loans of $-0- and increases in nonaccrual principal balances of
$1,213,000 which includes four large commercial credit customers of
$950,000 and 17 small consumer loan credits.
The level of nonperforming assets remains at relatively low levels and
Corporate management believes nonperforming assets are well collateralized.
The table below presents the level of nonperforming assets at the end of the
last four calendar quarters.
Amounts in thousands 03/31/03 12/31/02 09/30/02 06/30/02
-------- -------- -------- --------
Nonperforming Assets:
Nonaccrual $2,319 $1,863 $2,222 $1,650
Restructured 0 0 0 0
Other Foreclosed Assets 0 22 56 167
------ ------ ------ ------
Total Nonperforming Assets $2,319 $1,885 $2,278 $1,817
====== ====== ====== ======
Reserve for loan losses
to nonperforming assets 289.0% 352.9% 287.8% 337.9%
====== ====== ====== ======
Accruing loans past due
90 days $ 62 $ 45 $ 48 $ 327
====== ====== ====== ======
Potential problem loans are those loans identified on Management's watch list
in which Management has some doubt as to the borrower's ability to comply
with the present repayment terms and loans which Management is actively
monitoring due to changes in the borrower's financial condition. At March 31,
2003, potential problem loans totaled $15,084,000, a decrease of $465,000
from the December 31, 2002 balance.
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The Corporation's credit policies are reviewed and modified on an ongoing
basis in order to remain suitable for the management of credit risk within
the loan portfolio as conditions change. At March 31, 2003 there are no
significant concentrations of credit in the loan portfolio.
The Corporation had outstanding loan and credit commitments to make loans
totaling $147,466,000 and $140,685,000 at March 31, 2003 and December 31,
2002, respectively. The increase in outstanding loan commitments results in
part from an increase in the unused portion of home equity lines of credits
from home equity loan sale programs during 2002 plus an increase in loan
demand during the first quarter of 2003. Mortgage and commercial
construction loan demand is expected to increase in the second quarter of
2003 as seasonal weather conditions improve and the construction season
begins. Consumer loan demand is expected to increase in the second quarter
for home improvement and automobile loans as weather conditions improve.
Total deposits increased $12,728,000 during the first quarter to
$578,855,000. Noninterest-bearing deposits increased to $87,054,000, at
March 31, 2003 for an increase of $6,175,000, while interest-bearing deposits
increased to $491,801,000 for an increase of $6,553,000. Federal funds
purchased and securities sold under agreements to repurchase decreased
$10,027,000 during the first quarter of 2003, mainly as a result of customers
short-term liquidity position. Since customer repurchase agreements balances
are volatile on a daily basis, most funds generated by repurchase activity
enter the Corporation's earning assets as short-term investments.
LIQUIDITY
Liquidity measures a corporation's ability to generate cash or otherwise
obtain funds at reasonable prices to fund commitments to borrowers as well as
the demand of depositors and debt holders. Principal internal sources of
liquidity for the Corporation and the Bank are cash and cash equivalents,
Federal funds sold, and the maturity structures of securities and portfolio
loans. Securities and loans available for sale provide another source of
liquidity through the cash flows of these interest bearing assets as they
mature or are sold.
The Corporation continues to maintain a relatively liquid position in order
to take advantage of interest rate fluctuations. As of March 31, 2003 short-
term security investments with maturities of one year or less totaled
$6,679,000 which represented 4.3% of total securities. Adding cash and due
from banks of $25,572,000 and Federal Funds sold and other short-term
investments of $3,235,000, total liquid assets represented 4.9% of total
assets. The Corporation's subsidiary bank has established short-term lines
of credit at correspondent banks, the Federal Home Loan Bank and the Federal
Reserve Bank of Cleveland in the amounts of $24,000,000, $40,000,000 and
$35,704,000, respectively, with credit available in the amounts of
$24,000,000, $28,000,000 and $35,704,000, respectively.
18
CAPITAL RESOURCES
LNB Bancorp, Inc. continues to maintain a strong capital position. Total
shareholders' equity increased to $67,372,000, at March 31, 2003. The
increase resulted primarily from $2,191,000 of net income generated from the
first quarter of operations less a dividend payable to shareholders of
$1,123,000. The increase in mid-to-long term interest rates experienced in
the first quarter of 2003 has caused a decrease in the overall market value
of available for sale securities which resulted in a decrease of
shareholders' equity by $328,000 for the quarter ended March 31, 2003. As of
March 31, 2003, the LNB Bancorp, Inc. held 149,777 shares of common stock as
treasury stock at a cost of $2,894,000.
The Corporation continues to monitor growth to stay within the constraints
established by the regulatory authorities. Under Federal banking
regulations, an institution is deemed to be well-capitalized if it has a
Risk-based Tier 1 capital ratio of 6.00 percent or greater, a Risk-based
Total capital ratio of 10.00 percent or greater and a Leverage ratio of
5.00 percent or greater. The Corporation's Risk-based capital and Leverage
ratios have exceeded the ratios for a well-capitalized financial institution
for all periods presented. The Corporation's capital and leverage ratios as
of March 31, 2003 and 2002 follow together with those ratios required for the
Corporation to be considered well capitalized.
MARCH 31,
---------------------
2003 2002
------- -------
Tier I capital ratio 11.73% 12.60%
Required Tier I capital ratio 4.00% 4.00%
Total capital ratio 12.98% 13.87%
Required total capital ratio 8.00% 8.00%
Leverage ratio 8.87% 9.48%
Required leverage ratio 3.00% 3.00%
On an ongoing basis, the Corporation analyzes acquisition opportunities in
markets which are adjacent to or within the Corporation's current
geographical market. Corporate management believes that it's current capital
resources are sufficient to support any foreseeable acquisition activity.
RESULTS OF OPERATIONS
Interest and fees on loans decreased $170,000 when compared to the first
quarter of 2002. This was the result of the impact of increases in the loan
portfolio plus decreases in rates. Interest and dividends on securities was
$1,472,000 for the first quarter of 2003 for a decrease of $326,000 over the
same period in 2002. The first quarter decrease in interest and dividends on
securities results from the net of increases in the securities portfolio of
$2,794,000 which was more than offset by decreases in the average yield of
the securities portfolio. Interest and dividends on securities represented
19
15.2% of total interest income at March 31, 2003 compared to 17.6% at March
31, 2002. Interest on Federal funds sold and other interest-bearing
instruments was $12,000 at March 31, 2003 compared to $19,000 at March 31,
2002. The decrease resulted from lower average balances invested
in this form of financial instrument.
Total interest expense decreased by $580,000 when compared to the first
quarter of 2002. The interest expense decrease was fueled by a decrease in
interest expense from certificates of deposit in the amount of $111,000,
Checkinvest of $66,000, Money Market of $84,000, Market Access of $154,000,
savings deposit account interest of $116,000 and securities sold under
repurchase agreements and federal funds purchased of $83,000 offset in
part by increases in interest on Federal Home Loan Bank advances of $26,000.
The decreases in interest expense resulted from decreases in rates paid for
overnight and short-term deposit products.
The Corporation decreased its loan loss provision by $36,000 to $564,000 for
the first quarter of 2003. The decreased loan loss provision results from
the change and mix of the loan portfolio.
Total noninterest income decreased by $132,000 when compared to the first
quarter of 2002. This decrease resulted from the net of decreases in
Investment and Trust Services Division Income of $121,000, increases in
service charges of $30,000, increases in other service charges, exchanges and
fees of $56,000, decreases in gains on sales of securities of $72,000 and
other operating income of $25,000.
The Corporation continuously monitors noninterest expenses for greater
profitability. The entire staff is geared to improving productivity at all
levels. Noninterest expense for the quarter ended March 31, 2003 was
$5,946,000, compared with $5,928,000 for the first quarter of 2002. This
increase was due primarily to increases in salary expenses, net occupancy,
furniture and equipment expenses and Ohio Franchise Tax offset by decreases
in outside services, marketing expense, and credit card and merchant
expenses.
The effective tax rate was 30.6% and 32.7% during the first quarter of 2003
and 2002, respectively. The effective tax rate decreased due to increases in
holdings of tax-exempt securities. Net income was $2,191,000 and $2,148,000
for the quarters ended March 31, 2003 and 2002, respectively. Net income per
basic and diluted share was $.33 and $.32 for the quarters ended March 31,
2003 and 2002, respectively.
On March 15, 2003, LNB Bancorp, Inc.'s wholly -owned subsidiary, North Coast
Community Development Corporation was selected by the United States
Department of the Treasury to receive $9 million in tax credit allocations
under the New Markets Tax Credit program. This tax credit did not impact the
first quarter provision for federal income taxes, but its anticipated impact
for the remainder of 2003 is to lessen the provision for federal taxes to an
20
undetermined degree.
IMPACTS OF ACCOUNTING AND REGULATORY PRONOUNCEMENTS
Corporate management is not aware of any 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. However, the potential impact of
certain accounting and regulatory pronouncements warrant further discussion.
Statement of Financial Accounting Standards No. 149
Amendment of Statement 133 on Derivative Instruments and Hedging Activities
This Statement amends Statement 133 for certain decisions made by the Board
as part of the Derivatives Implementation Group (DIG) process. For those
amendments that relate to Statement 133 implementation guidance, the specific
Statement 133 Implementations Issue necessitating the amendment is
identified. If the amendment relates to a cleared issue, the clearance date
also is noted. The Statement also amends Statement 133 to incorporate
clarifications of the definition of a derivative. This Statement contains
amendments relating to FASB Concepts Statement No. 7, Using Cash Flow
Information and Present Value in Accounting Measurements, and FASB Statements
No. 65, Accounting for Certain Mortgage Banking Activities, No. 91,
Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases, No. 95, Statement of Cash
Flows, and No. 126, Exemption from Certain Required Disclosures about
Financial Instruments for Certain Nonpublic Entities.
FASB Interpretation No. 46 (FIN No. 46) "Consolidation of Variable Interest
Entities"
In January 2003, the FASB Issued FASB Interpretation No. 46 (FIN No. 46),
"Consolidation of Variable Interest Entities." The objective of this
Interpretation is to provide guidance on how to identify a variable interest
entity (VIE) and determine when the assets, liabilities, noncontrolling
interests, and results of operations of a VIE need to be included in a
company's consolidated financial statements. A company that holds variable
interests in an entity will need to consolidate the entity if the company's
interest in the VIE is such that the company will absorb a majority of the
VIE's expected losses and/or receive a majority of the entity's expected
residual returns, if they occur. The provisions of this Interpretation
became effective upon issuance. As of December 31, 2002, the Corporation had
no variable interest entities. The Corporation has determined that the
Interpretation will have no impact on financial position, results of
operations, or liquidity, as it applies to other areas within the
Corporation.
21
PART I - OTHER INFORMATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market indices such as interest rates, foreign exchange
rates and equity prices. The Corporation's principal market risk exposure
is interest rate risk, with no material impact on earnings from changes in
foreign exchange rates or equity prices. There have been no material
changes in the asset and liability mix of the Corporation since December
31, 2002, which would impact the Corporation's level of market risk.
Interest rate risk is the exposure to changes in market interest rates.
Interest rate sensitivity is the relationship between market interest
rates and net interest income due to the repricing characteristics of
assets and liabilities. The Corporation monitors the interest rate
sensitivity of its on - and - off balance sheet positions by examining its
near-term sensitivity and its longer term gap position. Corporate
management has determined no significant changes in the Corporation's
interest rate risk profile since December 31, 2002.
ITEM 4 - CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Corporation carried
out an evaluation under the supervision and with the participation of the
Corporation's management, including the Corporation's President and Chief
Executive Officer and Executive Vice President, Chief Financial Officer and
Corporate Secretary, of the effectiveness of the design and operation of the
Corporation's disclosure controls and procedures pursuant to SEC rule 13a-14.
Based upon that evaluation, the President and Chief Executive Officer and
Executive Vice President, Chief Financial Officer and Corporate Secretary
concluded that as of that date, the Corporation's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Corporation (including its consolidated subsidiaries)
required to be included in the Corporation's periodic SEC filings.
There were no significant changes made in the Corporation's internal controls
or in other factors that could significantly affect these internal controls
subsequent to the date of the evaluation performed by the Corporation's
President and Chief Executive Officer and Executive Vice President, Chief
Financial Officer and Corporate Secretary.
22
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
None
ITEM 2 - Changes in Securities
See item 4, (c), (1)
ITEM 3 - Defaults Upon Senior Securities
None
ITEM 4 - Submission of Matters to a Vote of Security Holders
None
ITEM 5 - Other Information
(a) None
ITEM 6 - Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
February 26, 2003 - LNB Bancorp, Inc. issued a press
release announcing a three-for-two stock split with a record
date of March 10, 2003 and a payable date of March 14, 2003.
March 17, 2003 - LNB Bancorp, Inc. issued a press release
announcing that its wholly-owned subsidiary, North Coast
Community Development Corporation, was selected by the
United States Department of the Treasury to receive $9 million in
tax credit allocations under the New Markets Tax Credit program.
April 15, 2003 - LNB Bancorp, Inc. published and released its
1st Quarter 2003 Report to Shareholders and issued a press
release announcing 1st Quarter 2003 Earnings dated April 15,
2003.
Also, see the Exhibit Index which is found on the next page
of this Form.
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LNB BANCORP, INC.
(registrant)
By:/s/ Gregory D. Friedman
Date: May 15, 2003 --------------------------
Gregory D. Friedman, CPA
Executive Vice President,
Chief Financial Officer and
Corporate Secretary
(Principal Financial Officer)
LNB BANCORP, INC.
(registrant)
By:/s/ Mitchell J. Fallis
Date: May 15, 2003 --------------------------
Mitchell J. Fallis, CPA
Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
24
Certifications
I, Gary C. Smith, President and Chief Executive Officer of LNB Bancorp,
Inc., certify that:
1. I, have reviewed this quarterly report on Form 10-Q of LNB Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
25
employees who have a significant role in the registrant's internal control;
and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date May 15, 2003
______________________
By /s/Gary C. Smith
______________________
Gary C. Smith, President and Chief Executive Officer
26
I, Gregory D. Friedman, CPA, Executive Vice President, Chief Financial
Officer and Corporate Secretary of LNB Bancorp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of LNB Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control;
and
27
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date May 15, 2003
____________________________
By /s/Gregory D. Friedman
____________________________
Gregory D. Friedman, CPA, Executive Vice President, Chief Financial
Officer and Corporate Secretary
28
LNB Bancorp, Inc.
Form 10-Q
Exhibit Index
Pursuant to Item 601 (a) of Regulation S-K
EXHIBIT NO. PAGE DESCRIPTION
3.1 NA LNB Bancorp, Inc. Second Amended Articles of
Incorporation (Incorporated by reference to
the quarterly report on Form 10-Q filed on
November 14, 2000.)
3.2 NA LNB Bancorp, Inc. Amended Code of Regulations.
(Incorporated by reference to the current report
on Form 8-K filed on January 4, 2001.)
4. NA Instruments Defining the Rights of Security
Holders. (See Exhibits 3.1 and 3.2)
99.1 24 Certification pursuant to 18 U.S.C. section 1350,
as enacted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 26 Certification pursuant to 18 U.S.C. section 1350,
as enacted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.