UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
fiscal year ended December 31, 2010
Commission file number 0-13203
LNB Bancorp, Inc.
(Exact name of the registrant as
specified in its charter)
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Ohio
(State of
Incorporation)
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34-1406303
(I.R.S. Employer
Identification No.)
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457 Broadway, Lorain, Ohio
(Address of principal
executive offices)
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44052-1769
(Zip Code)
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(440) 244-6000
(Registrants telephone
number, including area code)
Securities Registered Pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Shares
Par Value $1.00 Per Share
Preferred Share Purchase Rights
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The NASDAQ Stock Market
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Securities Registered Pursuant to Section 12(g) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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None
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None
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Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
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
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the common shares held by
non-affiliates of the registrant at June 30, 2010 was
approximately $34,639,885.
The number of common shares of the registrant outstanding on
March 1, 2011 was 7,884,749.
PART I
Overview
LNB Bancorp, Inc. (the Corporation) is a diversified
banking services company headquartered in Lorain, Ohio. It is
organized as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the BHC Act). Its
predecessor, The Lorain Banking Company was a state chartered
bank founded in 1905. It merged with the National Bank of Lorain
in 1961, and in 1984 became a wholly-owned subsidiary of LNB
Bancorp, Inc.
The Corporation engages in lending and depository services,
investment services, and other traditional banking services.
These services are generally offered through the
Corporations wholly-owned subsidiary, The Lorain National
Bank (the Bank).
The primary business of the Bank is providing personal, mortgage
and commercial banking products, along with investment
management and trust services. The Lorain National Bank operates
through 20 retail-banking locations and 30 automated teller
machines (ATMs) in Lorain, Erie, Cuyahoga and
Summit counties in the Ohio communities of Lorain, Elyria,
Amherst, Avon, Avon Lake, LaGrange, North Ridgeville, Oberlin,
Olmsted Township, Vermilion, Westlake and Hudson, as well as a
business development office in Cuyahoga County.
Services
Commercial Lending. The Banks commercial
lending activities consist of commercial and industrial loans,
commercial real estate loans, construction and equipment loans,
letters of credit, revolving lines of credit, Small Business
Administration loans and government guaranteed loans. The
Banks wholly-owned subsidiary, North Coast Community
Development Corporation, offers commercial loans with preferred
interest rates on projects that meet the standards for the
federal governments New Markets Tax Credit Program.
Residential, Installment and Personal
Lending. The Banks residential mortgage
lending activities consist of loans originated for portfolio or
to be sold in the secondary markets, for the purchase of
personal residences. The Banks installment lending
activities consist of traditional forms of financing for
automobile and personal loans, indirect automobile loans, second
mortgages, and home equity lines of credit. The Bank provides
indirect lending services to new and used automobile dealerships
throughout Ohio, Kentucky, Indiana, Tennessee and Georgia. This
program allows the Bank to generate high quality short term
assets to place in its own portfolio or to sell to several
investor banks
Deposit Services. The Banks deposit
services include traditional transaction and time deposit
accounts as well as cash management services for corporate and
municipal customers. The Bank may supplement local deposit
generation with time deposits generated through a broker
relationship. Deposits of the Bank are insured by the Bank
Insurance Fund administered by the Federal Deposit Insurance
Corporation (the FDIC).
Other Services. Other bank services offered
include safe deposit boxes, night depository, U.S. savings
bonds, travelers checks, money orders, cashiers checks,
ATMs, debit cards, wire transfer, electronic funds
transfers, foreign drafts, foreign currency, electronic banking
by phone or through the internet, lockbox and other services
tailored for both individuals and businesses.
Competition
and Market Information
The Corporation competes primarily with 17 other financial
institutions with operations in Lorain County, Ohio, which have
Lorain County-based deposits ranging in size from approximately
$588,000 to over $841 million. These competitors, as well
as credit unions and financial intermediaries, compete for
Lorain County deposits of approximately of $3.8 billion.
The Banks market share of total deposits in Lorain County
was 22.25% in 2010 and 23.64% in 2009, and the Bank ranked
number two in market share in Lorain County in 2010 and number
one in 2009.
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The Corporations Morgan Bank division operates from one
location in Hudson, Ohio. The Morgan Bank division competes
primarily with nine other financial institutions for
$549 million in deposits in the City of Hudson, and holds a
market share of 20.84%.
The Bank has a limited presence in Cuyahoga County, competing
primarily with 27 other financial institutions. Cuyahoga County
deposits as of June 30, 2010 totaled $37.7 billion.
The Banks market share of deposits in Cuyahoga County was
0.07% in 2010 and 0.04% in 2009 based on the FDIC Summary of
Deposits for specific market areas dated June 30, 2010.
Business
Strategy
The Bank competes with larger financial institutions by
providing exceptional local service that emphasizes direct
customer access to the Banks officers. It competes against
smaller local banks by providing more convenient distribution
channels and a wider array of products. The Bank endeavors to
provide informed and courteous personal services. The
Corporations management team (Management)
believes that the Bank is well positioned to compete
successfully in its market area. Competition among financial
institutions is based largely upon interest rates offered on
deposit accounts, interest rates charged on loans, the relative
level of service charges, the quality and scope of the services
rendered, the convenience of the banking centers and, in the
case of loans to commercial borrowers, relative lending limits.
Management believes that the commitment of the Bank to provide
quality personal service and its local community involvement
give the Bank a competitive advantage over other financial
institutions operating in its markets.
Supervision
and Regulation
The Corporation is subject to the supervision and examination of
the Board of Governors of the Federal Reserve System (the
Federal Reserve Board). The BHC Act requires prior
approval of the Federal Reserve Board before acquiring or
holding more than a 5% voting interest in any bank. It also
restricts interstate banking activities.
The Bank is subject to extensive regulation, supervision and
examination by applicable federal banking agencies, including
the Office of the Comptroller of the Currency (the
OCC) and the Federal Reserve Board. Because domestic
deposits in the Bank are insured (up to applicable limits) and
certain deposits of the Bank and debt obligations of the Bank
are temporarily guaranteed (up to applicable limits) by the
FDIC, the FDIC also has certain regulatory and supervisory
authority over the Bank under the Federal Deposit Insurance Act
(the FDIA).
Regulatory
Capital Standards and Related Matters
Bank holding companies are required to comply with the Federal
Reserve Boards risk-based capital guidelines. The FDIC and
the OCC have adopted risk-based capital ratio guidelines to
which depository institutions under their respective
supervision, such as the Bank, are subject. The guidelines
establish a systematic analytical framework that makes
regulatory capital requirements more sensitive to differences in
risk profiles among banking organizations. Risk-based capital
ratios are determined by allocating assets and specified
off-balance sheet commitments to four risk-weighted categories,
with higher levels of capital being required for the categories
perceived as representing greater risk. The Corporation and the
Bank met all risk-based capital requirements of the Federal
Reserve Board, FDIC and OCC as of December 31, 2010.
Both federal and state law extensively regulate various aspects
of the banking business, such as reserve requirements,
truth-in-lending
and
truth-in-savings
disclosures, equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking operations.
The Corporation and the Bank are subject to the Federal Reserve
Act, which restricts financial transactions between banks and
affiliated companies. The statute limits credit transactions
between banks, affiliated companies and its executive officers
and its affiliates. The statute prescribes terms and conditions
for bank affiliate transactions deemed to be consistent with
safe and sound banking practices, and restricts the types of
collateral security permitted in connection with a banks
extension of credit to an affiliate. Additionally, all
transactions with an affiliate must be on terms substantially
the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with
nonaffiliated parties.
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EESA and
ARRA
In October 2008, the Emergency Economic Stabilization Act of
2008 (EESA) was enacted. EESA authorized the
U.S. Department of the Treasury (the
U.S. Treasury) to purchase from financial
institutions and their holding companies up to $700 billion
in mortgage loans, mortgage-related securities and certain other
financial instruments, including debt and equity securities
issued by financial institutions and their holding companies in
a troubled asset relief program (TARP). The
U.S. Treasury allocated $350 billion towards the TARP
Capital Purchase Program (the CPP). Under the CPP,
the U.S. Treasury purchased equity securities from
participating institutions. Participants in the CPP, such as the
Corporation, are subject to employee compensation limitations
and are encouraged to expand their lending and mortgage loan
modifications. On February 17, 2009, the American Recovery
and Reinvestment Act of 2009 (ARRA) was enacted.
Among other things, ARRA, and the related interim final rule
promulgated by the U.S. Treasury, imposed certain new
employee compensation and corporate expenditure limits on all
CPP participants, including the Corporation, until the
institution has repaid the U.S. Treasury. For details
regarding the Corporations participation in the CPP, see
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Dodd-Frank
Act
On July 21, 2010, the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the Dodd-Frank Act) was
signed into law, which significantly changes the regulation of
financial institutions and the financial services industry. The
Dodd-Frank Act, together with the related regulations that are
to be implemented, includes provisions affecting large and small
financial institutions alike, including several provisions that
will affect how community banks, thrifts, and small bank and
thrift holding companies will be regulated in the future.
The Dodd-Frank Act, among other things, imposes new capital
requirements on bank holding companies; changes the base for
FDIC insurance assessments to a banks average consolidated
total assets minus average tangible equity, rather than upon its
deposit base, and permanently raises the current standard
deposit insurance limit to $250,000; and expands the FDICs
authority to raise insurance premiums. The new legislation also
calls for the FDIC to raise the ratio of reserves to deposits
from 1.15% to 1.35% for deposit insurance purposes by
September 30, 2020 and to offset the effect of
increased assessments on insured depository institutions with
assets of less than $10 billion. The Dodd-Frank Act also
limits interchange fees payable on debit card transactions,
establishes the Bureau of Consumer Financial Protection as an
independent entity within the Federal Reserve, which will have
broad rulemaking, supervisory and enforcement authority over
consumer financial products and services, including deposit
products, residential mortgages, home-equity loans and credit
cards, and contains provisions on mortgage-related matters such
as steering incentives, determinations as to a borrowers
ability to repay and prepayment penalties. The Dodd-Frank Act
also includes provisions that affect corporate governance and
executive compensation at all publicly-traded companies and
allows financial institutions to pay interest on business
checking accounts. The new law also restricts proprietary
trading, places restrictions on the owning or sponsoring of
hedge and private equity funds, and regulates the derivatives
activities of banks and their affiliates. In addition, the law
restricts the amount of trust preferred securities that may be
considered Tier 1 capital. For depository institution
holding companies with total assets of less than
$15 billion, such as the Corporation, trust preferred
securities issued before May 19, 2010 may continue to
be included in Tier 1 capital, but future issuances of
trust preferred securities will no longer be eligible for
treatment as Tier 1 capital.
Because most aspects of this legislation will be subject to
intensive agency rulemaking and subsequent public comment prior
to implementation over the next 12 months or more, it is
difficult to predict at this time the ultimate effect of the
Dodd-Frank Act on the Corporation.
Federal
Deposit Insurance Act
Deposit Insurance Coverage Limits. Prior to
enactment of EESA, the FDIC standard maximum depositor insurance
coverage limit was $100,000, excluding certain retirement
accounts qualifying for a maximum coverage limit of $250,000.
Pursuant to EESA, the FDIC standard maximum coverage limit was
temporarily increased to $250,000. This temporary standard
maximum coverage limit increase was made permanent under the
Dodd-Frank
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Act. The Dodd-Frank Act also provides that non-interest bearing
transaction accounts will have unlimited deposit insurance
through January 1, 2013.
Deposit Insurance Assessments. Substantially
all of the Banks domestic deposits are insured up to
applicable limits by the FDIC. Accordingly, the Bank is subject
to deposit insurance premium assessments by the FDIC.
FICO Assessments. Since 1997, all FDIC-insured
depository institutions have been required through assessments
collected by the FDIC to service the annual interest on
30-year
noncallable bonds issued by the Financing Corporation
(FICO) in the late 1980s to fund losses incurred by
the former Federal Savings and Loan Insurance Corporation. FICO
assessments are separate from and in addition to deposit
insurance assessments, are adjusted quarterly and, unlike
deposit insurance assessments, are assessed uniformly without
regard to an institutions risk category.
Conservatorship and Receivership of
Institutions. If any insured depository
institution becomes insolvent and the FDIC is appointed its
conservator or receiver, the FDIC may, under federal law,
disaffirm or repudiate any contract to which such institution is
a party, if the FDIC determines that performance of the contract
would be burdensome, and that disaffirmance or repudiation of
the contract would promote the orderly administration of the
institutions affairs. Such disaffirmance or repudiation
would result in a claim by its holder against the receivership
or conservatorship. The amount paid upon such claim would depend
upon, among other factors, the amount of receivership assets
available for the payment of such claim and its priority
relative to the priority of others. In addition, the FDIC as
conservator or receiver may enforce most contracts entered into
by the institution notwithstanding any provision providing for
termination, default, acceleration, or exercise of rights upon
or solely by reason of insolvency of the institution,
appointment of a conservator or receiver for the institution, or
exercise of rights or powers by a conservator or receiver for
the institution. The FDIC as conservator or receiver also may
transfer any asset or liability of the institution without
obtaining any approval or consent of the institutions
shareholders or creditors.
Depositor Preference. The FDIA provides that,
in the event of the liquidation or other resolution of an
insured depository institution, the claims of its depositors
(including claims by the FDIC as subrogee of insured depositors)
and certain claims for administrative expenses of the FDIC as
receiver would be afforded a priority over other general
unsecured claims against such an institution. If an insured
depository institution fails, insured and uninsured depositors
along with the FDIC will be placed ahead of unsecured,
nondeposit creditors, including a parent holding company and
subordinated creditors, in order of priority of payment.
Prompt Corrective Action. The prompt
corrective action provisions of the FDIA create a
statutory framework that applies a system of both discretionary
and mandatory supervisory actions indexed to the capital level
of FDIC-insured depository institutions. These provisions impose
progressively more restrictive constraints on operations,
management, and capital distributions of the institution as its
regulatory capital decreases, or in some cases, based on
supervisory information other than the institutions
capital level. This framework and the authority it confers on
the federal banking agencies supplement other existing authority
vested in such agencies to initiate supervisory actions to
address capital deficiencies. Moreover, other provisions of law
and regulation employ regulatory capital level designations the
same as or similar to those established by the prompt corrective
action provisions both in imposing certain restrictions and
limitations and in conferring certain economic and other
benefits upon institutions. These include restrictions on
brokered deposits, limits on exposure to interbank liabilities,
determination of risk-based FDIC deposit insurance premium
assessments, and action upon regulatory applications.
USA
PATRIOT Act
The Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001
(the USA PATRIOT Act) and the federal regulations
issued pursuant to it substantially broaden previously existing
anti-money laundering law and regulation, increase compliance,
due diligence and reporting obligations for financial
institutions, create new crimes and penalties, and require the
federal banking agencies, in reviewing merger and other
acquisition transactions, to consider the effectiveness of the
parties in combating money laundering activities.
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Employees
As of December 31, 2010, the Corporation employed
272 full-time equivalent employees. The Corporation is not
a party to any collective bargaining agreement. Management
considers its relationship with its employees to be good.
Employee benefits programs are considered by the Corporation to
be competitive with benefits programs provided by other
financial institutions and major employers within the current
market area.
Industry
Segments
The Corporation and the Bank are engaged in one line of
business, which is banking services.
Available
Information
LNB Bancorp, Inc.s internet website is www.4LNB.com.
Copies of the annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 are made available through this website or directly through
the Securities and Exchange Commission (the SEC)
website which is www.sec.gov.
Forward-Looking
Statements
This
Form 10-K
contains forward-looking statements within the meaning of the
Safe Harbor provisions of the Private Securities
Litigation Reform Act of 1995. Terms such as will,
should, plan, intend,
expect, continue, believe,
anticipate and seek, as well as similar
comments, are forward-looking in nature. Actual results and
events may differ materially from those expressed or anticipated
as a result of risks and uncertainties which include but are not
limited to:
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economic pressure on consumers and businesses and the lack of
confidence in the financial markets, resulting in reduced
business activity, lack of consumer spending and lack of
liquidity in the credit markets;
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changes in the interest rate environment which could reduce
anticipated or actual margins;
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increases in interest rates or further weakening economic
conditions that could constrain borrowers ability to repay
outstanding loans or diminish the value of the collateral
securing those loans;
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changes in political conditions or the legislative or regulatory
environment, including new or heightened legal standards and
regulatory requirements, practices or expectations, which may
impede profitability or affect the Corporations financial
condition (such as, for example, the Dodd-Frank Wall Street
reform and Consumer Protection Act and rules and regulations
that may be promulgated under the Act);
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persisting volatility and limited credit availability in the
financial markets, particularly if it results in limitations on
the Corporations ability to raise funding to the extent
required by banking regulators or otherwise;
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significant increases in competitive pressure in the banking and
financial services industries;
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limitations on the Corporations ability to return capital
to shareholders and dilution of the Corporations common
shares that may result from the terms of the CPP, pursuant to
which the Corporation issued securities to the
U.S. Treasury;
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limitations on the Corporations ability to pay dividends;
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adverse effects on the Corporations ability to engage in
routine funding transactions as a result of the actions and
commercial soundness of other financial institutions;
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asset price deterioration, which has had and may continue to
have a negative effect on the valuation of certain asset
categories represented on the Corporations balance sheet;
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general economic conditions, either nationally or regionally
(especially in northeastern Ohio), becoming less favorable than
expected resulting in, among other things, further deterioration
in credit quality of assets;
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increases in deposit insurance premiums or assessments imposed
on the Corporation by the FDIC;
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difficulty attracting
and/or
retaining key executives
and/or
relationship managers at compensation levels necessary to
maintain a competitive market position;
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changes occurring in business conditions and inflation;
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changes in technology;
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changes in trade, monetary, fiscal and tax policies;
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changes in the securities markets, in particular, continued
disruption in the fixed income markets and adverse capital
market conditions;
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continued disruption in the housing markets and related
conditions in the financial markets; and
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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
Corporations reports as filed with the SEC.
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As a competitor in the banking and financial services
industries, the Corporation and its business, operations and
financial condition are subject to various risks and
uncertainties. You should carefully consider the risks and
uncertainties described below, together with all of the other
information in this annual report on
Form 10-K
and in the Corporations other filings with the SEC, before
making any investment decision with respect to the
Corporations securities. In particular, you should
consider the discussion contained in Item 7 of this annual
report on
Form 10-K,
which contains Managements Discussion and Analysis of
Financial Condition and Results of Operations.
The risks and uncertainties described below may not be the only
ones the Corporation faces. Additional risks and uncertainties
not presently known by the Corporation or that the Corporation
currently deems immaterial may also affect the
Corporations business. If any of these known or unknown
risks or uncertainties actually occur or develop, the
Corporations business, financial condition, results of
operations and future growth prospects could change. Under those
circumstances, the trading prices of the Corporations
securities could decline, and you could lose all or part of your
investment.
Difficult
market conditions and economic trends have adversely affected
the Corporations industry and business.
The capital markets continued to experience difficult conditions
through 2009 and into 2010, producing uncertainty in the
financial markets in general and a related general economic
downturn. Dramatic declines in the housing market that resulted
in decreasing home prices and increasing delinquencies and
foreclosures negatively impacted the credit performance of
mortgage and construction loans and resulted in significant
write-downs of assets by many financial institutions. In
addition, the values of real estate collateral supporting many
loans have declined and may continue to decline. These general
downward economic trends, the reduced availability of commercial
credit and increasing unemployment have all negatively impacted
the credit performance of commercial and consumer credit and
resulted in additional write-downs. Concerns over the stability
of the financial markets and the economy have resulted in
decreased lending by financial institutions to their customers
and to each other. This market turmoil and tightening of credit
has led to increased commercial and consumer deficiencies, lack
of customer confidence, increased market volatility and
widespread reduction in general business activity. The resulting
economic pressure on consumers and businesses and the lack of
confidence in the financial markets have adversely affected the
Corporations business, financial condition, results of
operations and share price and may continue to do so. Also, the
Corporations ability to assess the creditworthiness of
customers and to estimate the losses inherent in its credit
exposure is made more complex by these difficult market and
economic conditions. Business activity across a wide range of
industries and regions is greatly reduced and local governments
and many companies are in serious difficulty due to the lack of
consumer spending and the lack of liquidity in the credit
markets. Any worsening of current conditions or slowing of any
economic recovery would have an adverse effect on
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the Corporation, its customers and the other financial
institutions in its market. As a result, the Corporation may
experience increases in foreclosures, delinquencies and customer
bankruptcies.
Changes
in interest rates could adversely affect the Corporations
earnings and financial condition.
The Corporations earnings and cash flows depend
substantially upon its net interest income. Net interest income
is the difference between interest income earned on
interest-earnings assets, such as loans and investment
securities, and interest expense paid on interest-bearing
liabilities, such as deposits and borrowed funds. Interest rates
are sensitive to many factors that are beyond the
Corporations control, including general economic
conditions, competition and policies of various governmental and
regulatory agencies and, in particular, the policies of the
Federal Reserve Board. Changes in monetary policy, including
changes in interest rates, could influence not only the interest
the Corporation receives on loans and investment securities and
the amount of interest it pays on deposits and borrowings, but
such changes could also affect: (1) the Corporations
ability to originate loans and obtain deposits; (2) the
fair value of the Corporations financial assets and
liabilities, including its securities portfolio; and
(3) the average duration of the Corporations
interest-earning assets. This also includes the risk that
interest-earning assets may be more responsive to changes in
interest rates than interest-bearing liabilities, or vice versa
(repricing risk), the risk that the individual interest rates or
rates indices underlying various interest-earning assets and
interest-bearing liabilities may not change in the same degree
over a given time period (basis risk), and the risk of changing
interest rate relationships across the spectrum of
interest-earning asset and interest-bearing liability maturities
(yield curve risk), including a prolonged flat or inverted yield
curve environment. Any substantial, unexpected, prolonged change
in market interest rates could have a material adverse affect on
the Corporations financial condition and results of
operations.
The
Corporations allowance for loan losses may not be adequate
to cover actual future losses.
The Corporation maintains an allowance for loan losses to cover
probable and incurred loan losses. Every loan the Corporation
makes carries a certain risk of non-repayment, and the
Corporation makes various assumptions and judgments about the
collectibility of its loan portfolio including the
creditworthiness of its borrowers and the value of the real
estate and other assets serving as collateral for the repayment
of loans. Through a periodic review and consideration of the
loan portfolio, Management determines the amount of the
allowance for loan losses by considering general market
conditions, credit quality of the loan portfolio, the collateral
supporting the loans and performance of customers relative to
their financial obligations with the Corporation. The amount of
future losses is susceptible to changes in economic, operating
and other conditions, including changes in interest rates, which
may be beyond the Corporations control, and these losses
may exceed current estimates. The Corporation cannot fully
predict the amount or timing of losses or whether the loss
allowance will be adequate in the future. If the
Corporations assumptions prove to be incorrect, its
allowance for loan losses may not be sufficient to cover losses
inherent in its loan portfolio, resulting in additions to the
allowance. Excessive loan losses and significant additions to
the Corporations allowance for loan losses could have a
material adverse impact on its financial condition and results
of operations.
Changes
in economic and political conditions could adversely affect the
Corporations earnings.
The Corporations success depends, to a certain extent,
upon economic and political conditions, local and national, as
well as governmental monetary policies. Conditions such as
inflation, recession, unemployment, changes in interest rates,
money supply and other factors beyond the Corporations
control may adversely affect its asset quality, deposit levels
and loan demand and, therefore, its earnings. Because the
Corporation has a significant amount of real estate loans,
additional decreases in real estate values could adversely
affect the value of property used as collateral and the
Corporations ability to sell the collateral upon
foreclosure. Adverse changes in the economy may also have a
negative effect on the ability of the Corporations
borrowers to make timely repayments of their loans, which would
have an adverse impact on the Corporations earnings. If
during a period of reduced real estate values the Corporation is
required to liquidate the collateral securing a loan to satisfy
the debt or to increase its allowance for loan losses, it could
materially reduce the Corporations profitability and
adversely affect its financial condition. The substantial
majority of the Corporations loans are to individuals and
businesses in Ohio. Consequently, further significant declines
in the economy in Ohio could have a materially adverse effect on
the
7
Corporations financial condition and results of
operations. It is uncertain when the negative credit trends in
the Corporations markets will reverse and, therefore,
future earnings are susceptible to further declining credit
conditions in the markets in which the Corporation operates.
Certain
industries, including the financial services industry, are
disproportionately affected by certain economic indicators such
as unemployment and real estate asset values. Should the
improvement of these economic indicators lag the improvement of
the overall economy, the Corporation could be adversely
affected.
Should the stabilization of the U.S. economy lead to a
general economic recovery, the improvement of certain economic
indicators, such as unemployment and real estate asset values
and rents, may nevertheless continue to lag behind the overall
economy. These economic indicators typically affect certain
industries, such as real estate and financial services, more
significantly. Furthermore, financial services companies with a
substantial lending business are dependent upon the ability of
their borrowers to make debt service payments on loans. Should
unemployment or real estate asset values fail to recover for an
extended period of time, the Corporations results of
operations could be negatively affected.
Strong
competition may reduce the Corporations ability to
generate loans and deposits in its market.
The Corporation competes in a consolidating industry.
Increasingly, the Corporations competition is large
regional companies which have the capital resources to
substantially impact such things as loan and deposit pricing,
delivery channels and products. This may allow those companies
to offer what may be perceived in the market as better products
and better convenience relative to smaller competitors like the
Corporation, which could impact the Corporations ability
to grow its assets and earnings.
The
Corporations earnings and reputation may be adversely
affected if credit risk is not properly managed. Originating and
underwriting loans is critical to the success of the
Corporation.
This activity exposes the Corporation to credit risk, which is
the risk of losing principal and interest income because the
borrower cannot repay the loan in full. The Corporation depends
on collateral in underwriting loans, and the value of this
collateral is impacted by interest rates and economic conditions.
The Corporations earnings may be adversely affected if
management does not understand and properly manage loan
concentrations. The Corporations commercial loan portfolio
is concentrated in commercial real estate. This includes
significant commercial and residential development customers.
This means that the Corporations credit risk profile is
dependent upon, not only the general economic conditions in the
market, but also the health of the local real estate market.
Certain of these loans are not fully amortized over the loan
period, but have a balloon payment due at maturity. The
borrowers ability to make a balloon payment typically will
depend on being able to refinance the loan or to sell the
underlying collateral. This factor, combined with others,
including the Corporations geographic concentration, can
lead to unexpected credit deterioration and higher provisions
for loan losses.
The
Corporation is subject to liquidity risk.
Market conditions or other events could negatively affect the
level or cost of funding, affecting the Corporations
ongoing ability to accommodate liability maturities and deposit
withdrawals, meet contractual obligations, and fund asset growth
and new business transactions at a reasonable cost, in a timely
manner and without adverse consequences. Although management has
implemented strategies to maintain sufficient sources of funding
to accommodate planned as well as unanticipated changes in
assets and liabilities under both normal and adverse conditions,
any substantial, unexpected
and/or
prolonged change in the level or cost of liquidity could
adversely affect the Corporations business, financial
condition and results of operations.
8
Legislative
or regulatory changes or actions, or significant litigation,
could adversely impact the Corporation or the businesses in
which it is engaged.
The financial services industry is extensively regulated. The
Corporation is subject to extensive state and federal
regulation, supervision and legislation that govern almost all
aspects of its operations. Laws and regulations may change from
time to time and are primarily intended for the protection of
consumers, depositors and the deposit insurance funds, and not
to benefit the Corporations shareholders. The impact of
any changes to laws and regulations or other actions by
regulatory agencies may negatively impact the Corporation or its
ability to increase the value of its business. Regulatory
authorities have extensive discretion in connection with their
supervisory and enforcement activities, including the imposition
of restrictions on the operation of an institution, the
classification of assets by the institution and the adequacy of
an institutions allowance for loan losses. Additionally,
actions by regulatory agencies or significant litigation against
the Corporation could require it to devote significant time and
resources to defending its business and may lead to penalties
that materially affect the Corporation and its shareholders.
The
Corporations results of operations, financial condition or
liquidity may be adversely impacted by issues arising in
foreclosure practices, including litigation and delays in the
foreclosure process related to certain industry
deficiencies.
Recent announcements of deficiencies in foreclosure
documentation by several large seller/servicer financial
institutions have raised various concerns relating to mortgage
foreclosure practices in the United States. A group of state
attorneys general and state bank and mortgage regulators in all
50 states and the District of Columbia is currently
reviewing foreclosure practices and a number of mortgage
sellers/servicers have temporarily suspended foreclosure
proceedings in some or all states in which they do business in
order to evaluate their foreclosure practices and underlying
documentation.
The Corporation could face delays and challenges in the
foreclosure process arising from claims relating to industry
practices generally, which could adversely affect recoveries and
the Corporations financial results, whether through
increased expenses of litigation and property maintenance,
deteriorating values of underlying mortgaged properties or
unsuccessful litigation results generally.
The
recently enacted Dodd-Frank Act may adversely affect the
Corporations business, financial conditions and results of
operations.
On July 21, 2010, President Obama signed into law the
Dodd-Frank Act. The Dodd-Frank Act imposes new restrictions and
an expanded framework of regulatory oversight for financial
institutions, including depository institutions. Because the
Dodd-Frank Act requires various federal agencies to adopt a
broad range of regulations with significant discretion, many of
the details of the new law and the effects they will have on the
Corporation will not be known for months or even years.
Many of the provisions of the Dodd-Frank Act apply directly only
to institutions much larger than the Corporation, and some will
affect only institutions that engage in activities in which the
Corporation does not engage. Among the changes to occur pursuant
to the Dodd-Frank Act that can be expected to have an effect on
the Corporation are the following:
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The OTS will be merged into the OCC and the authority of the
other remaining bank regulatory agencies restructured;
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A new independent consumer financial protection bureau will be
established within the Federal Reserve Board, empowered to
exercise broad regulatory, supervisory and enforcement authority
with respect to both new and existing consumer financial
protection laws;
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New capital regulations for thrift holding companies will be
adopted and any new trust preferred securities will no longer
count toward Tier 1 capital;
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The current prohibition on the payment of interest on demand
deposits will be repealed, effective July 21, 2011;
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9
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The standard maximum amount of deposit insurance per customer is
permanently increased to $250,000 and non-interest bearing
transaction accounts will have unlimited deposit insurance
through January 1, 2013;
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The deposit insurance assessment base calculation will be
expanded to equal a depository institutions total assets
minus the sum of its average tangible equity during the
assessment period;
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New corporate governance requirements applicable generally to
all public companies in all industries will require new
compensation practices, including, but not limited to, requiring
companies to claw back incentive compensation under
certain circumstances, to provide shareholders the opportunity
to cast a non-binding vote on executive compensation, to
consider the independence of compensation advisors and new
executive compensation disclosure requirements;
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establish new rules and restrictions regarding the origination
of mortgages; and
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permit the Federal Reserve to prescribe regulations regarding
interchange transaction fees, and limit them to an amount
reasonable and proportional to the cost incurred by the issuer
for the transaction in question.
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Many provisions of the Dodd-Frank Act will not be implemented
immediately and will require interpretation and rule making by
federal regulators. The Corporation is closely monitoring all
relevant sections of the
Dodd-Frank
Act to ensure continued compliance with laws and regulations.
While the ultimate effect of the Dodd-Frank Act on the
Corporation cannot be determined yet, the law is likely to
result in increased compliance costs and fees paid to
regulators, along with possible restrictions on the
Corporations operations.
The
Corporation is subject to additional uncertainties, and
potential additional regulatory or compliance burdens, as a
result of the Corporations participation in the
CPP.
The Corporation accepted an investment by the U.S. Treasury
under the CPP. The Stock Purchase Agreement the Corporation
entered into with the U.S. Treasury provides that the
U.S. Treasury may unilaterally amend the agreement to the
extent required to comply with any changes after the execution
in applicable federal statutes. As a result of this provision,
the U.S. Treasury and the Congress may impose additional
requirements or restrictions on the Corporation and the Bank in
respect of reporting, compliance, corporate governance,
executive or employee compensation, dividend payments, stock
repurchases, lending or other business practices, capital
requirements or other matters. The Corporation may be required
to expend additional resources in order to comply with these
requirements. Such additional requirements could impair the
Corporations ability to compete with institutions that are
not subject to the restrictions because they did not accept an
investment from the U.S. Treasury. To the extent that
additional restrictions or limitations on employee compensation
are imposed, such as those contained in ARRA and the regulations
issued thereunder in June 2009, the Corporation may be less
competitive in attracting and retaining successful incentive
compensation based lenders and customer relations personnel, or
senior executive officers.
Additionally, the ability of Congress to utilize the amendment
provisions to effect political or public relations goals could
result in the Corporation being subjected to additional burdens
as a result of public perceptions of issues relating to the
largest banks, and which are not applicable to community
oriented institutions such as the Corporation. The Corporation
may be disadvantaged as a result of these uncertainties.
The
Corporation may be adversely impacted by weakness in the local
economies it serves.
The Corporations business activities are geographically
concentrated in Northeast Ohio and, in particular, Lorain
County, Ohio, where commercial activity has deteriorated at a
greater rate than in other parts of Ohio and in the national
economy. This has led to and may lead to further unexpected
deterioration in loan quality, slower asset and deposit growth,
which may adversely affect the Corporations operating
results.
Future
FDIC premiums could be substantially higher and would have an
unfavorable effect on earnings.
The FDIC projects higher premiums to be necessary because
financial institution failures resulting from the depressed
market conditions have depleted and may continue to deplete the
deposit insurance fund and reduce its ratio of reserves to
insured deposits. The FDIC, in an effort to avoid larger
increases in the premiums, has already
10
taken action to collect FDIC premiums for the next three years
in advance. If any additional assessments or large premium
increases occur in the future, such actions would negatively
affect the Corporations financial condition and results of
operations.
The
soundness of other financial institutions could adversely affect
the Corporation.
The Corporations ability to engage in routine funding
transactions could be adversely affected by the actions and
commercial soundness of other financial institutions. Financial
services institutions are interrelated as a result of trading,
clearing, counterparty or other relationships. The Corporation
has exposure to many different industries and counterparties,
and it routinely executes transactions with counterparties in
the financial industry. As a result, defaults by, or even rumors
or questions about, one or more financial services institutions,
or the financial services industry generally, have led to
market-wide liquidity problems and could lead to losses or
defaults by the Corporation or by other institutions. Many of
these transactions expose the Corporation to credit risk in the
event of default of the Corporations counterparty or
client. In addition, the Corporations credit risk may be
exacerbated when the collateral held by it cannot be realized
upon or is liquidated at prices not sufficient to recover the
full amount of the loan or derivative exposure due the
Corporation. There is no assurance that any such losses would
not materially and adversely affect the Corporations
results of operations.
If the
Corporations technology and systems are damaged, its
ability to service customers, comply with regulation and grow
assets and liabilities may be adversely impacted.
The Corporation is dependent on the proper functioning of its
hardware, software and communications. Security breaches,
terrorist events, and natural disasters can all have a material
impact on the Corporations ability to maintain accurate
records which is critical to the Corporations operations.
The
Corporation is subject to risk from the failure of third party
vendors.
The Corporation relies on other companies to provide components
of the Corporations business infrastructure. Third party
vendors provide certain components of the Corporations
business infrastructure, such the Banks processing and
electronic banking systems, item processing and Internet
connections. While the Corporation has selected these third
party vendors carefully, it does not control their actions. Any
problems caused by these third parities not providing the
Corporation their services for any reason or their performing
their services poorly, could adversely affect the
Corporations ability to deliver products and services to
the Corporations operations directly through interference
with communications, including the interruption or loss of the
Corporations websites, which could adversely affect the
Corporations business, financial condition and results of
operations.
Changes in accounting standards could materially impact
the Corporations financial statements.
The Financial Accounting Standards Board (FASB) may change the
financial accounting and reporting standards that govern the
preparation of the Corporations financial statements.
These changes can be difficult to predict and can materially
impact how the Corporation records and reports it financial
condition and results of operations.
The
Corporation may not be able to attract and retain skilled
people.
The Corporations success depends, in large part, on its
ability to attract and retain key people. Competition for the
best people in most activities in which the Corporation is
engaged can be intense, and the Corporation may not be able to
retain or hire the people it wants
and/or
needs. In order to attract and retain qualified employees, the
Corporation must compensate its employees at market levels. If
the Corporation is unable to continue to attract and retain
qualified employees, or do so at rates necessary to maintain its
competitive position, the Corporations performance,
including its competitive position, could suffer, and, in turn,
adversely affect the Corporations business, financial
condition and results of operations.
11
TARP
and ARRA impose certain executive compensation and corporate
governance requirements that may adversely affect the
Corporation, including the Corporations ability to recruit
and retain qualified employees.
The purchase agreement the Corporation entered into in
connection with the Corporations participation in the CPP
required the Corporation to adopt the U.S. Treasurys
standards for executive compensation and corporate governance
while the U.S. Treasury holds the equity issued by the
Corporation pursuant to the CPP. These standards generally apply
to the Corporations Chief Executive Officer, Chief
Financial Officer and the next three most highly compensated
senior executive officers. The standards include:
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ensuring that incentive compensation for senior executives does
not encourage unnecessary and excessive risks that threaten the
value of financial institutions;
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required clawbacks of any bonus or incentive compensation paid
to a senior executive based on statements of earnings, gains or
other criteria that are later proven to be materially inaccurate;
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prohibitions on making golden parachute payments to senior
executives; and
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an agreement not to deduct for tax purposes executive
compensation in excess of $500,000 for each senior executive.
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ARRA imposed further limitations on compensation while the
U.S. Treasury holds equity issued by the Corporation
pursuant to TARP:
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a prohibition on making any golden parachute payment to a senior
executive officer or any of the Corporations next five
most highly compensated employees;
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a prohibition on any compensation plan that would encourage
manipulation of the Corporations reported earnings to
enhance the compensation of any of the Corporations
employees; and
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a prohibition on the payment or accrual of any bonus, retention
award or incentive compensation to the Corporations five
highest paid executives except for long-term restricted stock
with a value not greater than one-third of the total amount of
annual compensation of the employee receiving the stock.
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The U.S. Treasury released an interim final rule on TARP
standards for compensation and corporate governance on
June 10, 2009, which implemented and further expanded the
limitations and restrictions imposed on executive compensation
and corporate governance by the CPP and ARRA. The rules clarify
prohibitions on bonus payments, provide guidance on the use of
restricted stock units, expand restrictions on golden parachute
payments, mandate enforcement of clawback provisions unless
unreasonable to do so, outline the steps compensation committees
must take when evaluating risks posed by compensations
arrangements, and require the adoption and disclosure of a
luxury expenditure policy, among other things. New requirements
under the rules include enhanced disclosure of perquisites and
the use of compensation consultants, and prohibitions on tax
gross-up
payments.
These provisions and any future rules issued by the
U.S. Treasury could adversely affect the Corporations
ability to attract and retain management capable and motivated
sufficiently to manage and operate the Corporations
business through difficult economic and market conditions. If
the Corporation is unable to attract and retain qualified
employees to manage and operate the Corporations business,
it could negatively affect the Corporations business,
financial conditions and results of operations.
The
Corporations issuance of securities to the U.S. Treasury
may limit the Corporations ability to return capital to
its shareholders and is dilutive to the Corporations
common shares. If the Corporation is unable to redeem such
preferred shares, the dividend rate increases substantially
after five years.
In connection with the Corporations sale of
$25.2 million of its Series B Preferred Stock to the
U.S. Treasury in conjunction with the CPP, the Corporation
also issued a warrant to purchase 561,343 of its common shares
at an exercise price of $6.74. The number of shares was
determined based upon the requirements of the CPP, and was
calculated based on the average market price of the
Corporations common shares for the 20 trading days
preceding approval of the Corporations issuance (which was
also the basis for the exercise price of $6.74). The terms of
the
12
transaction with the U.S. Treasury include limitations on
the Corporations ability to pay dividends and repurchase
its common shares. For three years after the issuance or until
the U.S. Treasury no longer holds any Series B
Preferred Stock, the Corporation will not be able to increase
its dividends above the level of its quarterly dividend declared
during the third quarter of 2008 ($0.09 per common share on a
quarterly basis) nor repurchase any of its common shares or
preferred stock without, among other things, U.S. Treasury
approval or the availability of certain limited exceptions,
e.g., purchases in connection with the Corporations
benefit plans. Furthermore, as long as the Series B
Preferred Stock issued to the U.S. Treasury is outstanding,
dividend payments and repurchases or redemptions relating to
certain equity securities, including the Corporations
common shares, are prohibited until all accrued and unpaid
dividends are paid on such preferred stock, subject to certain
limited exceptions. These restrictions combined with the
dilutive impact of the warrant may have an adverse effect on the
market price of the Corporations Common Shares, and, as a
result, they could adversely affect the Corporations
business, financial condition and results of operations.
Unless the Corporation is able to redeem the Series B
Preferred Stock during the first five years, the dividend
payments on this capital will increase substantially at that
point, from 5% ($1.26 million annually) to 9%
($2.27 million annually). Depending on market conditions at
the time, this increase in dividends could significantly impact
the Corporations liquidity, and as a result, adversely
affect the Corporations business, financial condition and
results of operations.
The
Corporations ability to pay dividends is subject to
limitations.
Holders of the Corporations common shares are only
entitled to receive such dividends as the Board of Directors may
declare out of funds legally available for such payments.
Furthermore, the Corporations common shareholders are
subject to the prior dividend rights of holders of its preferred
stock.
In September 2009, the Corporation reduced its quarterly
dividend on its common shares to $0.01 per share and does not
expect to increase the quarterly dividend above $0.01 for the
foreseeable future. The Corporation could determine to eliminate
its common shares dividend altogether. Furthermore, as long as
the Series B Preferred Stock is outstanding, dividend
payments and repurchases or redemptions relating to certain
equity securities, including the Corporations common
shares, are prohibited until all accrued and unpaid dividends
are paid on such preferred stock, subject to certain limited
exceptions. This could adversely affect the market price of the
Corporations common shares. Also, the Corporation is a
bank holding company and its ability to declare and pay
dividends is dependent on certain federal regulatory
considerations, including the guidelines of the Federal Reserve
Board regarding capital adequacy and dividends.
In addition, the terms of the Corporations outstanding
trust preferred securities prohibit it from declaring or paying
any dividends or distributions on its capital stock, including
its common shares, if an event of default has occurred and is
continuing under the applicable indenture or if the Corporation
has given notice of its election to defer interest payments but
the related deferral period has not yet commenced or a deferral
period is continuing.
Additional
capital may not be available to the Corporation if and when it
is needed.
The Corporation and the Bank are subject to capital-based
regulatory requirements. The ability of the Corporation and the
Bank to meet capital requirements is dependent upon a number of
factors, including results of operations, level of nonperforming
assets, interest rate risk, future economic conditions, future
changes in regulatory and accounting policies and capital
requirements, and the ability to raise additional capital if and
when it is needed. Certain circumstances, such as a reduction of
capital due to losses from nonperforming assets or otherwise,
could cause the Corporation or the Bank to become unable to meet
applicable regulatory capital requirements, which may materially
and adversely affect the Corporations financial condition,
liquidity and results of operations. In such an event,
additional capital may be required to meet requirements. The
Corporations ability to raise additional capital, if
needed, will depend on conditions in the capital markets at that
time which are outside its control, and on the
Corporations financial performance. Accordingly,
additional capital, if needed, may not be available on terms
acceptable to the Corporation. Furthermore, if any such
additional capital is raised through the offering of equity
securities, it may dilute the holdings of the Corporations
existing shareholders or reduce the market price of the
Corporations common shares, or both.
13
If the
Corporation is required to write down goodwill recorded in
connection with its acquisitions, the Corporations
profitability would be negatively impacted.
Applicable accounting standards require the Corporation to use
the purchase method of accounting for all business combinations.
Under purchase accounting, if the purchase price of an acquired
company exceeds the fair value of the acquired companys
net assets, the excess is carried on the acquirers balance
sheet as goodwill. At December 31, 2010, the Corporation
had approximately $21.6 million of goodwill on its balance
sheet. Goodwill must be evaluated for impairment at least
annually. Write downs of the amount of any impairment, if
necessary, are to be charged to the results of operations in the
period in which the impairment occurs. There can be no assurance
that future evaluations of goodwill will not result in findings
of impairment and related write downs, which would have an
adverse effect on the Corporations financial condition and
results of operations.
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Item 1B.
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Unresolved
Staff Comments
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Not applicable.
The Corporations offices are located at the
Corporations Main Banking Center, 457 Broadway, Lorain,
Ohio, 44052. The Corporation owns the land and buildings
occupied by 10 of its banking centers, corporate offices,
operations, maintenance, purchasing and training center. The
Corporation leases the other 13 banking centers and loan centers
from various parties on varying lease terms. There is no
outstanding mortgage debt on any of the properties which the
Corporation owns. Listed below are the banking centers, loan
production offices and service facilities of the Corporation and
their addresses, all of which are located in Lorain, eastern
Erie, western Cuyahoga and Summit counties of Ohio:
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Main Banking Center & Corporate Offices
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457 Broadway, Lorain
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Vermilion
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4455 East Liberty Avenue, Vermilion
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Amherst
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1175 Cleveland Avenue, Amherst
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Lake Avenue
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42935 North Ridge Road, Elyria Township
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Avon
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2100 Center Road, Avon
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Avon Lake
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32960 Walker Road, Avon Lake
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Pearl Avenue
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2850 Pearl Avenue, Lorain
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Oberlin
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24 East College Street, Oberlin
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Ely Square
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124 Middle Avenue, Elyria
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Cleveland Street
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801 Cleveland Street, Elyria
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Oberlin Avenue
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3660 Oberlin Avenue, Lorain
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Olmsted Township
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27095 Bagley Road, Olmsted Township
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Kendal at Oberlin
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600 Kendal Drive, Oberlin
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The Renaissance
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26376 John Road, Olmsted Township
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Chestnut Commons
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105 Chestnut Commons Drive, Elyria
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North Ridgeville
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34085 Center Ridge Road, North Ridgeville
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Village of LaGrange
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546 North Center Street, LaGrange
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Westlake Village
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28550 Westlake Village Drive, Westlake
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Wesleyan Village
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807 West Avenue, Elyria
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Morgan Bank
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178 West Streetsboro Street, Hudson
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Cuyahoga Loan Center
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2 Summit Park Drive, Independence
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Operations
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2130 West Park Drive, Lorain
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Maintenance
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2140 West Park Drive, Lorain
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Purchasing
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2150 West Park Drive, Lorain
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Training Center
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521 Broadway, Lorain
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Main Office Drive Up
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200 West 6th Street, Lorain
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14
The Corporation also owns and leases equipment for use in its
business. The Corporate headquarters at 457 Broadway is
currently 75% occupied. The remaining space is expected to be
utilized to accommodate future growth. The Corporation considers
all its facilities to be in good condition, well-maintained and
more than adequate to conduct the business of banking.
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Item 3.
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Legal
Proceedings
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On April 18, 2008, the Corporation and Richard M. Osborne
and certain other parties entered into a settlement agreement
(the Settlement Agreement) to settle certain
contested matters relating to the Corporations 2008 annual
meeting of shareholders. Under the Settlement Agreement, among
other things, Mr. Osborne agreed not to seek representation
on the Corporations Board of Directors or to solicit
proxies with respect to the voting of the Corporations
common shares for a period of at least 18 months after
April 18, 2008. In proxy materials filed with the SEC on
March 20, 2009, Mr. Osborne indicated his intent to
solicit proxies in favor of the election of two nominees for
election as directors at the Corporations 2009 annual
meeting of shareholders. On March 24, 2009, the Corporation
filed a complaint against Mr. Osborne for a declaratory
judgment and preliminary and permanent injunctive relief in the
United States District Court for the Northern District of Ohio,
Eastern Division, to restrain Mr. Osborne from
(a) engaging in any solicitation of proxies or consents,
(b) seeking to advise, encourage or influence any person or
entity with respect to the voting of any voting securities of
the Corporation, (c) initiating, proposing or otherwise
soliciting shareholders of the Corporation for the approval of
shareholder proposals, (d) entering into any discussions,
negotiations, agreements, arrangements or understanding with any
third party with respect to any of the foregoing and
(e) disseminating his proposed proxy materials to
shareholders of the Corporation. The Corporation also sought an
order from the Court temporarily restraining Mr. Osborne
from engaging in any of the foregoing activities. On
March 28, 2009, the Court issued an order granting the
Corporations motion for a temporary restraining order. On
April 3, 2009, the Court issued an order granting the
Corporations motion for a preliminary injunction
restraining Mr. Osborne from engaging in any of the
foregoing activities. On February 15, 2010,
Mr. Osborne filed a motion to dissolve the preliminary
injunction, which the Corporation opposed. On March 23,
2010, the Court denied Mr. Osbornes motion to
dissolve the preliminary injunction. Prior to the Courts
decision, on March 19, 2010, Mr. Osborne filed a
motion for summary judgment and the Corporation filed a motion
for partial summary judgment. On April 14, 2010,
Mr. Osborne filed an interlocutory appeal of the denial of
his motion to dissolve the preliminary injunction with the Sixth
Circuit Court of Appeals. Proceedings in the District Court have
been stayed pending resolution of Mr. Osbornes appeal
by the Sixth Circuit Court of Appeals. The case has been fully
briefed and the parties are awaiting a decision from the Sixth
Circuit Court of Appeals regarding the continuing preliminary
injunction. Once the Sixth Circuit makes its decision, the case
will be remanded to the District Court for dispositive motions
and, if necessary, a trial on the merits.
15
Supplemental
Item Executive Officers of the Registrant
Pursuant to
Form 10-K,
General Instruction G(3), the following information on
Executive Officers is included as an additional item in this
Part I:
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Positions and
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Offices
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Held with
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Executive
|
Name
|
|
Age
|
|
Principal Occupation For Past Five Years
|
|
LNB Bancorp, Inc.
|
|
Officer Since
|
|
Daniel E. Klimas
|
|
|
52
|
|
|
President and Chief Executive Officer, LNB
|
|
President and Chief
|
|
|
2005
|
|
|
|
|
|
|
|
Bancorp, Inc., February 2005 to present. President, Northern
Ohio Region, Huntington Bank from 2001 to February 2005.
|
|
Executive Officer
|
|
|
|
|
Gary J. Elek
|
|
|
59
|
|
|
Chief Financial Officer, LNB Bancorp, Inc., from April 2009 to
present. Vice President and Controller for North America of A.
Schulman, Inc. in Akron, Ohio from 2006 to 2008. Corporate
Controller of A. Schulman, Inc. from 2004 to 2006. Executive
Vice President, Corporate Development from 1999 to 2004, as
Senior Vice President, Corporate Development from 1997 to 1999
and as Senior Vice President and Treasurer from 1988 to 1997 of
FirstMerit Corporation.
|
|
Chief Financial Officer and Principal Accounting Officer
|
|
|
2009
|
|
David S. Harnett
|
|
|
59
|
|
|
Senior Vice President and Chief Credit Officer, LNB Bancorp,
Inc., August 2007 to present. Senior Lender and Chief Credit
Officer, January 2006 to August 2007, and Senior Vice President
and Chief Credit Officer, January 2002 to January 2006, of the
Cleveland, Ohio affiliate of Fifth Third Bank.
|
|
Senior Vice President and Chief Credit Officer
|
|
|
2007
|
|
Kevin Nelson
|
|
|
47
|
|
|
Senior Vice President, LNB Bancorp, Inc., from April 2009 to
present. Director of Indirect Lending, The Lorain National Bank,
from May 2007 to present. Senior Vice President, Bank Sales and
Loan Originations, Morgan Bank, from September 2006 to May 2007.
President, Nelson Marketing Group, LLC, from November 2005 to
September 2006.
|
|
Senior Vice President, Indirect Lending
|
|
|
2009
|
|
Frank A. Soltis
|
|
|
58
|
|
|
Senior Vice President, LNB Bancorp, Inc., July 2005 to present.
Senior Vice President, Lakeland Financial Corporation, 1997 to
2005.
|
|
Senior Vice President, Information Technology
|
|
|
2005
|
|
Mary E. Miles
|
|
|
52
|
|
|
Senior Vice President, LNB Bancorp, Inc., April 2005 to present.
President, Miles Consulting, Inc. from 2001 to 2005.
|
|
Senior Vice President, Human Resources
|
|
|
2005
|
|
John Simacek
|
|
|
58
|
|
|
Senior Vice President, LNB Bancorp, Inc., from April 2009 to
present. Senior Retail Executive, The Lorain National Bank,
October 2005 to present. Vice President and Regional Manager of
the Cleveland, Ohio affiliate of Fifth Third Bank, 1999 to
October 2005.
|
|
Senior Vice President, Senior Retail Executive
|
|
|
2009
|
|
Robert F. Heinrich
|
|
|
57
|
|
|
Senior Vice President, LNB Bancorp, Inc., from April 2009 to
present. Corporate Secretary, LNB Bancorp, Inc., from February
2008 to Present. Director of Risk Management, LNB Bancorp, Inc.,
from 2005 to present. Controller, LNB Bancorp, Inc., from
January 2004 to March 2005. Auditor, LNB Bancorp, Inc., from May
2003 to January 2004.
|
|
Senior Vice President, Corporate Secretary and Director of Risk
Management
|
|
|
2009
|
|
16
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
Market Information; Equity Holders;
Dividends. LNB Bancorp, Inc. common shares, par
value $1.00 per share, are traded on The NASDAQ Stock
Market®
under the ticker symbol LNBB. The prices below
represent the high and low sales prices reported on The NASDAQ
Stock Market for each specified period. All prices reflect
inter-dealer prices without markup, markdown or commission and
may not necessarily represent actual transactions.
LNB Bancorp, Inc. has paid a cash dividend to shareholders each
year since becoming a holding company in 1984. At present, the
Corporation expects to pay cash dividends to shareholders in an
amount equal to $0.01 per share if approved by the Board of
Directors. The Corporation could decide to eliminate its common
share dividend altogether. Furthermore, the terms of the
Corporations sale of $25.2 million of its
Series B Preferred Stock to the U.S. Treasury in
conjunction with the CPP include limitations on the
Corporations ability to pay dividends. For three years
after the issuance or until the U.S. Treasury no longer
holds any Series B Preferred Stock, the Corporation will
not be able to increase its dividends above the level of its
quarterly dividend declared during the third quarter of 2008
($0.09 per common share on a quarterly basis) without, among
other things, U.S. Treasury approval. In addition, as long
as the Series B Preferred Stock issued to the
U.S. Treasury is outstanding, dividend payments and
repurchases or redemptions relating to certain equity
securities, including the Corporations common shares, are
prohibited until all accrued and unpaid dividends are paid on
such preferred stock, subject to certain limited exceptions.
The common shares of LNB Bancorp, Inc. are usually listed in
publications as LNB Bancorp. LNB Bancorp Inc.s
common stock CUSIP is 502100100.
As of March 1, 2011, LNB Bancorp, Inc. had
1,861 shareholders of record and the closing price per
share of the Corporations common shares was $5.52.
Prospective shareholders may contact the Corporations
Investor Relations Department at
(440) 244-7317
for more information.
Common
Stock Trading Ranges and Cash Dividends Declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
Declared
|
|
|
|
High
|
|
|
Low
|
|
|
Per Share
|
|
|
First Quarter
|
|
$
|
4.84
|
|
|
$
|
4.02
|
|
|
$
|
0.01
|
|
Second Quarter
|
|
|
5.85
|
|
|
|
4.30
|
|
|
|
0.01
|
|
Third Quarter
|
|
|
5.33
|
|
|
|
4.14
|
|
|
|
0.01
|
|
Fourth Quarter
|
|
|
5.05
|
|
|
|
4.55
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
Declared
|
|
|
|
High
|
|
|
Low
|
|
|
Per Share
|
|
|
First Quarter
|
|
$
|
7.00
|
|
|
$
|
4.01
|
|
|
$
|
0.09
|
|
Second Quarter
|
|
|
6.49
|
|
|
|
4.50
|
|
|
|
0.09
|
|
Third Quarter
|
|
|
7.70
|
|
|
|
5.30
|
|
|
|
0.01
|
|
Fourth Quarter
|
|
|
6.76
|
|
|
|
4.00
|
|
|
|
0.01
|
|
The following graph shows a five-year comparison of cumulative
total returns for LNB Bancorp, the Standard &
Poors 500 Stock
Index©
and the Nasdaq Bank Index.
17
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among
LNB Bancorp, Inc., The S&P 500 Index
And The NASDAQ Bank Index
|
|
|
* |
|
$100 invested on 12/31/05 in stock or index. Including
reinvestment of dividends. Fiscal year ending December 31. |
|
|
|
Copyright©
2011 S&P, a division of The McGrew-Hill Companies Inc. All
rights reserved. |
The graph shown above is based on the following data points:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/05
|
|
|
12/06
|
|
|
12/07
|
|
|
12/08
|
|
|
12/09
|
|
|
12/10
|
LNB Bancorp, Inc.
|
|
|
$
|
100.00
|
|
|
|
$
|
93.08
|
|
|
|
$
|
89.16
|
|
|
|
$
|
33.88
|
|
|
|
$
|
29.01
|
|
|
|
$
|
33.74
|
|
S&P 500 Index
|
|
|
|
100.00
|
|
|
|
|
115.80
|
|
|
|
|
122.16
|
|
|
|
|
76.96
|
|
|
|
|
97.33
|
|
|
|
|
111.99
|
|
NASDAQ Bank Index
|
|
|
|
100.00
|
|
|
|
|
114.45
|
|
|
|
|
88.71
|
|
|
|
|
71.34
|
|
|
|
|
62.32
|
|
|
|
|
75.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
Purchases of Equity Securities
The following table summarizes share repurchase activity for the
quarter ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
Shares (or Units)
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
Shares (or Units)
|
|
|
|
Total Number of
|
|
|
|
|
|
Part of Publicly
|
|
|
that may yet be
|
|
|
|
Shares (or Units)
|
|
|
Average Price Paid
|
|
|
Announced Plans
|
|
|
Purchased Under
|
|
Period
|
|
Purchased
|
|
|
Per Share (or Unit)
|
|
|
or Programs
|
|
|
the Plans or Programs
|
|
|
October 1, 2010 October 31, 2010
|
|
|
|
|
|
|
n/a
|
|
|
|
|
|
|
|
129,500
|
|
November 1, 2010 November 30, 2010
|
|
|
|
|
|
|
n/a
|
|
|
|
|
|
|
|
129,500
|
|
December 1, 2010 December 31, 2010
|
|
|
|
|
|
|
n/a
|
|
|
|
|
|
|
|
129,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
n/a
|
|
|
|
|
|
|
|
129,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On July 28, 2005, the Corporation announced a share
repurchase program of up to 5 percent, or about 332,000, of
its common shares outstanding. Repurchased shares can be used
for a number of corporate purposes, including the
Corporations stock option and employee benefit plans. The
share repurchase program provides that share repurchases are to
be made primarily on the open market from
time-to-time
until the 5 percent maximum is repurchased or the earlier
termination of the repurchase program by the Board of Directors,
at the discretion of
18
management based upon market, business, legal and other factors.
However, the terms of the Corporations sale of
$25.2 million of its Series B Preferred Stock to the
U.S. Treasury in conjunction with the CPP include
limitations on the Corporations ability to repurchase its
common shares. For three years after the issuance or until the
U.S. Treasury no longer holds any Series B Preferred
Stock, the Corporation will not be able to repurchase any of its
common shares or preferred stock without, among other things,
U.S. Treasury approval or the availability of certain
limited exceptions, e.g., purchases in connection with the
Corporations benefit plans. Furthermore, as long as the
Series B Preferred Stock issued to the U.S. Treasury
is outstanding, repurchases or redemptions relating to certain
equity securities, including the Corporations common
shares, are prohibited until all accrued and unpaid dividends
are paid on such preferred stock, subject to certain limited
exceptions. As of December 31, 2010, the Corporation had
repurchased an aggregate of 202,500 shares under this
program.
19
|
|
Item 6.
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands except share and
|
|
|
|
per share amounts and ratios)
|
|
|
Total interest income
|
|
$
|
51,372
|
|
|
$
|
57,647
|
|
|
$
|
58,328
|
|
|
$
|
58,762
|
|
|
$
|
49,242
|
|
Total interest expense
|
|
|
12,764
|
|
|
|
19,925
|
|
|
|
26,189
|
|
|
|
29,092
|
|
|
|
20,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
38,608
|
|
|
|
37,722
|
|
|
|
32,139
|
|
|
|
29,670
|
|
|
|
28,607
|
|
Provision for Loan Losses
|
|
|
10,225
|
|
|
|
19,017
|
|
|
|
6,809
|
|
|
|
2,255
|
|
|
|
2,280
|
|
Other income
|
|
|
10,290
|
|
|
|
10,182
|
|
|
|
11,213
|
|
|
|
10,362
|
|
|
|
9,514
|
|
Net gain on sale of assets
|
|
|
1,277
|
|
|
|
1,774
|
|
|
|
1,246
|
|
|
|
1,137
|
|
|
|
237
|
|
Gain on extinguishment of debt
|
|
|
2,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
35,569
|
|
|
|
35,330
|
|
|
|
34,281
|
|
|
|
31,751
|
|
|
|
28,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
6,591
|
|
|
|
(4,669
|
)
|
|
|
3,508
|
|
|
|
7,163
|
|
|
|
7,093
|
|
Income tax (benefit)
|
|
|
1,226
|
|
|
|
(2,668
|
)
|
|
|
112
|
|
|
|
1,651
|
|
|
|
1,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
5,365
|
|
|
|
(2,001
|
)
|
|
|
3,396
|
|
|
|
5,512
|
|
|
|
5,424
|
|
Preferred stock dividend and accretion
|
|
|
1,276
|
|
|
|
1,256
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
4,089
|
|
|
$
|
(3,257
|
)
|
|
$
|
3,305
|
|
|
$
|
5,512
|
|
|
$
|
5,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend declared
|
|
$
|
304
|
|
|
$
|
1,459
|
|
|
$
|
3,940
|
|
|
$
|
5,097
|
|
|
$
|
4,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss)
|
|
$
|
0.55
|
|
|
$
|
(0.45
|
)
|
|
$
|
0.45
|
|
|
$
|
0.79
|
|
|
$
|
0.84
|
|
Diluted earnings (loss)
|
|
|
0.55
|
|
|
|
(0.45
|
)
|
|
|
0.45
|
|
|
|
0.79
|
|
|
|
0.84
|
|
Cash dividend declared
|
|
|
0.04
|
|
|
|
0.20
|
|
|
|
0.54
|
|
|
|
0.72
|
|
|
|
0.72
|
|
Book value per share
|
|
$
|
10.75
|
|
|
$
|
10.84
|
|
|
$
|
11.22
|
|
|
$
|
11.33
|
|
|
$
|
10.66
|
|
Financial Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
0.46
|
%
|
|
|
(0.17
|
)%
|
|
|
0.31
|
%
|
|
|
0.58
|
%
|
|
|
0.66
|
%
|
Return on average common equity
|
|
|
4.97
|
|
|
|
(1.86
|
)
|
|
|
4.09
|
|
|
|
7.06
|
|
|
|
7.89
|
|
Net interest margin (FTE)(2)
|
|
|
3.60
|
|
|
|
3.39
|
|
|
|
3.23
|
|
|
|
3.39
|
|
|
|
3.78
|
|
Efficiency ratio
|
|
|
70.18
|
|
|
|
70.37
|
|
|
|
76.12
|
|
|
|
76.41
|
|
|
|
76.03
|
|
Period end loans to period end deposits
|
|
|
83.04
|
|
|
|
82.68
|
|
|
|
87.23
|
|
|
|
87.94
|
|
|
|
87.60
|
|
Dividend payout
|
|
|
7.28
|
|
|
|
n/a
|
|
|
|
120.00
|
|
|
|
91.14
|
|
|
|
85.78
|
|
Average shareholders equity to average assets
|
|
|
9.32
|
|
|
|
9.00
|
|
|
|
7.67
|
|
|
|
8.15
|
|
|
|
8.39
|
|
Net charge-offs to average loans
|
|
|
1.62
|
|
|
|
1.46
|
|
|
|
0.38
|
|
|
|
0.41
|
|
|
|
0.27
|
|
Allowance for loan losses to period end total loans
|
|
|
1.99
|
|
|
|
2.34
|
|
|
|
1.45
|
|
|
|
1.04
|
|
|
|
1.16
|
|
Nonperforming loans to period end total loans
|
|
|
5.15
|
|
|
|
4.84
|
|
|
|
2.44
|
|
|
|
1.44
|
|
|
|
2.04
|
|
Allowance for loan losses to nonperforming loans
|
|
|
38.57
|
|
|
|
48.39
|
|
|
|
59.47
|
|
|
|
72.20
|
|
|
|
56.98
|
|
At Year End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
48,220
|
|
|
$
|
26,933
|
|
|
$
|
36,923
|
|
|
$
|
23,523
|
|
|
$
|
29,122
|
|
Securities and interest-bearing deposits
|
|
|
222,073
|
|
|
|
255,841
|
|
|
|
234,665
|
|
|
|
212,694
|
|
|
|
155,688
|
|
Restricted stock
|
|
|
5,741
|
|
|
|
4,985
|
|
|
|
4,884
|
|
|
|
4,704
|
|
|
|
3,293
|
|
Loans held for sale
|
|
|
5,105
|
|
|
|
3,783
|
|
|
|
3,580
|
|
|
|
4,724
|
|
|
|
|
|
Gross loans
|
|
|
812,579
|
|
|
|
803,197
|
|
|
|
803,551
|
|
|
|
753,598
|
|
|
|
628,333
|
|
Allowance for loan losses
|
|
|
16,136
|
|
|
|
18,792
|
|
|
|
11,652
|
|
|
|
7,820
|
|
|
|
7,300
|
|
Net loans
|
|
|
796,443
|
|
|
|
784,405
|
|
|
|
791,899
|
|
|
|
745,778
|
|
|
|
621,033
|
|
Other assets
|
|
|
74,955
|
|
|
|
73,562
|
|
|
|
64,184
|
|
|
|
65,222
|
|
|
|
41,962
|
|
Total assets
|
|
|
1,152,537
|
|
|
|
1,149,509
|
|
|
|
1,136,135
|
|
|
|
1,056,645
|
|
|
|
851,098
|
|
Total deposits
|
|
|
978,526
|
|
|
|
971,433
|
|
|
|
921,175
|
|
|
|
856,941
|
|
|
|
717,261
|
|
Other borrowings
|
|
|
59,671
|
|
|
|
64,582
|
|
|
|
96,905
|
|
|
|
106,932
|
|
|
|
57,249
|
|
Other liabilities
|
|
|
4,876
|
|
|
|
9,353
|
|
|
|
10,996
|
|
|
|
10,119
|
|
|
|
7,891
|
|
Total liabilities
|
|
|
1,043,073
|
|
|
|
1,045,368
|
|
|
|
1,029,076
|
|
|
|
973,992
|
|
|
|
782,401
|
|
Total shareholders equity
|
|
|
109,464
|
|
|
|
104,141
|
|
|
|
107,059
|
|
|
|
82,653
|
|
|
|
68,697
|
|
Total liabilities and shareholders equity
|
|
$
|
1,152,537
|
|
|
$
|
1,149,509
|
|
|
$
|
1,136,135
|
|
|
$
|
1,056,645
|
|
|
$
|
851,098
|
|
|
|
|
(1) |
|
Basic and diluted earnings (loss) per share are computed using
the weighted-average number of shares outstanding during each
year. |
|
(2) |
|
Tax exempt income was converted to a fully taxable equivalent
basis at a 34% statutory Federal income tax rate in 2006, 2007,
2008, 2009 and 2010. |
20
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following commentary presents a discussion and analysis of
the Corporations financial condition and results of
operations by its management (Management). The
review highlights the principal factors affecting earnings and
significant changes in the balance sheet for 2010, 2009 and
2008. Financial information for the prior five years is
presented where appropriate. The objective of this financial
review is to enhance the readers understanding of the
accompanying tables and charts, the consolidated financial
statements, notes to the financial statements and financial
statistics appearing elsewhere in the report. Where applicable,
this discussion also reflects Managements insights of
known events and trends that have or may reasonably be expected
to have a material effect on the Corporations operations
and financial condition.
Summary
Amid the challenges of slow economic growth and asset quality in
Northeast Ohio, the Corporation grew its core business during
2010 and increased revenue while maintaining a solid balance
sheet. This is the direct result of investments that were made
in higher growth markets over the past several years. Total
revenues, which include net interest income and noninterest
income, increased 5.45% in 2010 compared to 2009. Equally
important was the Corporations management of operating
expenses which increased $293, or 0.07%, compared to 2009.
Higher costs related to loan collection and problem loan workout
increased $369 in comparison to 2009 and accounts for most of
this increase. During 2010, the Corporation experienced an
increase in credit cost as nonperforming loans increased and the
valuation of the underlying collateral decreased, resulting in
the recording of a provision for loan losses of $10,225. With
possible early signs of economic improvement in some sectors of
the regional economy, the Corporation made strategic investments
in business development personnel in late 2010 to take advantage
of enhanced revenue opportunities in commercial and small
business lending.
Net income for 2010 was $5,365. Net income available to common
shareholders was $4,089, or $0.55 per diluted common share. Net
loss in 2009 was $2,001. Net loss available to common
shareholders was $3,257, or $0.45 per diluted common share in
2009. Net income available to common shareholders was $3,305, or
$0.45 per diluted common share in 2008. Earnings per diluted
common share in 2010 were affected by the issuance of common
shares in exchange for a potion of the Corporations
outstanding trust preferred securities as well as the dividends
and discount accretion on preferred shares.
Net income as a percent of average assets in 2010 was 0.46%.
This compares to a net loss as a percentage of average assets of
0.17% in 2009 and a return of 0.31% in 2008. Return on assets is
one measurement of operating efficiency. As a percentage of
average shareholders equity this represents a return of
4.97% for 2010 compared to a loss of 1.86% in 2009 and a return
of 4.09% in 2008. Return on shareholders equity is a
measure of how well the Corporation employs leverage to maximize
the return on the capital it employs.
Net interest income grew 2.35% to $38,608 in 2010 from $37,722
in 2009. Since the Corporation is highly dependent on net
interest income for its revenue, maximizing net interest margin
is a very important factor in the Corporations financial
performance. The net interest margin on a fully tax-equivalent
(FTE) basis for 2010 was 3.60% versus 3.39% for 2009. For most
of 2010 the Corporation experienced weak loan demand as
evidenced by a decrease in average portfolio loans of 1.11% over
2010. Average interest-bearing deposits in 2010 also decreased
2.67% in comparison to 2009. Despite these decreases, the spread
between the yield on portfolio loans and the cost of
interest-bearing deposits increased 21 basis points during
2010.
Noninterest income for 2010 was $13,777, an increase of $1,821,
or 15.23% compared to 2009. Noninterest income was favorably
impacted by a $2,210 gain from the extinguishment of debt
related to the Corporations exchange of trust preferred
securities for common shares during the third quarter of 2010.
The largest component of noninterest income is deposit and other
service charges and fees which were $7,455 and $7,253 for 2010
and 2009, respectively. Deposit service charges decreased to
$4,247 for 2010 compared to $4,478 for the prior year and were
negatively impacted by federal legislation limiting overdraft
fees on debit card transactions. Other service charges and fees,
which include electronic banking and merchant service fees,
increased $433 over the prior year. Noninterest income derived
from trust and investment management services decreased during
2010 compared to 2009 as a result of the Corporations
decision to exit the brokerage line of business mid-year.
Market-based fees earned by the trust department remained
relatively constant when compared to the prior year.
21
Noninterest expense was $35,569 in 2010, compared to $35,330 in
2009. Salaries and employee benefits increased $712 compared to
2009, mainly due to the hiring of loan workout staff and
increased incentive compensation. Expenses related to the
collection of delinquent loans and foreclosed properties
increased significantly in 2010 compared to 2009. The increase
of $369 in loan and collection expense is primarily the result
of increased delinquencies and foreclosures due to the declining
economic conditions. Other real estate owned expenses increased
$230 compared to 2009, mainly as a result of the higher number
of properties transferred from the loan portfolio as a result of
foreclosures throughout 2010. During 2009, FDIC assessments
significantly increased in connection with higher standard
maximum deposit insurance coverage limits and a special
assessment of approximately $580 that was imposed on the
Corporation. Although 2010 operating expenses were higher
compared to 2009, expense management continues to be a major
area of focus for the Corporation.
Impacted by the downturn in the regional economy, average
commercial loan portfolio balances decreased from $450,730 for
the year ended December 31, 2009 to $442,041 for the year
ended December 31, 2010. Average residential mortgage loan
portfolio balances decreased from $87,362 for the year ended
December 31, 2009 to $72,327 for the year ended
December 31, 2010. This decrease is mainly attributable to
the refinancing in the existing seasoned mortgage portfolio
given the low interest rate environment and the
Corporations practice of selling new mortgage production
into the secondary market. Home equity lines of credit and
installment loans increased 3.34% and 4.38%, respectively, in
comparison to average portfolio balances for the year ended
December 31, 2009. The overall yield on portfolio loans in
2010 was down 29 basis points from 2009 as a result of the
lower interest rate environment. Average interest-bearing
deposits for the year ended December 31, 2010 were down
2.67% in comparison to average interest-bearing deposits for the
year ended December 31, 2009. The cost of deposits was down
71 basis points from 2009. The resulting net interest
margin (FTE) was 3.60% for 2010 versus 3.39% for 2009.
Asset quality is one key factor which impacts financial
performance, and the Corporation continues to manage credit risk
aggressively. The Corporation recorded a loan loss provision of
$10,225 in 2010, in light of the continuing unpredictability of
the economy, the continued decline in real estate values and
risks inherent in the portfolio. The provision for loan loss was
$19,017 in 2009 and $6,809 in 2008. The allowance for loan
losses decreased to $16,136 during 2010 compared to the same
period in 2009 due to the charge-off of previously provided
specific reserves where liquidation of collateral became the
primary source of repayment. The allowance as a percentage of
total loans decreased from 2.34% at December 31, 2009 to
1.99% at December 31, 2010. Net charged-off loans for 2010
increased to $12,881 from $11,877 for 2009 and the ratio of
charged-off loans to total loans increased to 1.62% for 2010
compared to 1.48% for 2009. Delinquent loans past due 30 to
89 days as a percentage of total loans was 0.87% at
December 31, 2010. In 2010, the level of nonperforming
loans increased over the prior year from $38,837 at
December 31, 2009 to $41,830 at December 31, 2010,
primarily due to an increase in nonperforming commercial real
estate loans.
Since the ability to generate deposits is a key indication of
the Corporations ability to manage its liquidity needs and
fund profitable asset growth, it is a significant measure of the
success of the Corporations business plan. As measured by
the FDIC at June 30, 2010, the Corporations market
share of deposits in Lorain County was 22.25% compared to 23.64%
in 2009. This compares to 18.82% five years ago. The Corporation
continues to maintain strong market share in the city markets of
Lorain, Elyria and Amherst, where the Corporation has a
long-time presence, and is pleased with the performance of its
newer offices in the eastern parts of Lorain county, as well as
Summit county.
22
Table 1:
Condensed Consolidated Average Balance Sheets
Interest,
Rate, and Rate/ Volume differentials are stated on a Fully-Tax
Equivalent (FTE) Basis.
Table 1 presents the condensed consolidated average balance
sheets for the three years ended December 31, 2010,
December 31, 2009 and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Govt agencies and corporations
|
|
$
|
221,600
|
|
|
$
|
7,220
|
|
|
|
3.26
|
%
|
|
$
|
244,556
|
|
|
$
|
10,449
|
|
|
|
4.27
|
%
|
|
$
|
189,837
|
|
|
$
|
8,528
|
|
|
|
4.49
|
%
|
State and political subdivisions
|
|
|
23,565
|
|
|
|
1,423
|
|
|
|
6.04
|
|
|
|
24,207
|
|
|
|
1,454
|
|
|
|
6.01
|
|
|
|
18,697
|
|
|
|
1,121
|
|
|
|
6.00
|
|
Federal funds sold and short-term investments
|
|
|
37,027
|
|
|
|
46
|
|
|
|
0.13
|
|
|
|
41,691
|
|
|
|
58
|
|
|
|
0.14
|
|
|
|
15,667
|
|
|
|
451
|
|
|
|
2.88
|
|
Restricted stock
|
|
|
5,532
|
|
|
|
269
|
|
|
|
4.86
|
|
|
|
4,961
|
|
|
|
247
|
|
|
|
4.97
|
|
|
|
4,796
|
|
|
|
258
|
|
|
|
5.38
|
|
Commercial loans
|
|
|
442,041
|
|
|
|
23,690
|
|
|
|
5.36
|
|
|
|
450,730
|
|
|
|
25,412
|
|
|
|
5.64
|
|
|
|
437,844
|
|
|
|
28,082
|
|
|
|
6.41
|
|
Real estate mortgage loans
|
|
|
72,327
|
|
|
|
3,940
|
|
|
|
5.45
|
|
|
|
87,362
|
|
|
|
5,006
|
|
|
|
5.73
|
|
|
|
98,397
|
|
|
|
5,884
|
|
|
|
5.98
|
|
Home equity lines of credit
|
|
|
109,593
|
|
|
|
4,325
|
|
|
|
3.95
|
|
|
|
106,055
|
|
|
|
4,245
|
|
|
|
4.00
|
|
|
|
89,847
|
|
|
|
4,243
|
|
|
|
4.72
|
|
Installment loans
|
|
|
175,934
|
|
|
|
10,963
|
|
|
|
6.23
|
|
|
|
168,545
|
|
|
|
11,301
|
|
|
|
6.70
|
|
|
|
153,481
|
|
|
|
10,200
|
|
|
|
6.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earning Assets
|
|
$
|
1,087,619
|
|
|
$
|
51,876
|
|
|
|
4.77
|
%
|
|
$
|
1,128,107
|
|
|
$
|
58,172
|
|
|
|
5.16
|
%
|
|
$
|
1,008,566
|
|
|
$
|
58,767
|
|
|
|
5.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss
|
|
|
(18,551
|
)
|
|
|
|
|
|
|
|
|
|
|
(14,851
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,732
|
)
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
17,904
|
|
|
|
|
|
|
|
|
|
|
|
17,711
|
|
|
|
|
|
|
|
|
|
|
|
20,520
|
|
|
|
|
|
|
|
|
|
Bank owned life insurance
|
|
|
16,756
|
|
|
|
|
|
|
|
|
|
|
|
16,058
|
|
|
|
|
|
|
|
|
|
|
|
15,560
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
52,992
|
|
|
|
|
|
|
|
|
|
|
|
47,365
|
|
|
|
|
|
|
|
|
|
|
|
47,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,156,720
|
|
|
|
|
|
|
|
|
|
|
$
|
1,194,390
|
|
|
|
|
|
|
|
|
|
|
$
|
1,082,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer time deposits
|
|
$
|
466,583
|
|
|
$
|
9,386
|
|
|
|
2.01
|
%
|
|
$
|
482,482
|
|
|
$
|
14,271
|
|
|
|
2.96
|
%
|
|
$
|
395,686
|
|
|
$
|
15,392
|
|
|
|
3.89
|
|
Public time deposits
|
|
|
83,818
|
|
|
|
551
|
|
|
|
0.66
|
|
|
|
84,761
|
|
|
|
1,683
|
|
|
|
1.99
|
|
|
|
63,652
|
|
|
|
2,554
|
|
|
|
4.01
|
|
Brokered time deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,631
|
|
|
|
320
|
|
|
|
4.19
|
|
|
|
13,890
|
|
|
|
696
|
|
|
|
5.01
|
|
Savings deposits
|
|
|
87,082
|
|
|
|
157
|
|
|
|
0.18
|
|
|
|
80,063
|
|
|
|
177
|
|
|
|
0.22
|
|
|
|
82,276
|
|
|
|
504
|
|
|
|
0.60
|
|
Money market accounts
|
|
|
91,255
|
|
|
|
369
|
|
|
|
0.40
|
|
|
|
109,354
|
|
|
|
580
|
|
|
|
0.53
|
|
|
|
113,968
|
|
|
|
2,111
|
|
|
|
1.85
|
|
Interest-bearing demand
|
|
|
137,543
|
|
|
|
246
|
|
|
|
0.18
|
|
|
|
125,790
|
|
|
|
348
|
|
|
|
0.28
|
|
|
|
122,527
|
|
|
|
1,049
|
|
|
|
0.86
|
|
Short-term borrowings
|
|
|
1,734
|
|
|
|
4
|
|
|
|
0.25
|
|
|
|
24,089
|
|
|
|
124
|
|
|
|
0.51
|
|
|
|
27,700
|
|
|
|
387
|
|
|
|
1.40
|
|
FHLB advances
|
|
|
42,941
|
|
|
|
1,272
|
|
|
|
2.96
|
|
|
|
45,425
|
|
|
|
1,481
|
|
|
|
3.26
|
|
|
|
62,341
|
|
|
|
2,322
|
|
|
|
3.72
|
|
Trust preferred securities
|
|
|
19,249
|
|
|
|
779
|
|
|
|
4.05
|
|
|
|
20,737
|
|
|
|
941
|
|
|
|
4.54
|
|
|
|
20,778
|
|
|
|
1,174
|
|
|
|
5.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-Bearing Liabilities
|
|
$
|
930,205
|
|
|
$
|
12,764
|
|
|
|
1.37
|
%
|
|
$
|
980,332
|
|
|
$
|
19,925
|
|
|
|
2.03
|
%
|
|
$
|
902,818
|
|
|
$
|
26,189
|
|
|
|
2.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
|
112,787
|
|
|
|
|
|
|
|
|
|
|
|
95,730
|
|
|
|
|
|
|
|
|
|
|
|
87,302
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
5,919
|
|
|
|
|
|
|
|
|
|
|
|
11,000
|
|
|
|
|
|
|
|
|
|
|
|
9,359
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
107,809
|
|
|
|
|
|
|
|
|
|
|
|
107,328
|
|
|
|
|
|
|
|
|
|
|
|
83,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
1,156,720
|
|
|
|
|
|
|
|
|
|
|
$
|
1,194,390
|
|
|
|
|
|
|
|
|
|
|
$
|
1,082,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest Income (FTE)
|
|
|
|
|
|
$
|
39,112
|
|
|
|
3.60
|
%
|
|
|
|
|
|
$
|
38,247
|
|
|
|
3.39
|
%
|
|
|
|
|
|
$
|
32,578
|
|
|
|
3.23
|
%
|
Taxable Equivalent Adjustment
|
|
|
|
|
|
|
(504
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
(525
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
(439
|
)
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income Per Financial Statements
|
|
|
|
|
|
$
|
38,608
|
|
|
|
|
|
|
|
|
|
|
$
|
37,722
|
|
|
|
|
|
|
|
|
|
|
$
|
32,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Yield on Earning Assets
|
|
|
|
|
|
|
|
|
|
|
3.55
|
%
|
|
|
|
|
|
|
|
|
|
|
3.34
|
%
|
|
|
|
|
|
|
|
|
|
|
3.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Results
of
Operations
(Dollars in thousands except per share data)
2010
versus 2009 Net Interest Income Comparison
Net interest income, the Corporations principal source of
earnings, is the difference between interest income generated by
earning assets (primarily loans and investment securities) and
interest paid on interest-bearing funds (namely customer
deposits and wholesale borrowings). Net interest income is
affected by market interest rates on both earning assets and
interest bearing liabilities, the level of earning assets being
funded by interest bearing liabilities, noninterest-bearing
liabilities, the mix of funding between interest bearing
liabilities, noninterest-bearing liabilities and equity, and the
growth in earning assets.
Net interest income for the year ended December 31, 2010
was $38,608 compared to $37,722 for the year ended
December 31, 2009. Total interest income was $51,372 for
2010 compared to $57,647 for 2009, a decrease of $6,275. Total
interest expense decreased $7,161 for the year-ended
December 31, 2010, from $19,925 for 2009 to $12,764 for
2010. This resulted in an increase in net interest income of
$886 for 2010.
For the purpose of this remaining discussion, net interest
income is presented on a FTE basis, to provide a comparison
among all types of interest earning assets. That is, interest on
tax-free securities and tax-exempt loans has been restated as if
such interest were taxed at the statutory Federal income tax
rate of 34% adjusted for the non-deductible portion of interest
expense incurred to acquire the tax-free assets. Net interest
income presented on a FTE basis is a non-GAAP financial measure
widely used by financial services corporations. The FTE
adjustment for full year 2010 was $504 compared with $525 in
2009.
Table 2 summarizes net interest income and the net interest
margin for the three years ended December 31, 2010.
Table 2:
Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(Dollars in thousands)
|
|
Net interest income
|
|
$
|
38,608
|
|
|
$
|
37,722
|
|
|
$
|
32,139
|
|
Tax equivalent adjustments
|
|
|
504
|
|
|
|
525
|
|
|
|
439
|
|
Net interest income (FTE)
|
|
$
|
39,112
|
|
|
$
|
38,247
|
|
|
$
|
32,578
|
|
Net interest margin
|
|
|
3.55
|
%
|
|
|
3.34
|
%
|
|
|
3.19
|
%
|
Tax equivalent adjustments
|
|
|
0.05
|
%
|
|
|
0.05
|
%
|
|
|
0.04
|
%
|
Net interest margin (FTE)
|
|
|
3.60
|
%
|
|
|
3.39
|
%
|
|
|
3.23
|
%
|
The Corporations net interest income on a fully tax
equivalent basis was $39,112 in 2010, which compares to $38,247
in 2009. This follows an increase of $5,669, or 17.40%, between
2009 and 2008. The net interest margin, which is determined by
dividing tax equivalent net interest income by average earning
assets, was 3.60% in 2010, an increase of 21 basis points
from 2009. This follows an increase of 16 basis points for
2009 compared to 2008.
The growth in net interest income in 2010 was largely driven by
lower funding cost due to lower market interest rates. Interest
expense ended 2010 at $12,764 compared to $19,925 in 2009 as the
cost of funds dropped by 66 basis points over this period.
Interest income on a fully tax equivalent basis totaled $51,876
for 2010 compared to $58,172 in 2009, a decline of $6,296, or
10.82%. The decline in interest income was primarily a result of
a lower yield on earning assets due to lower market interest
rates and the overall decline in average earning assets which
decreased $40,488, or 3.59%, to $1,087,619 in 2010 as compared
to $1,128,107 in 2009.
Average loans decreased $12,797, or 1.57%, to $799,895 in 2010
as compared to $812,692 in 2009. Investment securities, both
taxable and tax-free, decreased $23,598 to $245,165 in 2010
compared to $268,763 in 2009 as well as Federal funds sold which
decreased $4,664 over the same period. The decline in average
loans was mainly attributable to the real estate mortgage and
commercial loan portfolios which decreased $15,035 and $8,689,
respectively. Offsetting these declines were increases in the
installment loan portfolio of $7,389 and home equity loans of
$3,538.
24
Although average interest-bearing deposits decreased by $23,800,
or 2.67%, average noninterest-bearing deposits increased
$17,057, or 17.82% during 2010, resulting in a decline in total
average deposits of $6,743 compared to 2009. The decrease in
average interest-bearing deposits was mainly a result of a
decrease in average consumer time deposits of $15,899, or 3.30%,
as well as a decrease of $18,099, or 16.55%, in average money
market demand accounts. These decreases were offset by increases
in interest-bearing demand and savings accounts of $11,753 and
$7,019, respectively. The Bank uses FHLB advances and brokered
time deposits as alternative wholesale funding sources. The use
of alternative funding sources decreased $10,115, or 19.06%,
during 2010 in comparison to 2009. While brokered time deposits
have become an important and comparably priced substitute for
FHLB advances as they require no collateralization compared to
FHLB advances which require collateral in the form of real
estate mortgage loans and securities, there were no outstanding
brokered time deposits at the end of 2010 or 2009.
Net interest income may also be analyzed by segregating the
volume and rate components of interest income and interest
expense. Table 3 presents an analysis of increases and decreases
in interest income and expense due to changes in volume (changes
in the balance sheet) and rate (changes in interest rates)
during the two years ended December 31, 2010. 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 tax-equivalent
basis.
Table 3:
Rate/Volume Analysis of Net Interest Income (FTE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
Increase (Decrease) in Interest
|
|
|
Increase (Decrease) in Interest
|
|
|
|
Income/Expense in 2010 over 2009
|
|
|
Income/Expense in 2009 over 2008
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Govt agencies and corporations
|
|
$
|
(748
|
)
|
|
$
|
(2,481
|
)
|
|
$
|
(3,229
|
)
|
|
$
|
2,339
|
|
|
$
|
(415
|
)
|
|
$
|
1,924
|
|
State and political subdivisions
|
|
|
(39
|
)
|
|
|
8
|
|
|
|
(31
|
)
|
|
|
331
|
|
|
|
2
|
|
|
|
333
|
|
Federal funds sold and short-term investments
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
(12
|
)
|
|
|
36
|
|
|
|
(429
|
)
|
|
|
(393
|
)
|
Restricted stock
|
|
|
28
|
|
|
|
(6
|
)
|
|
|
22
|
|
|
|
8
|
|
|
|
(22
|
)
|
|
|
(14
|
)
|
Commercial loans
|
|
|
(466
|
)
|
|
|
(1,256
|
)
|
|
|
(1,722
|
)
|
|
|
727
|
|
|
|
(3,397
|
)
|
|
|
(2,670
|
)
|
Real estate mortgage loans
|
|
|
(820
|
)
|
|
|
(246
|
)
|
|
|
(1,066
|
)
|
|
|
(633
|
)
|
|
|
(245
|
)
|
|
|
(878
|
)
|
Home equity lines of credit
|
|
|
140
|
|
|
|
(60
|
)
|
|
|
80
|
|
|
|
649
|
|
|
|
(647
|
)
|
|
|
2
|
|
Installment loans
|
|
|
460
|
|
|
|
(798
|
)
|
|
|
(338
|
)
|
|
|
1,010
|
|
|
|
91
|
|
|
|
1,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income
|
|
|
(1,451
|
)
|
|
|
(4,845
|
)
|
|
|
(6,296
|
)
|
|
|
4,467
|
|
|
|
(5,062
|
)
|
|
|
(595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer time deposits
|
|
|
(320
|
)
|
|
|
(4,565
|
)
|
|
|
(4,885
|
)
|
|
|
2,567
|
|
|
|
(3,688
|
)
|
|
|
(1,121
|
)
|
Public time deposits
|
|
|
(6
|
)
|
|
|
(1,126
|
)
|
|
|
(1,132
|
)
|
|
|
419
|
|
|
|
(1,290
|
)
|
|
|
(871
|
)
|
Brokered time deposits
|
|
|
(320
|
)
|
|
|
|
|
|
|
(320
|
)
|
|
|
(262
|
)
|
|
|
(114
|
)
|
|
|
(376
|
)
|
Savings deposits
|
|
|
13
|
|
|
|
(33
|
)
|
|
|
(20
|
)
|
|
|
(5
|
)
|
|
|
(322
|
)
|
|
|
(327
|
)
|
Money market accounts
|
|
|
(73
|
)
|
|
|
(138
|
)
|
|
|
(211
|
)
|
|
|
(24
|
)
|
|
|
(1,507
|
)
|
|
|
(1,531
|
)
|
Interest bearing demand
|
|
|
21
|
|
|
|
(123
|
)
|
|
|
(102
|
)
|
|
|
9
|
|
|
|
(710
|
)
|
|
|
(701
|
)
|
Short-term borrowings
|
|
|
(55
|
)
|
|
|
(65
|
)
|
|
|
(120
|
)
|
|
|
(19
|
)
|
|
|
(244
|
)
|
|
|
(263
|
)
|
FHLB advances
|
|
|
(74
|
)
|
|
|
(135
|
)
|
|
|
(209
|
)
|
|
|
(552
|
)
|
|
|
(289
|
)
|
|
|
(841
|
)
|
Trust preferred securities
|
|
|
(60
|
)
|
|
|
(102
|
)
|
|
|
(162
|
)
|
|
|
(2
|
)
|
|
|
(231
|
)
|
|
|
(233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense
|
|
|
(874
|
)
|
|
|
(6,287
|
)
|
|
|
(7,161
|
)
|
|
|
2,131
|
|
|
|
(8,395
|
)
|
|
|
(6,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income (FTE)
|
|
$
|
(577
|
)
|
|
|
1,442
|
|
|
$
|
865
|
|
|
$
|
2,336
|
|
|
$
|
3,333
|
|
|
$
|
5,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income on a fully tax equivalent basis was
$51,876 in 2010 as compared to $58,172 in 2009, a decrease of
$6,296, or 10.82%. The decrease was attributable to a decline in
volume of $1,451 and a decrease of $4,845 attributable to rate,
when comparing 2010 to 2009. Of the $1,451 decrease due to
volume, loans accounted for $686 and investment securities and
Federal funds sold accounted for $793. Commercial loans by their
structure
25
are the group of assets most sensitive to interest rates
accounting for $1,256 of the change in interest income due to
rate. Total interest expense was $12,764 in 2010 compared to
$19,925 in 2009. This is a decrease of $7,161, or 35.94%.
Interest expense decreased $874 attributable to volume and
$6,287 as a result of a decline in rates. Time deposits, both
consumer and public funds, had a significant impact on rate as
existing accounts renewed at the lower market interest rates.
Although difficult to isolate, changing customer preferences and
competition impact the rate and volume factors. Deposits are
more sensitive to falling interest rates than loans, resulting
in an increase in net interest income due to rate. While
experiencing a decline in both loans and deposits in 2010,
deposits declined at a faster rate than loans. As a result, net
interest income from volume decreased. The effect of changes in
both rate and volume was an increase of $865 during 2010 in net
interest income.
2009
versus 2008 Net Interest Income Comparison
The Corporations net interest income on a fully tax
equivalent basis was $38,247 in 2009, which compares to $32,578
in 2008. The net interest margin was 3.39% in 2009, or an
increase of 16 basis points from 2008. This increase was
primarily the result of a lower funding cost due to lower market
interest rates.
Total interest income on a fully tax equivalent basis was
$58,172 in 2008 as compared to $58,767 in 2008. This is a
decrease of $595 or 1.01%. An increase of $4,473 attributable to
volume was offset by a decrease of $5,068 attributable to rate
when comparing 2009 to 2008. Of the $4,473 increase due to
volume, loans accounted for $1,753 and investment securities and
Federal funds sold accounted for $2,270 as increases in funding
exceeded loan growth. Total interest expense was $19,925 in 2009
compared to $26,189 in 2008. This is a decrease of $6,264, or
23.92%. Interest expense increased $2,131 attributable to
volume, but was offset $8,395 as a result of decline in rates.
Time deposits, both consumer and public funds, had a significant
impact on both volume and rate as new accounts grew and existing
accounts renewed at the lower market interest rates. While
experiencing growth in loans and deposits in 2009, deposits grew
at a faster rate than loans. As a result, net interest income
from volume increased. The effect of changes in both rate and
volume was in increase of $5,669 during 2009 in net interest
income.
Average earning assets increased $119,541, or 11.85%, to
$1,128,107 in 2009 as compared to $1,008,566 for the same period
of 2008. Average loans increased $33,123, or 4.25%, to $812,692
in 2009 as compared to $779,569 in 2008. Loan growth in all
areas of the portfolio except real estate mortgage loans
contributed to the average increase of $33,123, with an increase
in the commercial loan portfolio of $12,886, an increase in
installment loans of $15,064, an increase in home equity loans
of $16,208, offset by a decrease of $11,035 in real estate
mortgage loans. The increase in average loans was primarily
funded with $106,510 of deposit growth. During 2009, average
consumer time deposits increased $86,796 compared to 2008 as
well as public time deposits which increased $21,109 compared to
2008. Noninterest-bearing deposits increased in 2009 by $8,428,
or 9.65%, offset by a decrease in money market accounts of
$4,614, or 4.22%. The use of alternative funding sources
decreased $20,527, or 22.80%, during 2009 in comparison to 2008.
26
Noninterest
Income
Table 4:
Details of Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 versus
|
|
|
2009 versus
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Investment and trust services
|
|
$
|
1,797
|
|
|
$
|
1,919
|
|
|
$
|
1,908
|
|
|
|
(6.36
|
)%
|
|
|
0.58
|
%
|
Deposit service charges
|
|
|
4,247
|
|
|
|
4,478
|
|
|
|
4,760
|
|
|
|
(5.16
|
)%
|
|
|
(5.92
|
)%
|
Electronic banking fees
|
|
|
3,208
|
|
|
|
2,775
|
|
|
|
2,710
|
|
|
|
15.60
|
%
|
|
|
2.40
|
%
|
Income from bank owned life insurance
|
|
|
709
|
|
|
|
693
|
|
|
|
979
|
|
|
|
2.31
|
%
|
|
|
(29.21
|
)%
|
Other income
|
|
|
329
|
|
|
|
315
|
|
|
|
856
|
|
|
|
4.44
|
%
|
|
|
(63.20
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees and other income
|
|
|
10,290
|
|
|
|
10,180
|
|
|
|
11,213
|
|
|
|
1.08
|
%
|
|
|
(9.21
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities gains, net
|
|
|
393
|
|
|
|
690
|
|
|
|
538
|
|
|
|
(43.04
|
)%
|
|
|
28.25
|
%
|
Gain on sale of loans
|
|
|
1,000
|
|
|
|
1,146
|
|
|
|
797
|
|
|
|
(12.74
|
)%
|
|
|
43.79
|
%
|
Loss on sale of other assets, net
|
|
|
(116
|
)
|
|
|
(60
|
)
|
|
|
(89
|
)
|
|
|
93.33
|
%
|
|
|
(32.58
|
)%
|
Gain on extinguishment of debt
|
|
|
2,210
|
|
|
|
|
|
|
|
|
|
|
|
NM
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
$
|
13,777
|
|
|
$
|
11,956
|
|
|
$
|
12,459
|
|
|
|
15.23
|
%
|
|
|
(4.04
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
vs 2009 Noninterest Income Comparison
Generation of noninterest income is important to the long-term
success of the Corporation. Total noninterest income was $13,777
in 2010 compared to $11,956 in 2009. This was an increase of
$1,821, or 15.23%. This increase is mainly attributable to a
$2,210 gain from the extinguishment of debt related to the
Corporations exchange of trust preferred securities for
common shares during the third quarter of 2010. Total fees and
other income, which consists of noninterest income before gains
and losses, was $10,290 in 2010 as compared to $10,180 in 2009.
This was an increase of $110, or 1.08%.
Deposit service charges, which consist largely of overdraft,
stop payment and return item fees, amounted to $4,247 during
2010 and were negatively impacted by federal legislation
limiting overdraft fees on debit card transactions. Electronic
banking fees include debit, ATM and merchant services and were
$3,208 during 2010, an increase of $433, or 15.60% compared to
2009.
Noninterest income from investment and trust services decreased
in 2010 due to managements decision to exit the brokerage
line of business mid-year. Trust and investment management fees
decreased $122, or 6.36%, during 2010 in comparison to 2009. Net
trust fees, which are primarily based on market valuation,
remained relatively constant for 2010 compared to the same
period of 2009. Due to the Corporations discontinuance of
its brokerage services, brokerage fee income was $163 in 2010
compared to $242 in 2009.
During 2010, income from bank owned life insurance increased
$16, or 2.31%, in comparison to 2009. Other income was $329 in
2010 as compared to $315 in 2009. Other income consists of
miscellaneous fees such as safe deposit box rentals and fees,
gift card income and other miscellaneous income. Also included
in other income are servicing fees from sold loans. The
Corporation retains the servicing rights for both sold mortgage
loans and indirect auto loans. Net servicing fee income for 2010
increased $189 compared to 2009.
The Corporation originates residential mortgage loans and
indirect auto loans in the normal course of business. In
managing its interest rate risk, fixed rate and adjustable rate
mortgage loans are sold into the secondary market with the
Corporation retaining servicing. Given the low interest rate
environment, mortgage loan activity increased significantly in
2010 due largely to the number of customers refinancing existing
mortgages. As a result, the gains on the sale of mortgages
during 2010 were $705 compared to $672 for 2009. In addition,
the Corporation originates indirect auto loans for a niche
market of high quality loans. A portion of these loans are
booked to the Corporations portfolio and the remainder is
sold to a number of other financial institutions with servicing
retained by the Corporation. The gain on the sale of indirect
auto loans was $295 for 2010, compared to $474 for 2009.
27
During 2010,
available-for-sale
securities which were due to be called or mature during the year
were assessed and, in some cases, sold and replaced with
purchases of primarily mortgage-backed securities and some
agency securities. Because of the lower interest rate
environment, the interest rates available on mortgage-backed
securities made these securities more attractive to holders than
agency securities. Prior to the decline in interest rates,
agency securities had been producing a similar yield to
mortgage-backed securities, but without the prepayment option
and the longer term to maturity. The Corporation sold
approximately $15,006 of its
available-for-sale
securities prior to call or maturity in order to reinvest the
proceeds in other securities before any further interest rate
cuts reduced the yield on securities available for purchase.
Gains on the sale of
available-for-sale
securities and trading securities were $393 during 2010.
2009
vs 2008 Noninterest Income Comparison
Total noninterest income was $11,956 in 2009 as compared to
$12,459 in 2008. This was a decrease of $503, or 4.04%. Total
fees and other income, which consists of noninterest income
before gains and losses was $10,180 in 2009 compared to $11,213
in 2008. This was a decrease of $492, or 4.75%.
Trust and investment management fees slightly increased $11, or
0.58%, during 2009 in comparison to 2008. Net trust fees
decreased $21, or 1.22%, in 2009 from the same period in 2008.
During 2009, the fee-assessed trust accounts were increased to
offset the effect of lower market valuations. In 2009, the
Corporation added resources and focus to grow its investment
services as a result, brokerage fee income was $242 in 2009, in
comparison to $207 in 2008. Subsequently, the Corporation
decided to exit the brokerage line of business due to lack of
growth in 2009 and 2010.
Overall, deposit service charges and electronic banking fees
decreased 2.90% to $7,253 in 2009, compared to $7,470 in 2008.
The Corporation experienced a decrease in the number of
overdrawn accounts as customers challenged by the economy
managed their accounts more closely. This trend also appeared to
be indicative of the uncertainty related to new legislation
effective in the second half of 2010 related to overdrafts.
Although the Corporation charged a fee to business accounts
during the later part of 2009 to recapture a portion of the
Corporations FDIC assessments, fee income from deposit
service charges declined during 2009. Electronic banking fees
were $2,775 during 2009.
During 2009, income from bank owned life insurance decreased
$286, or 29.21%, in comparison to 2008. During 2008, $216 was
received for the redemption of a bank owned life insurance
policy. Other income was $315 in 2009 compared to $856 in 2008.
This was a decrease of $541, or 63.21%. During 2008, a mandatory
redemption of VISA stock resulted in additional income of $460.
Net servicing fee income for 2009 decreased $104 compared to
2008 primarily due to a temporary impairment charge of $96
recorded for mortgage servicing rights as of December 31,
2009. Gains on the sale of mortgage and indirect auto loans
during 2009 were $672 and $474, respectively.
28
Noninterest
Expense
Table 5:
Details on Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
2010 versus
|
|
2009 versus
|
|
|
2010
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
(Dollars in thousands)
|
|
Salaries and employee benefits
|
|
$
|
15,854
|
|
|
$
|
15,142
|
|
|
$
|
15,255
|
|
|
|
4.70
|
%
|
|
|
(0.74
|
)%
|
Furniture and equipment
|
|
|
3,550
|
|
|
|
4,344
|
|
|
|
3,950
|
|
|
|
(18.28
|
)%
|
|
|
9.97
|
%
|
Net occupancy
|
|
|
2,355
|
|
|
|
2,354
|
|
|
|
2,386
|
|
|
|
0.04
|
%
|
|
|
(1.34
|
)%
|
Outside services
|
|
|
2,182
|
|
|
|
2,459
|
|
|
|
2,490
|
|
|
|
(11.26
|
)%
|
|
|
(1.24
|
)%
|
Marketing and public relations
|
|
|
1,065
|
|
|
|
961
|
|
|
|
987
|
|
|
|
10.82
|
%
|
|
|
(2.63
|
)%
|
Supplies, postage and freight
|
|
|
1,225
|
|
|
|
1,260
|
|
|
|
1,468
|
|
|
|
(2.78
|
)%
|
|
|
(14.17
|
)%
|
Telecommunications
|
|
|
802
|
|
|
|
813
|
|
|
|
850
|
|
|
|
(1.35
|
)%
|
|
|
(4.35
|
)%
|
Ohio franchise tax
|
|
|
1,113
|
|
|
|
908
|
|
|
|
895
|
|
|
|
22.58
|
%
|
|
|
1.45
|
%
|
FDIC assessments
|
|
|
2,241
|
|
|
|
2,622
|
|
|
|
722
|
|
|
|
(14.53
|
)%
|
|
|
263.16
|
%
|
Other real estate owned
|
|
|
597
|
|
|
|
367
|
|
|
|
1,070
|
|
|
|
62.67
|
%
|
|
|
(65.70
|
)%
|
Electronic banking expenses
|
|
|
873
|
|
|
|
800
|
|
|
|
932
|
|
|
|
9.13
|
%
|
|
|
(14.16
|
)%
|
Other charge-offs and losses
|
|
|
274
|
|
|
|
301
|
|
|
|
389
|
|
|
|
(8.97
|
)%
|
|
|
(22.62
|
)%
|
Loan and collection expense
|
|
|
1,715
|
|
|
|
1,346
|
|
|
|
908
|
|
|
|
27.41
|
%
|
|
|
48.24
|
%
|
Other expense
|
|
|
1,723
|
|
|
|
1,653
|
|
|
|
1,979
|
|
|
|
4.23
|
%
|
|
|
(16.47
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
35,569
|
|
|
$
|
35,330
|
|
|
$
|
34,281
|
|
|
|
0.68
|
%
|
|
|
3.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
versus 2009 Noninterest Expense Comparison
Noninterest expense was $35,569 in 2010 compared to $35,330 in
2009. This is an increase of $239, or 0.68%. Management
continues to focus on increasing efficiencies while controlling
operating expenses. For 2010, noninterest expense equaled 3.07%
of average assets compared to 2.96% for 2009. Salaries and
employee benefits increased $712 compared to 2009, mainly as a
result of strategic investments in personnel in the second half
of 2010 designed to take advantage of enhanced revenue
opportunities in commercial and small business lending. Expenses
related to the collection of delinquent loans and foreclosed
properties increased significantly compared to 2009. The
increase of $369 in loan and collection expense is primarily the
result of increased delinquencies and foreclosures due to the
declining economic conditions throughout 2009 and 2010.
Offsetting these increases were declines in furniture and
equipment expense and FDIC assessments of $794 and $381,
respectively, compared to 2009. The decrease in furniture and
equipment expense is mainly attributable to cost savings
realized as a result of the consolidation of data processing
servicing centers. During 2009, FDIC assessments significantly
increased in connection with higher standard maximum deposit
insurance coverage limits and a special assessment of
approximately $580 was imposed on the Corporation.
2009
versus 2008 Noninterest Expense Comparison
Noninterest expense was $35,330 in 2009 compared to $34,281 in
2008. This is an increase of $1,049, or 3.06%. The largest
increase in noninterest expense was FDIC insurance assessments
which increased $1,900 in 2009 over the prior year. Excluding
the $1,900 increase in FDIC assessments, noninterest expense was
down 2.54% compared to 2008. Management continues to focus on
increasing efficiencies while controlling operating expenses.
For 2009, noninterest expense equaled 2.96% of average assets
compared to 3.17% for 2008.
Salaries and benefits totaled $15,142 in 2009 compared to
$15,225 in 2008. A net reduction in the workforce and managing
health care cost through wellness programs helped contribute to
the savings. Furniture and equipment expense increased $394 or
9.97% compared to 2008, the increase resulted from new
electronic services available to customers along with an
increase in data processing costs. As the weakness of the
economy continued and delinquencies increased, the Corporation
experienced an increase of $438 in loan and collection expense,
which
29
includes related legal costs. These costs were offset by a $703
decline in other real estate owned expense on a year over year
basis.
2010
versus 2009 Income taxes
The Corporation recognized tax expense of $1,226 during 2010
compared to a tax benefit of $2,668 for 2009. The
Corporations effective tax rate was 18.60% for 2010.
Included in net income for 2010 was $1,678 of nontaxable income,
including $586 related to life insurance policies and $1,092 of
tax-exempt investment and loan interest income. After
considering the tax-exempt income and relatively small
nondeductible expenses, income subject to tax is significantly
less than income before income tax expense. The new market tax
credit generated by North Coast Community Development
Corporation (NCCDC), a wholly-owned subsidiary of the Bank, also
had a significant impact on income tax expense and contributes
to a lower effective tax rate for the Corporation. On
December 29, 2003, NCCDC received official notification of
a new market tax credit award. Over the remaining nine years of
the award, it is expected that projects will be financed, with
the intent of improving the overall economic conditions in
Lorain County and generating additional interest income through
the funding of qualified loans to these projects and tax credits
for the Corporation. The Corporation had total qualified
investments in NCCDC of $9,000 at December 31, 2010 and
December 31, 2009, generating a tax credit of $536 and
$530, respectively. Investment tax credit for the first three
years is 5%, and 6% for the next four for each layer added.
2009
versus 2008 Income taxes
The Corporation recognized a tax benefit of $2,668 during 2009
compared to income tax expense of $112 for 2008. Included in net
income for 2009 was $1,712 of nontaxable income, including $576
related to life insurance policies and $1,136 of tax-exempt
investment and loan interest income. After considering the
tax-exempt income and relatively small nondeductible expenses,
income subject to tax is significantly less than income before
income tax expense. The Corporation had total qualified
investments in NCCDC of $9,000 at December 31, 2009 and
$8,620 at December 31, 2008, generating a tax credit of
$530 and $476, respectively.
Financial
Condition
Overview
The Corporations total assets at December 31, 2010
were $1,152,537 compared to $1,149,509 at December 31,
2009. This is an increase of $3,028, or 0.26%. Total securities
decreased $33,757, or 13.21%, over December 31, 2009.
Portfolio loans increased by $9,382, or 11.68%, from
December 31, 2009. Total deposits at December 31, 2010
were $978,526 compared to $971,433 at December 31, 2009.
Total interest-bearing liabilities were $1,038,197 at
December 31, 2010 compared to $1,036,015 at
December 31, 2009.
Securities
The distribution of the Corporations securities portfolio
at December 31, 2010 and December 31, 2009 is
presented in Note 5 to the Consolidated Financial
Statements contained within this
Form 10-K.
The Corporation continues to employ the securities portfolio to
manage the Corporations interest rate risk and liquidity
needs. Currently, the entire portfolio consists of available for
sale securities which are comprised of 25.28%
U.S. Government agencies, 43.27% U.S. agency mortgage
backed securities, 20.52% U.S. collateralized mortgage
obligations and 10.93% municipal securities. This compares to
18.30% U.S. Government agencies, 51.54% U.S. agency
mortgaged backed securities, 20.83% U.S. collateralized
mortgage obligations and 9.33% municipal securities as of
December 31, 2009. Given the current economic environment,
the increase in U.S. government agencies as well as the
decrease in U.S. mortgage backed securities was intentional
as Management strives to obtain a more balanced portfolio
between mortgage backed securities and agencies.
At December 31, 2010 the available for sale securities
portfolio had unrealized gains of $6,410 and unrealized losses
of $1,139. The unrealized losses represent 0.53% of the total
amortized cost of the Corporations available for sale
securities. An analysis was performed for available for sale
securities which identified no securities with an unrealized
loss position for greater than twelve months. Available for sale
securities with an unrealized loss position
30
for less than twelve months totaled $1,139 at December 31,
2010. The unrealized gains and losses at December 31, 2009
were $7,017 and $418, respectively. See Note 5 (Securities)
for further detail.
Tables 6 and 7 present the maturity distribution of securities
and the weighted average yield for each maturity range for the
year ended December 31, 2010.
Table 6:
Maturity Distribution of Available for Sale Securities at
Amortized Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From 1 to 5
|
|
|
From 5 to 10
|
|
|
After
|
|
|
At December 31,
|
|
|
|
Years
|
|
|
Years
|
|
|
10 Years
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and corporations
|
|
$
|
30,192
|
|
|
$
|
11,064
|
|
|
$
|
14,983
|
|
|
$
|
56,239
|
|
|
$
|
45,142
|
|
|
$
|
46,418
|
|
Mortgage backed securities
|
|
|
|
|
|
|
30,465
|
|
|
|
61,328
|
|
|
|
91,793
|
|
|
|
122,586
|
|
|
|
123,891
|
|
Collateralized mortgage obligations
|
|
|
880
|
|
|
|
4,190
|
|
|
|
39,227
|
|
|
|
44,297
|
|
|
|
50,122
|
|
|
|
26,827
|
|
State and political subdivisions
|
|
|
4,283
|
|
|
|
11,269
|
|
|
|
8,573
|
|
|
|
24,125
|
|
|
|
22,588
|
|
|
|
21,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
35,355
|
|
|
$
|
56,988
|
|
|
$
|
124,111
|
|
|
$
|
216,454
|
|
|
$
|
240,438
|
|
|
$
|
219,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 7:
The Weighted Average Yield for Each Range of Maturities of
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From 1 to 5
|
|
|
From 5 to
|
|
|
After
|
|
|
At December 31,
|
|
|
|
Years
|
|
|
10 Years
|
|
|
10 Years
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and corporations
|
|
|
1.45
|
%
|
|
|
3.81
|
%
|
|
|
1.17
|
%
|
|
|
1.84
|
%
|
|
|
3.07
|
%
|
|
|
4.55
|
%
|
Mortgage backed securities
|
|
|
|
|
|
|
3.35
|
|
|
|
4.73
|
|
|
|
4.27
|
|
|
|
4.91
|
|
|
|
5.27
|
|
Collateralized mortgage obligations
|
|
|
4.43
|
|
|
|
4.61
|
|
|
|
4.07
|
|
|
|
4.12
|
|
|
|
4.75
|
|
|
|
5.20
|
|
State and political subdivisions(1)
|
|
|
6.00
|
|
|
|
6.79
|
|
|
|
6.18
|
|
|
|
6.43
|
|
|
|
6.46
|
|
|
|
6.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
|
2.07
|
%
|
|
|
2.25
|
%
|
|
|
4.19
|
%
|
|
|
3.85
|
%
|
|
|
4.68
|
%
|
|
|
5.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Yields on tax-exempt obligations are computed on a tax
equivalent basis based upon a 34% statutory Federal income tax
rate. |
Loans
The detail of loan balances are presented in Note 7 to the
Consolidated Financial Statements contained within this
Form 10-K.
Total portfolio loans at December 31, 2010 were $812,579.
This is an increase of $9,382, or 1.17% over December 31,
2009. At December 31, 2010, commercial loans represented
56.32%, and real estate mortgage loans represented 9.61% of
total portfolio loans. Consumer loans, consisting of installment
loans and home equity loans, comprised 34.07% of total portfolio
loans.
Loan balances and loan mix are presented by type for the five
years ended December 31, 2010 in Table 8.
31
Table 8:
Loan Portfolio Distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Commercial
|
|
$
|
447,346
|
|
|
$
|
452,341
|
|
|
$
|
450,081
|
|
|
$
|
433,081
|
|
|
$
|
374,055
|
|
Real estate mortgage
|
|
|
65,557
|
|
|
|
77,204
|
|
|
|
96,241
|
|
|
|
100,419
|
|
|
|
99,182
|
|
Home equity lines of credit
|
|
|
109,501
|
|
|
|
108,921
|
|
|
|
100,873
|
|
|
|
80,049
|
|
|
|
70,028
|
|
Purchased installment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,019
|
|
Installment
|
|
|
190,175
|
|
|
|
164,731
|
|
|
|
156,356
|
|
|
|
140,049
|
|
|
|
42,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
|
812,579
|
|
|
|
803,197
|
|
|
|
803,551
|
|
|
|
753,598
|
|
|
|
628,333
|
|
Allowance for loan losses
|
|
|
(16,136
|
)
|
|
|
(18,792
|
)
|
|
|
(11,652
|
)
|
|
|
(7,820
|
)
|
|
|
(7,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans
|
|
$
|
796,443
|
|
|
$
|
784,405
|
|
|
$
|
791,899
|
|
|
$
|
745,778
|
|
|
$
|
621,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Loan Mix Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
55.05
|
%
|
|
|
56.32
|
%
|
|
|
56.01
|
%
|
|
|
57.47
|
%
|
|
|
59.53
|
%
|
Real Estate Mortgage
|
|
|
8.07
|
%
|
|
|
9.61
|
%
|
|
|
11.98
|
%
|
|
|
13.33
|
%
|
|
|
15.78
|
%
|
Home Equity lines of credit
|
|
|
13.48
|
%
|
|
|
13.56
|
%
|
|
|
12.55
|
%
|
|
|
10.62
|
%
|
|
|
11.15
|
%
|
Purchased installment
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
6.85
|
%
|
Installment
|
|
|
23.40
|
%
|
|
|
20.51
|
%
|
|
|
19.46
|
%
|
|
|
18.58
|
%
|
|
|
6.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans were $447,346 at December 31, 2010. This
was a decrease of $4,995, or 1.10%, over December 31, 2009.
Commercial loans are primarily made to local businesses in the
form of
lines-of-credit,
equipment or plant facilities.
Consumer loans are made to borrowers mainly on secured terms.
Consumer loans increased $26,024, or 9.51%, in comparison to
December 31, 2009. Since the acquisition of Morgan Bank in
2007, consumer loans previously purchased from Morgan Bank, N.A,
are included with installment loans. Home Equity lines of credit
increased $580 when compared to December 31, 2009 and
$8,268 when compared to December 31, 2008.
Real estate mortgages are primarily adjustable rate 1-4 family
mortgage loans and construction loans made to individuals. The
Corporation generally requires a
loan-to-value
ratio of 80% or private mortgage insurance for
loan-to-value
ratios in excess of 80% for real estate mortgages. Construction
loans comprised $1,382 of the $65,557 real estate mortgage loan
portfolio at December 31, 2010. At December 31, 2010
mortgage loans decreased $11,647, or 15.09%, in comparison to
December 31, 2009. The Corporation continues to sell new
loan production when there is a favorable interest rate
environment coupled with the level of refinancing in the market
place.
Loans held for sale, and not included in portfolio loans, were
$5,105 at December 31, 2010. Mortgage loans represented
79.12% and installment loans represented 20.88% of loans held
for sale. There were no commercial loans held for sale at
December 31, 2010.
Table 9 shows the amount of commercial loans outstanding as of
December 31, 2010 based on the remaining scheduled
principal payments or principal amounts repricing in the periods
indicated. Amounts due after one year which are subject to more
frequent repricing are included in the due in one year or less
classification.
32
Table 9:
Commercial Loan Maturity and Repricing Analysis
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
(Dollars in thousands)
|
|
|
Maturing and repricing in one year or less
|
|
$
|
91,621
|
|
Maturing and repricing after one year but within five years
|
|
|
251,374
|
|
Maturing and repricing beyond five years
|
|
|
104,351
|
|
|
|
|
|
|
Total Commercial Loans
|
|
$
|
447,346
|
|
|
|
|
|
|
Provision
and Allowance for Loan Losses
The allowance for loan losses is maintained by the Corporation
at a level considered by Management to be adequate 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. Management determines the adequacy of the
allowance based upon past experience, changes in portfolio size
and mix, relative quality of the loan portfolio and the rate of
loan growth, assessments of current and future economic
conditions and information about specific borrower situations,
including their financial position and collateral values, and
other factors, which are subject to change over time. While
Managements periodic analysis of the allowance for loan
losses may dictate portions of the allowance be allocated to
specific problem loans, the entire amount is available for any
loan charge-offs that may occur. Table 10 presents the detailed
activity in the allowance for loan losses and related charge-off
activity for the five years ended 2010.
Table 10:
Analysis of Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
18,792
|
|
|
$
|
11,652
|
|
|
$
|
7,820
|
|
|
$
|
7,300
|
|
|
$
|
6,622
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(10,015
|
)
|
|
|
(7,528
|
)
|
|
|
(2,305
|
)
|
|
|
(2,179
|
)
|
|
|
(1,120
|
)
|
Real estate mortgage
|
|
|
(1,491
|
)
|
|
|
(1,338
|
)
|
|
|
(275
|
)
|
|
|
(304
|
)
|
|
|
(171
|
)
|
Home equity lines of credit
|
|
|
(1,091
|
)
|
|
|
(1,651
|
)
|
|
|
(467
|
)
|
|
|
(61
|
)
|
|
|
(81
|
)
|
Purchased installment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37
|
)
|
|
|
(69
|
)
|
Installment
|
|
|
(809
|
)
|
|
|
(1,741
|
)
|
|
|
(856
|
)
|
|
|
(495
|
)
|
|
|
(347
|
)
|
DDA Overdrafts
|
|
|
(219
|
)
|
|
|
(219
|
)
|
|
|
(265
|
)
|
|
|
(256
|
)
|
|
|
(240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(13,625
|
)
|
|
|
(12,477
|
)
|
|
|
(4,168
|
)
|
|
|
(3,332
|
)
|
|
|
(2,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
244
|
|
|
|
252
|
|
|
|
920
|
|
|
|
150
|
|
|
|
153
|
|
Real estate mortgage
|
|
|
30
|
|
|
|
12
|
|
|
|
21
|
|
|
|
21
|
|
|
|
9
|
|
Home equity lines of credit
|
|
|
39
|
|
|
|
24
|
|
|
|
10
|
|
|
|
25
|
|
|
|
|
|
Installment
|
|
|
363
|
|
|
|
266
|
|
|
|
186
|
|
|
|
249
|
|
|
|
150
|
|
DDA Overdrafts
|
|
|
68
|
|
|
|
46
|
|
|
|
54
|
|
|
|
54
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Recoveries
|
|
|
744
|
|
|
|
600
|
|
|
|
1,191
|
|
|
|
499
|
|
|
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Charge-offs
|
|
|
(12,881
|
)
|
|
|
(11,877
|
)
|
|
|
(2,977
|
)
|
|
|
(2,833
|
)
|
|
|
(1,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
10,225
|
|
|
|
19,017
|
|
|
|
6,809
|
|
|
|
2,255
|
|
|
|
2,280
|
|
Allowance from merger
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
16,136
|
|
|
$
|
18,792
|
|
|
$
|
11,652
|
|
|
$
|
7,820
|
|
|
$
|
7,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
The allowance for loan losses at December 31, 2010 was
$16,136 or 1.99% of outstanding loans, compared to $18,792 or
2.34% of outstanding loans at December 31, 2009. The
allowance for loan losses was 38.58% and 48.39% of nonperforming
loans at December 31, 2010 and 2009, respectively.
Net charge-offs for the year ended December 31, 2010 were
$12,881, compared to $11,877 for the year ended
December 31, 2009. Net charge-offs as a percent of average
loans was 1.62% for 2010 and 1.46% for 2009.
Direct deposit account overdrafts are charged to the allowance
for loan losses and accounted for $151 and $173, respectively,
of the net charge-offs in 2010 and 2009.
The provision charged to expense was $10,225 for the year ended
December 31, 2010 compared to $19,017 for 2009. The current
condition of the real estate market has resulted in a decline in
the valuation of underlying collateral over the past two years
which has impacted the level of charged-off loans in the
commercial portfolio. Consumer loans while somewhat affected by
the real estate market are largely influenced by the level of
unemployment given the current economy. The allowance for loan
losses is, in the opinion of Management, sufficient given its
analysis of the information available about the portfolio at
December 31, 2010. Management continues to work toward
prompt resolution of nonperforming loan situations and to adjust
underwriting standards as conditions warrant.
Funding
Sources
The Corporation obtains funding through many
sources. The primary source of funds continues to
be the generation of deposit accounts within our primary market.
In order to achieve deposit account growth, the Corporation
offers retail and business customers a full line of deposit
products that includes checking accounts, interest checking,
savings accounts and time deposits. The Corporation also
generates funds through wholesale sources that include local
borrowings generated by a business sweep product. The
Corporation from time to time utilizes brokered time deposits to
provide term funding at rates comparable to other wholesale
funding sources. Wholesale funding sources include lines of
credit with correspondent banks, advances through the Federal
Home Loan Bank of Cincinnati, and a secured line of credit with
the Federal Reserve Bank of Cleveland. Table 11 highlights the
average balances and the average rates paid on these sources of
funds for the three years ended December 31, 2010.
The following table shows the various sources of funding for the
Corporation.
Table 11:
Funding Sources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances Outstanding
|
|
|
Average Rates Paid
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
$
|
112,787
|
|
|
$
|
95,730
|
|
|
$
|
87,302
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Interest-bearing checking
|
|
|
137,543
|
|
|
|
125,790
|
|
|
|
122,527
|
|
|
|
0.18
|
%
|
|
|
0.28
|
%
|
|
|
0.86
|
%
|
Savings deposits
|
|
|
87,082
|
|
|
|
80,063
|
|
|
|
82,276
|
|
|
|
0.18
|
%
|
|
|
0.22
|
%
|
|
|
0.60
|
%
|
Money market accounts
|
|
|
91,255
|
|
|
|
109,354
|
|
|
|
113,968
|
|
|
|
0.40
|
%
|
|
|
0.53
|
%
|
|
|
1.85
|
%
|
Consumer time deposits
|
|
|
466,583
|
|
|
|
482,482
|
|
|
|
395,686
|
|
|
|
2.01
|
%
|
|
|
2.96
|
%
|
|
|
3.89
|
%
|
Public time deposits
|
|
|
83,818
|
|
|
|
84,761
|
|
|
|
63,652
|
|
|
|
0.66
|
%
|
|
|
1.99
|
%
|
|
|
4.01
|
%
|
Brokered time deposits
|
|
|
|
|
|
|
7,631
|
|
|
|
13,890
|
|
|
|
|
|
|
|
4.19
|
%
|
|
|
5.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
|
979,068
|
|
|
|
985,811
|
|
|
|
879,301
|
|
|
|
1.09
|
%
|
|
|
1.77
|
%
|
|
|
2.54
|
%
|
Short-term borrowings
|
|
|
1,734
|
|
|
|
24,089
|
|
|
|
27,700
|
|
|
|
0.25
|
%
|
|
|
0.51
|
%
|
|
|
1.40
|
%
|
FHLB borrowings
|
|
|
42,941
|
|
|
|
45,425
|
|
|
|
62,341
|
|
|
|
2.96
|
%
|
|
|
3.26
|
%
|
|
|
3.72
|
%
|
Junior subordinated debentures
|
|
|
19,249
|
|
|
|
20,737
|
|
|
|
20,778
|
|
|
|
4.50
|
%
|
|
|
4.54
|
%
|
|
|
5.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
63,924
|
|
|
|
90,251
|
|
|
|
110,819
|
|
|
|
4.05
|
%
|
|
|
2.82
|
%
|
|
|
3.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding
|
|
$
|
1,042,992
|
|
|
$
|
1,076,062
|
|
|
$
|
990,120
|
|
|
|
1.22
|
%
|
|
|
1.74
|
%
|
|
|
2.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
Average deposit balances declined 0.68% in 2010 compared to
increases of 12.11% in 2009 and 10.78% in 2008. The Corporation
benefits from a large concentration of low-cost local deposit
funding. These funding sources include demand deposits,
interest-bearing checking accounts, money market accounts and
savings deposits. These sources, which experienced an increase
of 1.19% between 2009 and 2008, also increased 4.31% during 2010
in comparison to 2009. These low-cost funds had an average yield
of 0.18% in 2010 compared to 0.27% in 2009 and 0.90% in 2008.
Included in these funds are money market accounts which carried
an average yield of 0.40% in 2010 compared to 0.53% in 2009.
Time deposits over the last three years to total average
deposits were 56.22% in 2010, 48.94% in 2009 and 46.18% in 2008.
Average time deposits were $550,401 in 2010 compared to $574,874
in 2009. This was a decrease of $24,473, or 4.26%. Brokered time
deposits and public fund time deposits represented 8.56% and
16.07% of total average time deposits during 2010 and 2009,
respectively. At December 31 2010 the Corporation had no
brokered time deposit balances.
Borrowings
The Corporation utilizes both short-term and long-term
borrowings to assist in the growth of earning assets. For the
Corporation, short-term borrowings include Federal funds
purchased and repurchase agreements. During the fourth quarter
of 2009, the Corporation discontinued its then existing
repurchase agreements and entered into a new repurchase
agreement with terms more consistent with current customary
market terms. As a result, short-term borrowings decreased
significantly at December 31, 2009. Repurchase agreements
remained relatively constant throughout 2010 and were $932 at
December 31, 2010. The Corporation did not have any Federal
funds purchased at December 31, 2010 and December 31,
2009.
Long-term borrowings by the Corporation consist of Federal Home
Loan Bank advances of $42,501 and junior subordinated debentures
of $16,238. Federal Home Loan Bank advances were $42,505 at
December 31, 2009. Maturities of long-term Federal Home
Loan Bank advances are presented in Note 12 to the
Consolidated Financial Statements contained within this
Form 10-K.
During 2007, the Corporation completed a private offering of
trust preferred securities, as described in Note 13 to the
Consolidated Financial Statements contained within this
Form 10-K.
The securities were issued in two $10 million tranches, one
of which pays dividends at a fixed rate of 6.64% per annum and
the other of which pays dividends at LIBOR plus 1.48% per annum.
In August 2010, the Corporation entered into an agreement with
certain holders of its non-pooled trust preferred securities and
exchanged $2,125 in principal amount of the securities issued by
Trust I and $2,125 in principal amount of the securities
issued by Trust II for 462,234 newly issued shares of the
Corporations common stock at a volume-weighted average
price of $4.41 per share. At December 31, 2010, the balance
of the subordinated notes payable to Trust I and
Trust II was $8,119 each.
Capital
Resources
The Corporation continues to maintain a capital position that it
believes is appropriate. Total shareholders equity was
$109,464 at December 31, 2010. This is an increase of 5.11%
over December 31, 2009.
Total common stock cash dividends declared in 2010 by the Board
of Directors were $304 compared to $1,459 in 2009. In 2010, the
Corporation paid $.01 per share of common stock for its
quarterly dividend for all quarters. Given the current economic
environment and the related pressure on credit quality, the
Board of Directors believes it is prudent to retain as much
capital as reasonably possible in order to enhance the
Corporations strength, confidence and stability. Any
future dividend is subject to Board approval.
At December 31, 2010, the Corporations market
capitalization was $38,988 compared to $31,444 at
December 31, 2009. There were 1,871 shareholders of
record at December 31, 2010. LNB Bancorp, Inc.s
common shares are traded on the NASDAQ Stock Market under the
ticker symbol LNBB.
During 2008, shareholders equity was increased $25,223 by
the issuance of 25,223 shares of the Corporations
Series B Preferred Stock to the U.S. Treasury in the
TARP Capital Purchase Program. The Corporation also granted a
warrant to purchase 561,343 common shares to the
U.S. Treasury in conjunction with this program. The warrant
gives the U.S. Treasury the option to purchase the
Corporations common shares at an exercise price of $6.74
per share. See Note 15 to the Consolidated Financial
Statements for further information on the Series B
Preferred Stock and common shares warrant issued pursuant to the
Capital Purchase Program.
35
Net income of $5,365 increased total shareholders equity.
Factors increasing shareholders equity were $2,040 for the
issuance of common shares related to the exchange and retirement
of $4,250 in principal amount of LNBs trust preferred
securities, a $257 increase in the Corporations minimum
pension liability and a $102 increase for share-based
compensation arrangements. The factors decreasing total
shareholders equity during 2010 were a $876 decrease in
accumulated other comprehensive loss resulting from a decrease
in the fair value of available for sale securities, cash
dividends payable to common shareholders of $304 and cash
dividends, net of discount accretion, to preferred shareholders
of $1,261.
On July 28, 2005, the Corporation announced a share
repurchase program of up to 5 percent, or about 332,000, of
its common shares outstanding. Repurchased shares can be used
for a number of corporate purposes, including the
Corporations stock option and employee benefit plans. The
share repurchase program provides that share repurchases are to
be made primarily on the open market from
time-to-time
until the 5 percent maximum is repurchased or the earlier
termination of the repurchase program by the Board of Directors,
at the discretion of Management based upon market, business,
legal and other factors. At December 31, 2010 the
Corporation held 328,194 shares of common stock as treasury
stock at a cost of $6,092. No shares were acquired under this
program in 2010.
The terms of the Corporations sale of $25,223 of its
Series B Preferred Stock to the U.S. Treasury in
conjunction with the TARP Capital Purchase Program include
limitations on the Corporations ability to repurchase its
common shares. For three years after the issuance or (if
earlier) until the U.S. Treasury no longer holds any
Series B Preferred Stock, the Corporation is prohibited
from repurchasing any of its common shares or preferred stock
without, among other things, U.S. Treasury approval, or
subject to the availability of certain limited exceptions, such
as purchases in connection with the Corporations benefit
plans. Furthermore, as long as the Series B Preferred Stock
issued to the U.S. Treasury is outstanding, repurchases or
redemptions relating to certain equity securities, including the
Corporations common shares, are prohibited until all
accrued and unpaid dividends are paid on such preferred stock,
subject to certain limited exceptions.
The Federal Reserve Board has established risk-based capital
guidelines that must be observed by financial holding companies
and banks. The Corporation has consistently maintained the
regulatory capital ratios of the Corporation and its bank
subsidiary, The Lorain National Bank, above
well-capitalized levels. For further information on
capital ratios see Notes 1 and 16 of the Consolidated
Financial Statements.
Contractual
Obligations and Commitments
Contractual obligations and commitments of the Corporation at
December 31, 2010 are as follows:
Table 12:
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year or
|
|
|
Two and
|
|
|
Four and
|
|
|
Over Five
|
|
|
|
|
|
|
Less
|
|
|
Three Years
|
|
|
Five Years
|
|
|
Years
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Short-term borrowings
|
|
$
|
932
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
932
|
|
FHLB advances
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
12,501
|
|
|
|
|
|
|
|
42,501
|
|
Operating leases
|
|
|
800
|
|
|
|
882
|
|
|
|
633
|
|
|
|
539
|
|
|
|
2,854
|
|
Trust preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,238
|
|
|
|
16,238
|
|
Benefit payments
|
|
|
310
|
|
|
|
703
|
|
|
|
735
|
|
|
|
1,869
|
|
|
|
3,617
|
|
Severance payments
|
|
|
131
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,173
|
|
|
$
|
16,652
|
|
|
$
|
13,869
|
|
|
$
|
18,646
|
|
|
$
|
66,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical
Accounting Policies and Estimates
The Corporations 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 the Management to make
assumptions, estimates and
36
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. 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 borrowers ability to pay.
Determination of the allowance is subjective in nature. Loan
losses are charged off against the allowance when Management
believes that the full collectability of the loan is unlikely.
Recoveries of amounts previously charged-off are credited to the
allowance.
A loan is considered impaired when it is probable that not all
principal and interest amounts will be collected according to
the loan contract. Residential mortgage, installment and other
consumer loans are evaluated collectively for impairment.
Individual commercial loans exceeding size thresholds
established by Management are evaluated for impairment. Impaired
loans are written down by the establishment of a specific
allowance where necessary. The fair value of all loans currently
evaluated for impairment is collateral-dependent and therefore
the fair value is determined by the fair value of the underlying
collateral.
The Corporation maintains the allowance for loan losses at a
level adequate to absorb Managements estimate of probable
credit losses inherent in the loan portfolio. The allowance is
comprised of a general allowance, a specific allowance for
identified problem loans and an unallocated allowance
representing estimations pursuant to either Statement of
Financial Accounting Standards ASC 450,Accounting for
Contingencies, or
ASC 310-10-45,
Accounting by Creditors for Impairment of a Loan.
The general allowance is determined by applying estimated loss
factors to the credit exposures from outstanding loans. For
commercial and commercial real estate loans the Corporation uses
historical loss experience along with factors that are
considered when loan 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
Corporations 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 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 Managements 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.
The Corporations income tax expense and related current
and deferred tax assets and liabilities are presented as
prescribed in ASC 740, Accounting for Income
Taxes. The accounting requires the periodic review and
adjustment of tax assets and liabilities based on many
assumptions. These assumptions include predictions as to the
Corporations future profitability, as well as potential
changes in tax laws that could impact the deductibility of
37
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.
The goodwill impairment test is a two-step process that requires
Management to make judgments in determining what assumptions to
use in the calculation. The first step in impairment testing is
to estimate the fair value based on valuation techniques
including a discounted cash flow model with revenue and profit
forecasts and comparing those estimated fair values with the
carrying values, which includes the allocated goodwill. If the
carrying value exceeds its fair value, goodwill impairment may
be indicated and a second step is performed to compute the
amount of the impairment by determining an implied fair
value of goodwill. The determination of an implied
fair value of goodwill requires the Corporation to
allocate fair value to the assets and liabilities. Any
unallocated fair value represents the implied fair
value of goodwill, which is compared to its corresponding
carrying value. An impairment loss would be recognized as a
charge to earnings to the extent the carrying amount of the
goodwill exceeds the implied fair value of the goodwill. See
Note 4 (Goodwill and Intangible Assets) for further detail.
|
|
|
|
|
New Accounting Pronouncements
|
Management is not aware of any proposed regulations or current
recommendations by the Financial Accounting Standards Board or
by regulatory authorities, which, if they were implemented,
would have a material effect on the liquidity, capital
resources, or operations of the Corporation.
|
|
ITEM 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
RISK
ELEMENTS
Risk management is an essential aspect in operating a financial
services company successfully and effectively. The most
prominent risk exposures, for a financial services company, are
credit, operational, interest rate, market and liquidity risk.
Credit risk involves the risk of uncollectible interest and
principal balance on a loan when it is due. Fraud, legal and
compliance issues, processing errors, technology and the related
disaster recovery and breaches in business continuation and
internal controls are types of operational risks. Changes in
interest rates affecting net interest income are considered
interest rate risks. Market risk is the risk that a financial
institutions earnings and capital or its ability to meet
its business objectives are adversely affected by movements in
market rates or prices. Such movements include fluctuations in
interest rates, foreign exchange rates, equity prices that
affect the changes in value of
available-for-sale
securities, credit spreads and commodity prices. The inability
to fund obligations due to investors, borrowers or depositors is
liquidity risk. For the Corporation, the dominant risks are
market, credit and liquidity risk.
Credit
Risk Management
Uniform underwriting criteria, ongoing risk monitoring and
review processes, and well-defined, centralized credit policies
dictate the management of credit risk for the Corporation. As
such, credit risk is managed through the Banks allowance
for loan loss policy which requires the loan officer, lending
officers and the loan review committee to manage loan quality.
The Corporations credit policies are reviewed and modified
on an ongoing basis in order to remain suitable for the
management of credit risks within the loan portfolio as
conditions change. The Corporation uses a loan rating system to
properly classify and assess the credit quality of individual
commercial loan transactions. The loan rating system is used to
determine the adequacy of the allowance for loan losses for
financial reporting purposes and to assist in the determination
of the frequency of review for credit exposures.
During 2010, the uncertain economic conditions, especially in
residential and commercial real-estate, and commercial
development lending, resulted in higher levels of nonperforming
loans and potential problem loans. Most of the Banks
business activity is with customers located within the
Banks defined market area. As of December 31, 2010
the Bank had concentrations of credit risk in its loan portfolio
for the following loan categories: non-farm, non-residential
real estate loans, home equity lines of credit and indirect
consumer loans. A concentration is defined as greater than 10%
of outstanding loans. The Bank has no exposure to highly
leveraged transactions and no foreign credits in its loan
portfolio.
38
Nonperforming
Assets
Total nonperforming assets consist of nonperforming loans, loans
which have been restructured and other foreclosed assets. As
such, a loan is considered nonperforming if it is 90 days
past due
and/or in
Managements estimation the collection of interest on the
loan is doubtful. Nonperforming loans no longer accrue interest
and are accounted for on a cash basis. The classification of
restructured loans involves the deterioration of a
borrowers financial ability leading to original terms
being favorably modified or either principal or interest being
forgiven.
Table 13 sets forth nonperforming assets for the five years
ended December 31, 2010.
Table 13:
Nonperforming Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial loans
|
|
$
|
28,613
|
|
|
$
|
26,846
|
|
|
$
|
14,209
|
|
|
$
|
7,927
|
|
|
$
|
10,322
|
|
Real estate mortgage
|
|
|
8,853
|
|
|
|
9,139
|
|
|
|
3,465
|
|
|
|
2,097
|
|
|
|
2,165
|
|
Home equity lines of credit
|
|
|
2,398
|
|
|
|
1,417
|
|
|
|
989
|
|
|
|
429
|
|
|
|
168
|
|
Installment loans
|
|
|
1,967
|
|
|
|
1,435
|
|
|
|
929
|
|
|
|
378
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
41,830
|
|
|
|
38,837
|
|
|
|
19,592
|
|
|
|
10,831
|
|
|
|
12,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other foreclosed assets
|
|
|
3,119
|
|
|
|
1,264
|
|
|
|
1,108
|
|
|
|
2,478
|
|
|
|
1,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
44,949
|
|
|
$
|
40,101
|
|
|
$
|
20,700
|
|
|
$
|
13,309
|
|
|
$
|
14,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans 90 days past due accruing interest
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to nonperforming loans
|
|
|
38.57
|
%
|
|
|
48.39
|
%
|
|
|
59.47
|
%
|
|
|
72.20
|
%
|
|
|
56.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans at December 31, 2010 were $41,830
compared to $38,837 at December 31, 2009, an increase of
$2,993. Of this total, commercial loans were $28,613 compared to
$26,846 at December 31, 2009. These are commercial loans
that are primarily secured by real estate and, in some cases, by
SBA guarantees, and have either been charged-down to their
realizable value or a specific reserve has been established for
any collateral short-fall. All nonperforming loans are being
actively managed.
Management monitors delinquency and potential commercial problem
loans. Bank-wide delinquency at December 31, 2010 was 4.89%
of total loans. Total 30-59 day delinquency and 60-89 day
delinquency was 0.54% and 0.33% of total loans at
December 31, 2010, respectively.
Other foreclosed assets were $3,119 as of December 31,
2010, an increase of $1,855 from December 31, 2009. The
$3,119 is comprised of ten commercial properties totaling $1,184
and eleven 1-4 family residential properties totaling $1,935.
This compares to $1,068 of commercial properties with the
remainder being 1-4 family residential properties as of
December 31, 2009.
Liquidity
Management of liquidity is a continual process in the banking
industry. The liquidity of the Bank reflects its ability to meet
loan demand, the possible outflow of deposits and its ability to
take advantage of market opportunities made possible by
potential rate environments. Assuring adequate liquidity
requires the management of the cash flow characteristics of the
assets the Bank originates and the availability of alternative
funding sources. The Bank monitors liquidity according to limits
established in its liquidity policy. The policy establishes
minimums for the ratio of cash and cash equivalents to total
assets and the loan to deposit ratio. At December 31, 2010,
the Banks liquidity was within its policy limits.
In addition to maintaining a stable source of core deposits, the
Bank manages liquidity by seeking continual cash flow in its
securities portfolio. At December 31, 2010, the Corporation
expects the securities portfolio to generate cash flow in the
next 12 months of $49,372 and $127,419 in the next
36 months.
39
The Bank maintains borrowing capacity at the Federal Home Loan
Bank of Cincinnati, the Federal Reserve Bank of Cleveland and
Federal Fund lines with correspondent banks. The Corporation has
a $4.0 million line of credit through an unaffiliated
financial institution. The term of the line is one year, with
principal due at maturity and is subject to renewal on an annual
basis. The interest rate on the line of credit is the
unaffiliated financial institutions prime rate. Table 14
highlights the liquidity position of the Bank and the
Corporation including total borrowing capacity and current
unused capacity for each borrowing arrangement at
December 31, 2010.
Table 14:
Liquidity
|
|
|
|
|
|
|
|
|
|
|
Borrowing
|
|
|
Unused
|
|
|
|
Capacity
|
|
|
Capacity
|
|
|
|
(Dollars in thousands)
|
|
|
FHLB Cincinnati
|
|
$
|
50,754
|
|
|
$
|
6,714
|
|
FRB Cleveland
|
|
|
45,251
|
|
|
|
45,251
|
|
Federal Funds Lines
|
|
|
10,000
|
|
|
|
10,000
|
|
Unaffiliated Financial Institutions
|
|
|
4,000
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
110,005
|
|
|
$
|
65,965
|
|
|
|
|
|
|
|
|
|
|
Liquidity is also provided by unencumbered, or unpledged
investment securities that totaled $74,374 at December 31,
2010.
The Corporation is the bank holding company of the Bank and
conducts no operations. The Corporations primary ongoing
needs for liquidity are the payment of the quarterly shareholder
dividend if declared and miscellaneous expenses related to the
regulatory and reporting requirements of a publicly traded
corporation. The holding companys main source of operating
liquidity is the dividend that it receives from the Bank.
Dividends from the Bank are subject to restrictions by banking
regulators. The holding company from
time-to-time,
has access to additional sources of liquidity through
correspondent lines of credit as of December 31, 2010.
Market
Risk Management
The Corporation manages market risk through its Asset/Liability
Management Committee (ALCO) at the Bank level
governed by policies set forth and established by the Board of
Directors. This committee assesses interest rate risk exposure
through two primary measures: rate sensitive assets divided by
rate sensitive liabilities and
earnings-at-risk
simulation of net interest income over the one year planning
cycle and the longer term strategic horizon in order to provide
a stable and steadily increasing flow of net interest income.
The difference between a financial institutions interest
rate sensitive assets and interest rate sensitive liabilities is
referred to as the interest rate gap. An institution that has
more interest rate sensitive assets than interest rate sensitive
liabilities in a given period is said to be asset sensitive or
has a positive gap. This means that if interest rates rise a
corporations net interest income may rise and if interest
rates fall its net interest income may decline. If interest
sensitive liabilities exceed interest sensitive assets then the
opposite impact on net interest income may occur. The usefulness
of the gap measure is limited. It is important to know the gross
dollars of assets and liabilities that may re-price in various
time horizons, but without knowing the frequency and basis of
the potential rate changes the predictive power of the gap
measure is limited.
Two more useful tools in managing market risk are
earnings-at-risk
simulation and economic value of equity simulation. An
earnings-at-risk
analysis is a modeling approach that combines the repricing
information from gap analysis, with forecasts of balance sheet
growth and changes in future interest rates. The result of this
simulation provides management with a range of possible net
interest margin outcomes. Trends that are identified in
earnings-at-risk
simulation can help identify product and pricing decisions that
can be made currently to assure stable net interest income
performance in the future. At December 31, 2010, a
shock treatment of the balance sheet, in which a
parallel shift in the yield curve occurs and all rates increase
immediately, indicates that in a +200 basis point shock,
net interest income would increase $232 or 0.6%, and in a
-200 basis point shock, net interest income would decrease
$2,123, or 5.5%. The reason for the lack of symmetry in these
results is the implied floors in many of the Corporations
core funding which limits their downward adjustment from current
offering
40
rates. This analysis is done to describe a best or worst case
scenario. Factors such as non-parallel yield curve shifts,
management pricing changes, customer preferences and other
factors are likely to produce different results.
The economic value of equity approach measures the change in the
value of the Corporations equity as the value of assets
and liabilities on the balance sheet change with interest rates.
At December 31, 2010, this analysis indicated that a
+200 basis point change in rates would reduce the value of
the Corporations equity by 14.7% while a -200 basis
point change in rates would increase the value of the
Corporations equity by 8.2%.
Table 15:
GAP Analysis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
Under 3 Months
|
|
|
3 to 12 Months
|
|
|
1 to 3 Years
|
|
|
3-5 Years
|
|
|
5-15 Years
|
|
|
After 15 Years
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities and short-term investments
|
|
$
|
49,725
|
|
|
$
|
28,994
|
|
|
$
|
66,635
|
|
|
$
|
54,372
|
|
|
$
|
43,725
|
|
|
$
|
5,186
|
|
|
$
|
248,637
|
|
Loans
|
|
|
209,144
|
|
|
|
117,142
|
|
|
|
257,320
|
|
|
|
124,514
|
|
|
|
81,126
|
|
|
|
28,618
|
|
|
|
817,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
$
|
258,869
|
|
|
$
|
146,136
|
|
|
$
|
323,955
|
|
|
$
|
178,886
|
|
|
$
|
124,851
|
|
|
$
|
33,804
|
|
|
$
|
1,066,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer time deposits
|
|
$
|
131,713
|
|
|
$
|
254,588
|
|
|
$
|
117,324
|
|
|
$
|
40,522
|
|
|
$
|
|
|
|
$
|
469
|
|
|
$
|
544,616
|
|
Money Market deposits
|
|
|
92,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,177
|
|
Savings deposits
|
|
|
7,351
|
|
|
|
14,701
|
|
|
|
44,103
|
|
|
|
25,727
|
|
|
|
|
|
|
|
|
|
|
|
91,882
|
|
Interest-bearing demand deposits
|
|
|
10,750
|
|
|
|
21,500
|
|
|
|
64,500
|
|
|
|
37,625
|
|
|
|
|
|
|
|
|
|
|
|
134,375
|
|
Short-term borrowings
|
|
|
15,000
|
|
|
|
|
|
|
|
15,000
|
|
|
|
12,540
|
|
|
|
|
|
|
|
|
|
|
|
42,540
|
|
Long-term debt
|
|
|
8,134
|
|
|
|
|
|
|
|
8,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,268
|
|
Fed Funds, Repos, Other
|
|
|
932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
266,057
|
|
|
$
|
290,789
|
|
|
$
|
249,061
|
|
|
$
|
116,414
|
|
|
$
|
|
|
|
$
|
469
|
|
|
$
|
922,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate gap
|
|
$
|
(7,188
|
)
|
|
$
|
(151,841
|
)
|
|
$
|
(76,947
|
)
|
|
$
|
(14,475
|
)
|
|
$
|
110,376
|
|
|
$
|
143,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSA/RSL
|
|
|
97
|
%
|
|
|
73
|
%
|
|
|
90
|
%
|
|
|
98
|
%
|
|
|
112
|
%
|
|
|
116
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009
|
|
|
|
Under 3 Months
|
|
|
3 to 12 Months
|
|
|
1 to 3 Years
|
|
|
3-5 Years
|
|
|
5-15 Years
|
|
|
After 15 Years
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities and short-term investments
|
|
$
|
20,008
|
|
|
$
|
25,915
|
|
|
$
|
63,786
|
|
|
$
|
44,333
|
|
|
$
|
102,356
|
|
|
$
|
|
|
|
$
|
256,398
|
|
Trading securities
|
|
|
8,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,445
|
|
Loans
|
|
|
205,351
|
|
|
|
114,111
|
|
|
|
239,052
|
|
|
|
124,806
|
|
|
|
104,229
|
|
|
|
19,431
|
|
|
|
806,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
$
|
233,804
|
|
|
$
|
140,026
|
|
|
$
|
302,838
|
|
|
$
|
169,139
|
|
|
$
|
206,585
|
|
|
$
|
19,431
|
|
|
$
|
1,071,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer time deposits
|
|
$
|
144,195
|
|
|
$
|
264,249
|
|
|
$
|
122,102
|
|
|
$
|
17,337
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
547,883
|
|
Money Market deposits
|
|
|
84,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,467
|
|
Savings deposits
|
|
|
|
|
|
|
|
|
|
|
82,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,771
|
|
Interest-bearing demand deposits
|
|
|
|
|
|
|
|
|
|
|
137,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137,807
|
|
Short-term borrowings
|
|
|
2,500
|
|
|
|
7,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
31,905
|
|
|
|
4,600
|
|
|
|
|
|
|
|
20,620
|
|
|
|
57,125
|
|
Fed Funds, Repos, Other
|
|
|
1,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
232,619
|
|
|
$
|
271,749
|
|
|
$
|
374,585
|
|
|
$
|
21,937
|
|
|
$
|
|
|
|
$
|
20,620
|
|
|
$
|
921,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate gap
|
|
$
|
1,185
|
|
|
$
|
(130,538
|
)
|
|
$
|
(202,285
|
)
|
|
$
|
(55,084
|
)
|
|
$
|
151,502
|
|
|
$
|
150,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSA/RSL
|
|
|
101
|
%
|
|
|
74
|
%
|
|
|
77
|
%
|
|
|
94
|
%
|
|
|
117
|
%
|
|
|
116
|
%
|
|
|
|
|
41
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Table of
Contents
42
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
LNB Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of
LNB Bancorp, Inc. as of December 31, 2010 and 2009, and the
related consolidated statements of income, changes in
shareholders equity and cash flows for each of the years
in the three-year period ended December 31, 2010. These
financial statements are the responsibility of the
Corporations management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Corporation is not required
to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Corporations internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of LNB Bancorp, Inc. as of December 31, 2010 and
2009, and the results of its operations and its cash flows for
each of the years in the three-year period ended
December 31, 2010, in conformity with accounting principles
generally accepted in the United States of America.
March 9, 2011
Columbus, Ohio
43
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands except share amounts)
|
|
|
ASSETS
|
Cash and due from banks (Note 3)
|
|
$
|
17,370
|
|
|
$
|
16,933
|
|
Federal funds sold and short-term investments
|
|
|
30,850
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
48,220
|
|
|
|
26,933
|
|
Interest-bearing deposits in other banks
|
|
|
348
|
|
|
|
359
|
|
Securities: (Note 5)
|
|
|
|
|
|
|
|
|
Trading securities, at fair value
|
|
|
|
|
|
|
8,445
|
|
Available for sale, at fair value
|
|
|
221,725
|
|
|
|
247,037
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
|
221,725
|
|
|
|
255,482
|
|
Restricted stock
|
|
|
5,741
|
|
|
|
4,985
|
|
Loans held for sale
|
|
|
5,105
|
|
|
|
3,783
|
|
Loans:
|
|
|
|
|
|
|
|
|
Portfolio loans (Note 7)
|
|
|
812,579
|
|
|
|
803,197
|
|
Allowance for loan losses (Note 8)
|
|
|
(16,136
|
)
|
|
|
(18,792
|
)
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
|
796,443
|
|
|
|
784,405
|
|
|
|
|
|
|
|
|
|
|
Bank premises and equipment, net (Note 9)
|
|
|
9,645
|
|
|
|
10,105
|
|
Other real estate owned
|
|
|
3,119
|
|
|
|
1,264
|
|
Bank owned life insurance
|
|
|
17,146
|
|
|
|
16,435
|
|
Goodwill, net (Note 4)
|
|
|
21,582
|
|
|
|
21,582
|
|
Intangible assets, net (Note 4)
|
|
|
868
|
|
|
|
1,005
|
|
Accrued interest receivable
|
|
|
3,519
|
|
|
|
4,072
|
|
Other assets (Note 14)
|
|
|
19,076
|
|
|
|
19,099
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,152,537
|
|
|
$
|
1,149,509
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Deposits (Note 10)
|
|
|
|
|
|
|
|
|
Demand and other noninterest-bearing
|
|
$
|
115,476
|
|
|
$
|
118,505
|
|
Savings, money market and interest-bearing demand
|
|
|
318,434
|
|
|
|
305,045
|
|
Certificates of deposit
|
|
|
544,616
|
|
|
|
547,883
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
978,526
|
|
|
|
971,433
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (Note 11)
|
|
|
932
|
|
|
|
1,457
|
|
Federal Home Loan Bank advances (Note 12)
|
|
|
42,501
|
|
|
|
42,505
|
|
Junior subordinated debentures (Note 13)
|
|
|
16,238
|
|
|
|
20,620
|
|
Accrued interest payable
|
|
|
1,434
|
|
|
|
2,074
|
|
Accrued taxes, expenses and other liabilities (Note 14)
|
|
|
3,442
|
|
|
|
7,279
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,043,073
|
|
|
|
1,045,368
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity (Notes 15 and 16)
|
|
|
|
|
|
|
|
|
Preferred stock, Series A Voting, no par value, authorized
150,000 shares at December 31, 2010,
750,000 shares at December 31, 2009, none issued at
December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
Preferred stock, Series B, no par value, $1,000 liquidation
value, 25,223 shares authorized and issued at
December 31, 2010 and December 31, 2009.
|
|
|
25,223
|
|
|
|
25,223
|
|
Discount on Series B preferred stock
|
|
|
(116
|
)
|
|
|
(131
|
)
|
Warrant to purchase common stock
|
|
|
146
|
|
|
|
146
|
|
Common stock, par value $1 per share, authorized
15,000,000 shares, issued 8,172,943 shares at
December 31, 2010 and 7,623,857 at December 31,
2009.
|
|
|
8,173
|
|
|
|
7,624
|
|
Additional paid-in capital
|
|
|
39,455
|
|
|
|
37,862
|
|
Retained earnings
|
|
|
40,668
|
|
|
|
36,883
|
|
Accumulated other comprehensive income
|
|
|
2,007
|
|
|
|
2,626
|
|
Treasury shares at cost, 328,194 shares at
December 31, 2010 and December 31, 2009
|
|
|
(6,092
|
)
|
|
|
(6,092
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
109,464
|
|
|
|
104,141
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
1,152,537
|
|
|
$
|
1,149,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
44
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands except share and per share amounts)
|
|
|
Interest and Dividend Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
42,850
|
|
|
$
|
45,885
|
|
|
$
|
48,314
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and corporations
|
|
|
7,220
|
|
|
|
10,452
|
|
|
|
8,786
|
|
State and political subdivisions
|
|
|
987
|
|
|
|
1,008
|
|
|
|
777
|
|
Other debt and equity securities
|
|
|
269
|
|
|
|
244
|
|
|
|
304
|
|
Federal funds sold and short-term investments
|
|
|
46
|
|
|
|
58
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
51,372
|
|
|
|
57,647
|
|
|
|
58,328
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
10,709
|
|
|
|
17,379
|
|
|
|
22,306
|
|
Federal Home Loan Bank advances
|
|
|
1,272
|
|
|
|
1,481
|
|
|
|
2,322
|
|
Short-term borrowings
|
|
|
4
|
|
|
|
124
|
|
|
|
387
|
|
Junior subordinated debentures
|
|
|
779
|
|
|
|
941
|
|
|
|
1,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
12,764
|
|
|
|
19,925
|
|
|
|
26,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
38,608
|
|
|
|
37,722
|
|
|
|
32,139
|
|
Provision for Loan Losses (Note 8)
|
|
|
10,225
|
|
|
|
19,017
|
|
|
|
6,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
28,383
|
|
|
|
18,705
|
|
|
|
25,330
|
|
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and trust services
|
|
|
1,797
|
|
|
|
1,919
|
|
|
|
1,908
|
|
Deposit service charges
|
|
|
4,247
|
|
|
|
4,478
|
|
|
|
4,760
|
|
Other service charges and fees
|
|
|
3,208
|
|
|
|
2,775
|
|
|
|
2,710
|
|
Income from bank owned life insurance
|
|
|
709
|
|
|
|
693
|
|
|
|
979
|
|
Other income
|
|
|
329
|
|
|
|
315
|
|
|
|
856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees and other income
|
|
|
10,290
|
|
|
|
10,180
|
|
|
|
11,213
|
|
Securities gains, net
|
|
|
393
|
|
|
|
690
|
|
|
|
538
|
|
Gains on sale of loans
|
|
|
1,000
|
|
|
|
1,146
|
|
|
|
797
|
|
Loss on sale of other assets, net
|
|
|
(116
|
)
|
|
|
(60
|
)
|
|
|
(89
|
)
|
Gain on extinguishment of debt (Note 13)
|
|
|
2,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
13,777
|
|
|
|
11,956
|
|
|
|
12,459
|
|
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits (Notes 19 & 20)
|
|
|
15,854
|
|
|
|
15,142
|
|
|
|
15,255
|
|
Furniture and equipment
|
|
|
3,550
|
|
|
|
4,344
|
|
|
|
3,950
|
|
Net occupancy (Note 9)
|
|
|
2,355
|
|
|
|
2,354
|
|
|
|
2,386
|
|
Outside services
|
|
|
2,182
|
|
|
|
2,459
|
|
|
|
2,490
|
|
Marketing and public relations
|
|
|
1,065
|
|
|
|
961
|
|
|
|
987
|
|
Supplies, postage and freight
|
|
|
1,225
|
|
|
|
1,260
|
|
|
|
1,468
|
|
Telecommunications
|
|
|
802
|
|
|
|
813
|
|
|
|
850
|
|
Ohio franchise tax
|
|
|
1,113
|
|
|
|
908
|
|
|
|
895
|
|
FDIC assessments
|
|
|
2,241
|
|
|
|
2,622
|
|
|
|
722
|
|
Other real estate owned
|
|
|
597
|
|
|
|
367
|
|
|
|
1,070
|
|
Electronic banking expenses
|
|
|
873
|
|
|
|
800
|
|
|
|
932
|
|
Loan and collection expense
|
|
|
1,715
|
|
|
|
1,346
|
|
|
|
908
|
|
Other expense
|
|
|
1,997
|
|
|
|
1,954
|
|
|
|
2,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
35,569
|
|
|
|
35,330
|
|
|
|
34,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit)
|
|
|
6,591
|
|
|
|
(4,669
|
)
|
|
|
3,508
|
|
Income tax expense (benefit) (Note 15)
|
|
|
1,226
|
|
|
|
(2,668
|
)
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
5,365
|
|
|
|
(2,001
|
)
|
|
|
3,396
|
|
Dividends and accretion on preferred stock
|
|
|
1,276
|
|
|
|
1,256
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Available to Common Shareholders
|
|
$
|
4,089
|
|
|
$
|
(3,257
|
)
|
|
$
|
3,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per Common Share (Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.55
|
|
|
$
|
(0.45
|
)
|
|
$
|
0.45
|
|
Diluted
|
|
|
0.55
|
|
|
|
(0.45
|
)
|
|
|
0.45
|
|
Dividends declared
|
|
|
0.04
|
|
|
|
0.20
|
|
|
|
0.54
|
|
Average Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,511,173
|
|
|
|
7,295,663
|
|
|
|
7,295,663
|
|
Diluted
|
|
|
7,511,173
|
|
|
|
7,295,663
|
|
|
|
7,295,663
|
|
See accompanying notes to consolidated financial statements
45
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Warrant to
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Purchase
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
(Net of
|
|
|
Common
|
|
|
Common
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Discount)
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Total
|
|
|
|
(Dollars in thousands except share and per share amounts)
|
|
|
Balance, January 1, 2008
|
|
$
|
|
|
|
|
|
|
|
$
|
7,624
|
|
|
$
|
37,712
|
|
|
$
|
42,226
|
|
|
$
|
458
|
|
|
$
|
(6,092
|
)
|
|
$
|
81,928
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,396
|
|
|
|
|
|
|
|
|
|
|
|
3,396
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension liability adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,083
|
)
|
|
|
|
|
|
|
(1,083
|
)
|
Change in unrealized gains and losses on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,464
|
|
|
|
|
|
|
|
1,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,777
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
Issuance of 25,223 shares of preferred stock, Series B
|
|
|
25,077
|
|
|
$
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,223
|
|
Common dividends declared, $.54 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,940
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
25,077
|
|
|
$
|
146
|
|
|
$
|
7,624
|
|
|
$
|
37,783
|
|
|
$
|
41,682
|
|
|
$
|
839
|
|
|
$
|
(6,092
|
)
|
|
$
|
107,059
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,001
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,001
|
)
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension liability adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
38
|
|
Change in unrealized gains and losses on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,749
|
|
|
|
|
|
|
|
1,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(214
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
Preferred dividends and accretion of discount
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,339
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,324
|
)
|
Common dividends declared, $.20 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,459
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
25,092
|
|
|
$
|
146
|
|
|
$
|
7,624
|
|
|
$
|
37,862
|
|
|
$
|
36,883
|
|
|
$
|
2,626
|
|
|
$
|
(6,092
|
)
|
|
$
|
104,141
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,365
|
|
|
|
|
|
|
|
|
|
|
|
5,365
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension liability adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257
|
|
|
|
|
|
|
|
257
|
|
Change in unrealized gains and losses on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(876
|
)
|
|
|
|
|
|
|
(876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,746
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
|
|
Common shares issued (462,234 shares)
|
|
|
|
|
|
|
|
|
|
|
462
|
|
|
|
1,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,040
|
|
Restricted shares granted (86,852 shares)
|
|
|
|
|
|
|
|
|
|
|
87
|
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends and accretion of discount
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,276
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,261
|
)
|
Common dividends declared, $.04 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(304
|
)
|
|
|
|
|
|
|
|
|
|
|
(304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
$
|
25,107
|
|
|
$
|
146
|
|
|
$
|
8,173
|
|
|
$
|
39,455
|
|
|
$
|
40,668
|
|
|
$
|
2,007
|
|
|
$
|
(6,092
|
)
|
|
$
|
109,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
46
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5,365
|
|
|
$
|
(2,001
|
)
|
|
$
|
3,396
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
10,225
|
|
|
|
19,017
|
|
|
|
6,809
|
|
Depreciation and amortization
|
|
|
1,357
|
|
|
|
1,632
|
|
|
|
1,749
|
|
Amortization (accretion) of premiums and discounts
|
|
|
2,206
|
|
|
|
1,529
|
|
|
|
(431
|
)
|
Amortization of intangibles
|
|
|
137
|
|
|
|
137
|
|
|
|
138
|
|
Amortization of loan servicing rights
|
|
|
262
|
|
|
|
422
|
|
|
|
219
|
|
Amortization of deferred loan fees
|
|
|
162
|
|
|
|
103
|
|
|
|
294
|
|
Federal deferred income tax expense (benefit)
|
|
|
1,535
|
|
|
|
(2,578
|
)
|
|
|
(1,241
|
)
|
Securities gains, net
|
|
|
(393
|
)
|
|
|
(690
|
)
|
|
|
(538
|
)
|
Share-based compensation expense
|
|
|
102
|
|
|
|
79
|
|
|
|
71
|
|
Loans originated for sale
|
|
|
(80,175
|
)
|
|
|
(105,623
|
)
|
|
|
(85,164
|
)
|
Proceeds from sales of loan originations
|
|
|
79,853
|
|
|
|
106,566
|
|
|
|
87,103
|
|
Net gain from loan sales
|
|
|
(1,000
|
)
|
|
|
(1,146
|
)
|
|
|
(797
|
)
|
Federal Home Loan Bank stock dividends
|
|
|
|
|
|
|
|
|
|
|
(143
|
)
|
Net loss on sale of other assets
|
|
|
116
|
|
|
|
60
|
|
|
|
89
|
|
Net gain on extinguishment of debt
|
|
|
(2,210
|
)
|
|
|
|
|
|
|
|
|
Net increase in accrued interest receivable and other assets
|
|
|
(817
|
)
|
|
|
(9,092
|
)
|
|
|
(2,345
|
)
|
Net increase (decrease) in accrued interest payable, taxes and
other liabilities
|
|
|
(4,477
|
)
|
|
|
(1,930
|
)
|
|
|
727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
12,248
|
|
|
|
6,485
|
|
|
|
9,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of
available-for-sale
securities
|
|
|
15,499
|
|
|
|
38,141
|
|
|
|
77,069
|
|
Proceeds from maturities of
available-for-sale
securities
|
|
|
118,569
|
|
|
|
69,307
|
|
|
|
37,728
|
|
Purchase of
available-for-sale
securities
|
|
|
(111,777
|
)
|
|
|
(129,941
|
)
|
|
|
(155,946
|
)
|
Purchase of trading securities
|
|
|
|
|
|
|
(9,005
|
)
|
|
|
(81,738
|
)
|
Proceeds from maturities of trading securities
|
|
|
436
|
|
|
|
1,737
|
|
|
|
|
|
Proceeds from sale of trading securities
|
|
|
7,774
|
|
|
|
10,462
|
|
|
|
104,433
|
|
Change in interest-bearing deposits in other banks
|
|
|
11
|
|
|
|
(7
|
)
|
|
|
(252
|
)
|
Purchase of Federal Reserve Bank Stock
|
|
|
(756
|
)
|
|
|
|
|
|
|
|
|
Purchase of Federal Home Loan Bank Stock
|
|
|
|
|
|
|
(101
|
)
|
|
|
(117
|
)
|
Net increase in loans made to customers
|
|
|
(25,395
|
)
|
|
|
(12,943
|
)
|
|
|
(53,912
|
)
|
Proceeds from the sale of other real estate owned
|
|
|
584
|
|
|
|
917
|
|
|
|
1,203
|
|
Purchase of bank premises and equipment
|
|
|
(906
|
)
|
|
|
(549
|
)
|
|
|
(500
|
)
|
Proceeds from sale of bank premises and equipment
|
|
|
11
|
|
|
|
197
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
4,050
|
|
|
|
(31,785
|
)
|
|
|
(72,026
|
)
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in demand and other noninterest-bearing
|
|
|
(3,029
|
)
|
|
|
24,511
|
|
|
|
5,182
|
|
Net increase (decrease) in savings, money market and
interest-bearing demand
|
|
|
13,389
|
|
|
|
12,366
|
|
|
|
(2,445
|
)
|
Net increase (decrease) in certificates of deposit
|
|
|
(3,267
|
)
|
|
|
13,381
|
|
|
|
61,497
|
|
Net decrease in short-term borrowings
|
|
|
(525
|
)
|
|
|
(21,471
|
)
|
|
|
(19,177
|
)
|
Proceeds from Federal Home Loan Bank advances
|
|
|
34,000
|
|
|
|
22,500
|
|
|
|
65,000
|
|
Payment of Federal Home Loan Bank advances
|
|
|
(34,004
|
)
|
|
|
(33,352
|
)
|
|
|
(55,850
|
)
|
Issuance of preferred stock
|
|
|
|
|
|
|
|
|
|
|
25,223
|
|
Extinguishment of debt, net
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(1,565
|
)
|
|
|
(2,625
|
)
|
|
|
(3,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
4,989
|
|
|
|
15,310
|
|
|
|
75,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
21,287
|
|
|
|
(9,990
|
)
|
|
|
13,400
|
|
Cash and cash equivalents, January 1
|
|
|
26,933
|
|
|
|
36,923
|
|
|
|
23,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, December 31
|
|
$
|
48,220
|
|
|
$
|
26,933
|
|
|
$
|
36,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
13,404
|
|
|
$
|
21,664
|
|
|
$
|
25,937
|
|
Income taxes paid
|
|
|
675
|
|
|
|
400
|
|
|
|
2,555
|
|
Transfer of loans to other real estate owned
|
|
|
2,970
|
|
|
|
1,317
|
|
|
|
688
|
|
See accompanying notes to consolidated financial statements
47
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.
Use of
Estimates
LNB Bancorp Inc. prepares its financial statements in conformity
with generally accepted accounting principles (GAAP), which
requires the Corporations 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 Managements
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 Corporations 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 securities.
Segment
Information
The Corporations 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
Banks deposit and loan and trust activities. The majority
of the Banks 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 December 31, 2010, the Corporation did not hold any
trading securities. The Corporation held trading securities as
of December 31, 2009. Securities that the Corporation has a
positive intent and ability to hold to maturity are classified
as held to maturity. As of December 31, 2010 and
December 31, 2009, 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,
48
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 issuers 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 issuers
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 an entity 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 an entity
intends to sell or it is more likely than not it will be
required to sell the security before recovery of its amortized
cost basis, the OTTI shall be recognized in earnings equal to
the entire difference between the investments 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 entity 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. 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 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
49
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 loans
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 Managements estimate of
credit losses inherent in the loan portfolio at the balance
sheet date. Managements determination of the allowance,
and the resulting provision, is based on judgments and
assumptions, including general economic conditions, loan
portfolio composition, loan loss experience, Managements
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
Managements evaluation of the loan portfolio and the
adequacy of the allowance for loan losses under current economic
conditions and such other factors which, in Managements
judgment, deserve current recognition.
Servicing
Servicing assets are recognized as separate assets when rights
are acquired through sale of financial assets. Capitalized
servicing rights are reported in other assets and are amortized
into noninterest income in proportion to, and over the period
of, the estimated future net servicing income of the underlying
financial assets. Servicing assets are evaluated for impairment
on a quarterly basis based upon the fair value of the rights as
compared to amortized cost. Impairment is determined by
stratifying rights by predominant characteristics, such as
interest rates and terms. Fair value is determined using prices
for similar assets with similar characteristics, when available,
or based upon discounted cash flows using market-based
assumptions. Impairment is recognized through a valuation
allowance for an individual stratum, to the extent that fair
value is less than the capitalized amount for the stratum.
Bank
Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are
computed generally on the straight-line method over the
estimated useful lives of the assets. Upon the sale or other
disposition of assets, the cost and related accumulated
depreciation are retired and the resulting gain or loss is
recognized. Maintenance and repairs are charged to expense as
incurred, while renewals and improvements are capitalized.
Software costs related to externally developed systems are
capitalized at cost less accumulated amortization. Amortization
is computed on the straight-line method over the estimated
useful life.
Goodwill
and Core Deposit Intangibles
Intangible assets arise from acquisitions and include goodwill
and core deposit intangibles. Goodwill is the excess of purchase
price over the fair value of identified net assets in
acquisitions. Core deposit intangibles represent the value of
depositor relationships purchased. Goodwill is tested at least
annually for impairment or whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. The Corporation tests for goodwill impairment
annually as of November 30th of each year. Core deposit
intangible assets are amortized using the straight-line method
over ten years and are subject to annual impairment testing.
Other
Real Estate Owned
Other real estate (ORE) is comprised of property acquired
through a foreclosure proceeding or acceptance of a
deed-in-lieu
of foreclosure, and loans classified as in-substance
foreclosure. Other real estate owned is recorded at the lower of
the recorded investment in the loan at the time of acquisition
or the fair value of the underlying property collateral, less
estimated selling costs. Any write-down in the carrying value of
a property at the time of acquisition is charged to the
allowance for loan losses. Any subsequent write-downs to reflect
current fair market value, as well as gains and losses on
disposition and revenues and expenses incurred in maintaining
such properties, are treated as
50
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
postretirement 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 Corporations
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 Corporations
available-for-sale
securities (after applicable income tax expense) totaling $3,479
and $4,356 at December 31, 2010 and 2009, respectively, and
the minimum pension liability adjustment (after applicable
income tax benefit) totaling $1,472 and $1,730 at
December 31, 2010 and 2009, respectively, are included in
accumulated other comprehensive income.
New
Accounting Pronouncements
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, 2009, 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 22, Estimated Fair Value of
Financial Instruments.
ASU
No. 2010-20,
Receivables (Topic 310): Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit
Losses. In July 2010, FASB issued ASU
2010-20
which is intended to provide
51
additional information to assist financial statement users in
assessing an entitys credit risk exposures and evaluating
the adequacy of its allowance for credit losses. The disclosures
as of the end of a reporting period are effective for interim
and annual reporting periods ending on or after
December 15, 2010. The disclosures about activity that
occurs during a reporting period are effective for interim and
annual reporting periods beginning on or after December 15,
2010. The amendments in ASU
2010-20
encourage, but do not require, comparative disclosures for
earlier reporting periods that ended before initial adoption.
However, an entity should provide comparative disclosures for
those reporting periods ending after initial adoption. See
Note 8, Allowance for Loan Losses.
ASC Topic 860, Transfers and Servicing. In
November 2009, an amendment to the accounting standards for
transfers of financial assets was issued. This amendment removes
the concept of a qualifying special purpose entity from existing
GAAP and removes the exception from applying the accounting and
reporting standards within ASC 810, Consolidation, to
qualifying special purpose entities. This amendment also
establishes conditions for accounting and reporting of a
transfer of a portion of a financial asset, modifies the asset
sale/derecognition criteria, and changes how retained interests
are initially measured. This amendment is expected to provide
greater transparency about transfers of financial assets and a
transferors continuing involvement, if any, with the
transferred assets. This accounting pronouncement is effective
in 2010. The adoption of this pronouncement did not have a
material impact on the Corporations financial statements.
ASC Topic 810, Consolidation. In November
2009, an amendment to the accounting standards for consolidation
was issued. The new guidance amends the criteria for determining
the primary beneficiary of, and the entity required to
consolidate, a variable interest entity. This accounting
pronouncement is effective in 2010. The adoption of this
pronouncement did not have a material impact on the
Corporations financial statements.
|
|
(2)
|
Earnings
(Loss) Per Common Share
|
Basic earnings (loss) 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands except per share amounts)
|
|
|
Weighted average shares outstanding used in Basic Earnings per
Common Share
|
|
|
7,511,173
|
|
|
|
7,295,663
|
|
|
|
7,295,663
|
|
Dilutive effect of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used in Diluted Earnings Per
Common Share
|
|
|
7,511,173
|
|
|
|
7,295,663
|
|
|
|
7,295,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
5,365
|
|
|
$
|
(2,001
|
)
|
|
$
|
3,396
|
|
Preferred stock dividend and accretion
|
|
|
1,276
|
|
|
|
1,256
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Available to Common Shareholders
|
|
$
|
4,089
|
|
|
$
|
(3,257
|
)
|
|
$
|
3,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) Per Common Share
|
|
$
|
0.55
|
|
|
$
|
(0.45
|
)
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) Per Common Share
|
|
$
|
0.55
|
|
|
$
|
(0.45
|
)
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All outstanding stock options and common stock warrants were
antidilutive for the years ended December 31, 2010 and
December 31, 2008. No dilution exists for the year ended
December 31, 2009 due to the net loss.
|
|
(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 $1,195 on
December 31, 2010 and $919 on December 31, 2009.
52
|
|
(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
Corporations 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
Corporations customer base or a material negative change
in the relationship with significant customers.
Based on the Corporations goodwill impairment analysis,
the fair value of the reporting unit exceeded its carrying value
by an estimated 10%; therefore, no impairment charge was
recognized as of December 31, 2010.
Core deposit intangibles are amortized over their estimated
useful life of 10 years. A summary of core deposit
intangible assets follows:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Core deposit intangibles
|
|
$
|
1,367
|
|
|
$
|
1,367
|
|
Less: accumulated amortization
|
|
|
499
|
|
|
|
362
|
|
|
|
|
|
|
|
|
|
|
Carrying value of core deposit intangibles
|
|
$
|
868
|
|
|
$
|
1,005
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets was $137, $137 and
$138 for the years ended December 31, 2010, 2009 and 2008,
respectively. The following table shows the estimated future
amortization expense for amortizable intangible assets based on
existing asset balances and the interest rate environment as of
December 31, 2010. The Corporations actual
amortization expense in any given period may be significantly
different from the estimated amounts depending upon the addition
of new intangible assets, changes in underlying deposits and
market conditions.
Core
Deposits Intangibles
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
2011
|
|
$
|
137
|
|
2012
|
|
|
137
|
|
2013
|
|
|
137
|
|
2014
|
|
|
137
|
|
2015
|
|
|
137
|
|
2016 and beyond
|
|
|
183
|
|
53
The amortized cost, gross unrealized gains and losses and fair
values of securities at December 31, 2010 and 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
Amortized
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized 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
|
|
$
|
216,454
|
|
|
$
|
6,410
|
|
|
$
|
(1,139
|
)
|
|
$
|
221,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009
|
|
|
|
Amortized
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and corporations
|
|
$
|
45,142
|
|
|
$
|
354
|
|
|
$
|
(281
|
)
|
|
$
|
45,215
|
|
Mortgage backed securities
|
|
|
122,585
|
|
|
|
4,727
|
|
|
|
|
|
|
|
127,312
|
|
Collateralized mortgage obligations
|
|
|
50,123
|
|
|
|
1,365
|
|
|
|
(21
|
)
|
|
|
51,467
|
|
State and political subdivisions
|
|
|
22,588
|
|
|
|
571
|
|
|
|
(116
|
)
|
|
|
23,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities
|
|
$
|
240,438
|
|
|
$
|
7,017
|
|
|
$
|
(418
|
)
|
|
$
|
247,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Securities Held at December 31, 2009
|
|
|
|
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Recorded to Income
|
|
|
Recorded to Income
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
Trading Securities
|
|
$
|
8,327
|
|
|
$
|
118
|
|
|
$
|
|
|
|
$
|
8,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of available for sale debt
securities by contractual maturity date at December 31,
2010 is provided in the following table. Mortgage backed
securities are not due at a single maturity date and are
therefore shown separately.
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
Fair
|
|
|
|
Amortized Cost
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
|
|
|
$
|
|
|
Due from one year to five years
|
|
|
34,475
|
|
|
|
34,503
|
|
Due from five years to ten years
|
|
|
22,333
|
|
|
|
23,000
|
|
Due after ten years
|
|
|
23,556
|
|
|
|
22,812
|
|
Mortgage backed securities and collateralized mortgage
obligations
|
|
|
136,090
|
|
|
|
141,410
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
216,454
|
|
|
$
|
221,725
|
|
|
|
|
|
|
|
|
|
|
54
Realized gains and losses related to securities
available-for-sale
for each of the three years ended December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Gross realized gains
|
|
$
|
493
|
|
|
$
|
444
|
|
|
$
|
612
|
|
Gross realized losses
|
|
|
|
|
|
|
(111
|
)
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Securities Gains
|
|
$
|
493
|
|
|
$
|
333
|
|
|
$
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of available for sale securities
|
|
$
|
15,499
|
|
|
$
|
38,141
|
|
|
$
|
77,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses of $100 were recorded on the sale of trading
securities during 2010. Net gains of $357 were recorded on the
sale of trading securities during 2009 which included unrealized
gains of $118 recorded to income on currently held trading
securities. Net gains of $2 were recorded on the sale of trading
securities during 2008 which included unrealized gains of $16
recorded to income on currently held trading securities.
U.S. Government agencies and corporations include callable
and bullet agency issues and agency-backed mortgage backed
securities. The maturity of mortgage backed securities is shown
based on contractual maturity of the security although
repayments occur each year.
The carrying value of securities pledged to secure trust
deposits, public deposits, line of credit, and for other
purposes required by law amounted to $152,079 and $187,701 at
December 31, 2010 and 2009, respectively.
The securities portfolio contained $6,721 and $4,844 in
non-rated securities of state and political subdivisions at
December 31, 2010 and 2009, respectively. Based upon yield,
term to maturity and market risk, the fair value of these
securities was estimated to be $6,784 and $5,040 at
December 31, 2010 and 2009, respectively. Management
reviewed these non-rated securities and has determined that
there was no other than temporary impairment to their value at
December 31, 2010 and 2009.
The following is a summary of securities that had unrealized
losses at December 31, 2010 and 2009. 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 December 31, 2010, the Corporation held
33 securities with unrealized losses totaling $1,139. At
December 31, 2009 there were 19 securities with unrealized
losses totaling $418. 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 to hold these securities until their value
recovers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Unrealized 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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Government agencies and corporations
|
|
$
|
21,440
|
|
|
$
|
(281
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
21,440
|
|
|
$
|
(281
|
)
|
Mortgage backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
|
2,177
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
2,177
|
|
|
|
(21
|
)
|
State and political subdivisions
|
|
|
4,549
|
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
4,549
|
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,166
|
|
|
$
|
(418
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28,166
|
|
|
$
|
(418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6)
|
Transactions
with Related Parties
|
The Corporation, through its subsidiary Bank, makes loans to its
officers, directors and their affiliates. These loans are made
on substantially the same terms and conditions as transactions
with non-related parties. A comparison of loans outstanding to
related parties follows:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Amount at beginning of year
|
|
$
|
18,737
|
|
|
$
|
20,306
|
|
New loans
|
|
|
2,130
|
|
|
|
6,760
|
|
Repayments
|
|
|
(2,521
|
)
|
|
|
(7,994
|
)
|
Changes in directors and officers and /or affiliations, net
|
|
|
17
|
|
|
|
(335
|
)
|
|
|
|
|
|
|
|
|
|
Amount at end of year
|
|
$
|
18,363
|
|
|
$
|
18,737
|
|
|
|
|
|
|
|
|
|
|
The Corporation, through its subsidiary Bank, maintains deposits
accounts for officers, directors and their affiliates. These
deposits are made on substantially the same terms and conditions
as transactions with non-related parties. The balances of
deposit accounts for related parties were $7,214 and $7,350,
respectively at December 31, 2010 and 2009.
56
Loan balances at December 31, 2010 and December 31,
2009 are summarized by purpose as follows:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Real estate loans (includes loans secured primarily by real
estate):
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
$
|
52,713
|
|
|
$
|
65,052
|
|
One to four family residential
|
|
|
207,221
|
|
|
|
219,508
|
|
Multi-family residential
|
|
|
29,211
|
|
|
|
28,988
|
|
Non-farm non-residential properties
|
|
|
293,892
|
|
|
|
286,778
|
|
Commercial and industrial loans
|
|
|
60,623
|
|
|
|
61,929
|
|
Personal loans to individuals:
|
|
|
|
|
|
|
|
|
Auto, single payment and installment
|
|
|
163,896
|
|
|
|
135,097
|
|
All other loans
|
|
|
5,023
|
|
|
|
5,845
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
812,579
|
|
|
|
803,197
|
|
Allowance for loan losses
|
|
|
(16,136
|
)
|
|
|
(18,792
|
)
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
796,443
|
|
|
$
|
784,405
|
|
|
|
|
|
|
|
|
|
|
|
|
(8)
|
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 Managements 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. For residential real estate,
installment and other loans, loss factors are applied on a
portfolio basis. Loss factors are based on the
Corporations 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 Corporations 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.
57
Activity in the allowance for loan losses by segment for 2010 is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies
Management monitors delinquency and potential commercial problem
loans. Bank-wide delinquency at December 31, 2010 was 4.89%
of total loans. Total 30-59 day delinquency and 60-89 day
delinquency was 0.54% and 0.33% of total loans at
December 31, 2010, respectively. Information regarding
delinquent loans as of December 31, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
>
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 Days
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
Greater than
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
90 Days
|
|
|
Total Past Due
|
|
|
Current
|
|
|
Total Loans
|
|
|
Accruing
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial
|
|
$
|
31
|
|
|
$
|
211
|
|
|
$
|
793
|
|
|
$
|
1,035
|
|
|
$
|
64,627
|
|
|
$
|
65,662
|
|
|
$
|
|
|
Commercial Real Estate
|
|
|
1,906
|
|
|
|
856
|
|
|
|
19,970
|
|
|
|
22,732
|
|
|
|
357,553
|
|
|
|
375,803
|
|
|
|
|
|
Residential
|
|
|
1,018
|
|
|
|
1,284
|
|
|
|
7,172
|
|
|
|
9,474
|
|
|
|
60,729
|
|
|
|
74,685
|
|
|
|
|
|
Home Equity Loans
|
|
|
776
|
|
|
|
235
|
|
|
|
1,130
|
|
|
|
2,141
|
|
|
|
130,395
|
|
|
|
132,536
|
|
|
|
|
|
Indirect
|
|
|
612
|
|
|
|
123
|
|
|
|
112
|
|
|
|
847
|
|
|
|
149,166
|
|
|
|
150,031
|
|
|
|
|
|
Consumer
|
|
|
61
|
|
|
|
|
|
|
|
26
|
|
|
|
87
|
|
|
|
13,793
|
|
|
|
13,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,404
|
|
|
$
|
2,709
|
|
|
$
|
29,203
|
|
|
$
|
36,316
|
|
|
$
|
776,263
|
|
|
$
|
812,579
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
Loans
A loan is considered impaired when it is probable that not all
principal and interest amounts will be collected according to
the loan contract. Residential mortgage, installment and other
consumer loans are evaluated collectively for impairment.
Individual commercial loans are evaluated for impairment.
Impaired loans are written
58
down by the establishment of a specific allowance where
necessary. Information regarding impaired loans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Related
|
|
|
Recorded
|
|
|
Income
|
|
At December 31, 2010
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
Balance
|
|
|
Recognized
|
|
|
|
(Dollars in thousands)
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
549
|
|
|
$
|
549
|
|
|
$
|
|
|
|
$
|
600
|
|
|
$
|
16
|
|
Commercial Real Estate
|
|
|
6,414
|
|
|
|
6,414
|
|
|
|
|
|
|
|
8,643
|
|
|
|
133
|
|
Residential
|
|
|
4,010
|
|
|
|
4,010
|
|
|
|
|
|
|
|
2,666
|
|
|
|
|
|
Home Equity Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
578
|
|
|
|
784
|
|
|
|
206
|
|
|
|
1,143
|
|
|
|
|
|
Commercial Real Estate
|
|
|
25,595
|
|
|
|
32,460
|
|
|
|
6,865
|
|
|
|
29,946
|
|
|
|
6
|
|
Residential
|
|
|
405
|
|
|
|
451
|
|
|
|
46
|
|
|
|
102
|
|
|
|
|
|
Home Equity Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,551
|
|
|
$
|
44,668
|
|
|
$
|
7,117
|
|
|
$
|
43,100
|
|
|
$
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
|
Year-end impaired loans with allowance for loan losses
specifically allocated
|
|
$
|
24,250
|
|
|
$
|
13,213
|
|
Year-end impaired loans without allowance for loan losses
specifically allocated
|
|
|
2,804
|
|
|
|
2,331
|
|
Amount of allowance specifically allocated to impaired loans
|
|
|
7,584
|
|
|
|
3,569
|
|
Average of impaired loans during the year
|
|
|
22,872
|
|
|
|
16,094
|
|
Interest income recognized during impairment
|
|
|
|
|
|
|
|
|
Nonaccrual loans at year end
|
|
|
38,837
|
|
|
|
19,592
|
|
Troubled
Debt Restructuring
A restructuring of a debt constitutes a troubled debt
restructuring if the creditor for economic or legal reasons
related to the debtors financial difficulties grants a
concession to the debtor that it would not otherwise consider.
That concession either stems from an agreement between the
creditor and the debtor or is imposed by law or a court. The
Corporation adheres to ASC
310-40,
Troubled Debt Restructurings by Creditors, to determine
whether a troubled debt structuring applies in a particular
instance. The Corporation had one loan as of December 31,
2010 that was classified as a troubled debt restructuring. The
loan had a principal loan balance of $636 and has made timely
payments of principal and interest per the modified agreement
throughout 2010.
59
Nonaccrual
Loans
Nonaccrual loan balances at December 31, 2010 and
December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial
|
|
$
|
1,333
|
|
|
$
|
2,465
|
|
Commercial Real Estate
|
|
|
25,941
|
|
|
|
24,914
|
|
Residential
|
|
|
11,052
|
|
|
|
9,395
|
|
Home Equity Loans
|
|
|
2,372
|
|
|
|
1,417
|
|
Indirect
|
|
|
667
|
|
|
|
557
|
|
Consumer
|
|
|
466
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,831
|
|
|
$
|
38,837
|
|
|
|
|
|
|
|
|
|
|
Credit
Risk Grading
Sound credit systems, practices and procedures such as credit
risk grading systems; effective credit review and examination
processes; effective loan monitoring, problem identification,
and resolution processes; and a conservative loss recognition
process and charge-off policy are integral to Managements
proper assessment of the adequacy of the allowance. Many factors
are considered when 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. Credit quality indicators used in
Managements periodic analysis of the adequacy of the
allowance include the Corporations internal credit risk
grades and are identified in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real
|
|
|
Commercial Real
|
|
|
|
|
|
|
|
|
|
|
|
|
Estate
|
|
|
Estate
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
Other
|
|
|
Residential
|
|
|
Total
|
|
Commercial
|
|
|
|
Credit Exposure
|
|
December 31, 2010
|
|
|
|
(Dollars in thousands)
|
|
|
Grade 1 Minimal
|
|
$
|
3,124
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,124
|
|
Grade 2 Modest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grade 3 Better than average
|
|
|
162
|
|
|
|
|
|
|
|
3,055
|
|
|
|
|
|
|
|
3,217
|
|
Grade 4 Average
|
|
|
8,343
|
|
|
|
833
|
|
|
|
58,818
|
|
|
|
267
|
|
|
|
68,261
|
|
Grade 5 Acceptable
|
|
|
49,727
|
|
|
|
16,358
|
|
|
|
230,117
|
|
|
|
5,733
|
|
|
|
301,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Pass Credits
|
|
|
61,356
|
|
|
|
17,191
|
|
|
|
291,990
|
|
|
|
6,000
|
|
|
|
376,537
|
|
Grade 6 Special mention
|
|
|
2,599
|
|
|
|
808
|
|
|
|
12,999
|
|
|
|
170
|
|
|
|
16,576
|
|
Grade 7 Substandard
|
|
|
1,707
|
|
|
|
2,083
|
|
|
|
50,732
|
|
|
|
2,516
|
|
|
|
57,038
|
|
Grade 8 Doubtful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grade 9 Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
65,662
|
|
|
$
|
20,082
|
|
|
$
|
355,721
|
|
|
$
|
8,686
|
|
|
$
|
450,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
The Corporation adheres to underwriting standards consistent
with its Loan Policy for indirect and consumer loans. Final
approval of a consumer credit depends on the repayment ability
of the borrower. Repayment ability generally requires the
determination of the borrowers capacity to meet current
and proposed debt service requirements. A borrowers
repayment ability is monitored based on delinquency, generally
for time periods of 30 to 59 days past due, 60 to
89 days past due and greater than 90 days past due.
This information is provided in the above delinquent loan table.
Additionally, a good indicator of repayment ability is a
borrowers credit history. A borrowers credit history
is evaluated though the use of credit reports and or an
automated underwriting system. A borrowers credit score is
an indication of a persons creditworthiness that is used
to access the likelihood that a borrower will repay their debts.
A credit score is generally based upon a persons past
credit history and is a number between 300 and 850
the higher the number, the more creditworthy the person is
deemed to be. Below is a table that shows the average credit
scores in the consumer loan portfolio of the Corporation as of
December 31, 2010.
|
|
|
|
|
Consumer Credit Score Migration
|
|
December 31, 2010
|
|
|
Total 1-4 family residential
|
|
|
701
|
|
Total home equity loans
|
|
|
750
|
|
Total loans to individuals
|
|
|
728
|
|
Total indirect
|
|
|
771
|
|
Total revolving lines
|
|
|
713
|
|
|
|
(9)
|
Bank
Premises, Equipment and Leases
|
Bank premises and equipment are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
At December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Land
|
|
$
|
2,602
|
|
|
$
|
2,602
|
|
Buildings
|
|
|
11,612
|
|
|
|
11,434
|
|
Equipment
|
|
|
14,451
|
|
|
|
14,034
|
|
Purchased software
|
|
|
4,105
|
|
|
|
3,979
|
|
Leasehold improvements
|
|
|
1,088
|
|
|
|
1,078
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
$
|
33,858
|
|
|
$
|
33,127
|
|
Less: accumulated depreciation and amortization
|
|
|
24,213
|
|
|
|
23,022
|
|
|
|
|
|
|
|
|
|
|
Net bank premises and equipment
|
|
$
|
9,645
|
|
|
$
|
10,105
|
|
|
|
|
|
|
|
|
|
|
Depreciation of Bank premises and equipment charged to
noninterest expense amounted to $1,121 in 2010, $1,330 in 2009
and $1,459 in 2008. Amortization of purchased software charged
to noninterest expense amounted to $236 in 2010, $302 in 2009
and $290 in 2008.
At December 31, 2010, the Bank was obligated to pay rental
commitments under noncancelable operating leases on certain Bank
premises and equipment as follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(Dollars in thousands)
|
|
|
2011
|
|
$
|
800
|
|
2012
|
|
|
540
|
|
2013
|
|
|
342
|
|
2014
|
|
|
315
|
|
2015
|
|
|
318
|
|
2016 and thereafter
|
|
|
539
|
|
|
|
|
|
|
Total
|
|
$
|
2,854
|
|
|
|
|
|
|
61
Rentals paid under leases on Corporation premises and equipment
amounted to $1,118 in 2010, $1,186 in 2009 and $1,190 in 2008.
Deposit balances are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Demand and other noninterest-bearing
|
|
$
|
115,476
|
|
|
$
|
118,505
|
|
Interest checking
|
|
|
134,375
|
|
|
|
137,807
|
|
Savings
|
|
|
91,882
|
|
|
|
82,771
|
|
Money market accounts
|
|
|
92,177
|
|
|
|
84,467
|
|
Consumer time deposits
|
|
|
464,860
|
|
|
|
476,798
|
|
Public time deposits
|
|
|
79,756
|
|
|
|
71,085
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
978,526
|
|
|
$
|
971,433
|
|
|
|
|
|
|
|
|
|
|
The aggregate amount of certificates of deposit in denominations
of $100,000 or more amounted to $240,127 and $218,966 at
December 31, 2010 and 2009, respectively.
The maturity distribution of certificates of deposit as of
December 31, 2010 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 12 Months
|
|
|
After 36 Months
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
but within 36
|
|
|
but within 60
|
|
|
|
|
|
|
|
|
|
12 Months
|
|
|
Months
|
|
|
Months
|
|
|
After 5 Years
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Consumer time deposits
|
|
$
|
307,010
|
|
|
$
|
119,022
|
|
|
$
|
38,828
|
|
|
$
|
|
|
|
$
|
464,860
|
|
Public time deposits
|
|
|
73,259
|
|
|
|
4,490
|
|
|
|
2,007
|
|
|
|
|
|
|
|
79,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total time deposits
|
|
$
|
380,269
|
|
|
$
|
123,512
|
|
|
$
|
40,835
|
|
|
$
|
|
|
|
$
|
544,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11)
|
Short-Term
Borrowings
|
The Bank has a line of credit for advances and discounts with
the Federal Reserve Bank of Cleveland. The amount of this line
of credit varies on a monthly basis. The line is equal to 50% of
the balances of qualified home equity lines of credit that are
pledged as collateral. At December 31, 2010, the Bank had
pledged approximately $90,502 in qualifying home equity lines of
credit, resulting in an available line of credit of
approximately $45,251. No amounts were outstanding at
December 31, 2010 or December 31, 2009. The
Corporation also has a $4.0 million line of credit with an
unaffiliated financial institution. The balance of this line of
credit was $0 as of December 31, 2010 and December 31,
2009.
Short-term borrowings include securities sold under repurchase
agreements and Federal funds purchased from correspondent banks.
At December 31, 2010 and 2009, the outstanding balance of
securities sold under repurchase agreements totaled $932 and
$1,457, respectively. No federal funds were purchased as of
December 31, 2010 and 2009.
|
|
(12)
|
Federal
Home Loan Bank Advances
|
Federal Home Loan Bank advances amounted to $42,501 and $42,505
at December 31, 2010 and December 31, 2009
respectively. All advances are bullet maturities with no call
features. At December 31, 2010, collateral pledged for FHLB
advances consisted of qualified real estate mortgage loans and
investment securities of $59,833 and $29,261, respectively. The
maximum borrowing capacity of the Bank at December 31, 2010
was $50,754 with unused collateral borrowing capacity of $6,714.
The Bank maintains a $40,000 cash management line of credit
(CMA) with the FHLB. The amount outstanding was $0 for the CMA
line of credit as of December 31, 2010 and
December 31, 2009.
62
Maturities of FHLB advances outstanding at December 31,
2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Maturity January 2010, fixed rate 3.58%
|
|
$
|
|
|
|
$
|
10,000
|
|
Maturities January 2011 through February 2011, with fixed rates
ranging from 3.17% to 3.67%, averaging 3.50% for 2010 and
2009.
|
|
|
15,000
|
|
|
|
15,000
|
|
Maturity January 2012, fixed rate 2.37%
|
|
|
15,000
|
|
|
|
15,000
|
|
Maturities January 2014, fixed rates ranging from 2.57% to
3.55%, averaging 2.57% for 2010 and 3.55% for 2009.
|
|
|
10,040
|
|
|
|
55
|
|
Maturity July 2015, fixed rate 4.76%
|
|
|
2,461
|
|
|
|
2,450
|
|
|
|
|
|
|
|
|
|
|
Total FHLB advances
|
|
$
|
42,501
|
|
|
$
|
42,505
|
|
|
|
|
|
|
|
|
|
|
|
|
(13)
|
Trust Preferred
Securities
|
In May 2007, LNB Trust I (Trust I) and LNB
Trust II (Trust II) each sold
$10.0 million of preferred securities to outside investors
and invested the proceeds in junior subordinated debentures
issued by the Corporation. The Corporation used the proceeds
from the debentures to fund the cash portion of the Morgan
Bancorp, Inc. acquisition. Trust I and Trust II are
wholly-owned unconsolidated subsidiaries of the Corporation. The
Corporations obligations under the transaction documents,
taken together, have the effect of providing a full guarantee by
the Corporation, on a subordinated basis, of the payment
obligation of the Trusts.
The subordinated notes mature in 2037. Trust I bears a
floating interest rate (current three-month LIBOR plus
148 basis points). Trust II bears a fixed rate of 6.6%
through June 15, 2017, and then becomes a floating interest
rate (current three-month LIBOR plus 148 basis points).
Interest on the notes is payable quarterly. The interest rates
in effect as of the last determination date in 2010 were 1.78%
and 6.64% for Trust I and Trust II, respectively. At
December 31, 2010 and December 31, 2009, accrued
interest payable for Trust I was $6 and $8 and for
Trust II was $24 and $30, respectively.
The subordinated notes are redeemable in whole or in part,
without penalty, at the Corporations option on or after
June 15, 2012 and mature on June 15, 2037. The notes
are junior in right of payment to the prior payment in full of
all Senior Indebtedness of the Corporation, whether outstanding
at the date of this Indenture or thereafter incurred.
In August 2010, the Corporation entered into an agreement with
certain holders of its non-pooled trust preferred securities and
exchanged $2,125 in principal amount of the securities issued by
Trust I and $2,125 in principal amount of the securities
issued by Trust II for 462,234 newly issued shares of the
Corporations common stock at a volume-weighted average
price of $4.41 per share and recorded a gain of $2,210 which is
included in the consolidated statements of operations as
Gain on extinguishment of debt. At December 31,
2010, the balance of the subordinated notes payable to
Trust I and Trust II was $8,119 each.
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal current expense (benefit)
|
|
$
|
(309
|
)
|
|
$
|
(90
|
)
|
|
$
|
1,353
|
|
Federal deferred expense (benefit)
|
|
|
1,535
|
|
|
|
(2,578
|
)
|
|
|
(1,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax (Benefit)
|
|
$
|
1,226
|
|
|
$
|
(2,668
|
)
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
The following presents a reconciliation of income taxes as shown
on the Consolidated Statements of Income with that which would
be computed by applying the statutory Federal tax rate of 34% to
income (loss) before taxes in 2010, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Computed expected tax expense (benefit)
|
|
$
|
2,241
|
|
|
$
|
(1,587
|
)
|
|
$
|
1,193
|
|
Increase (reduction) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt interest on obligations of state and political
subdivisions
|
|
|
(371
|
)
|
|
|
(386
|
)
|
|
|
(265
|
)
|
Tax exempt interest on bank owned life insurance
|
|
|
(199
|
)
|
|
|
(236
|
)
|
|
|
(332
|
)
|
New markets tax credit
|
|
|
(536
|
)
|
|
|
(530
|
)
|
|
|
(476
|
)
|
Other, net
|
|
|
92
|
|
|
|
71
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Taxes (Benefit)
|
|
$
|
1,226
|
|
|
$
|
(2,668
|
)
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management monitors changes in tax statutes and regulations and
the issuance of judicial decisions to determine the potential
impact to uncertain income tax positions. During 2010 and 2009
there were no material uncertain income tax positions. At
December 31, 2010 and December 31, 2009, the
Corporation had no unrecognized tax benefits recorded. The
Corporation does not expect the amount of unrecognized tax
benefits to significantly change within the next twelve months.
64
Net deferred Federal tax assets are included in other assets on
the consolidated Balance Sheets. Management believes that it is
more likely than not that the deferred Federal tax assets will
be realized. At December 31, 2010 and 2009 there was no
valuation allowance required. The tax effects of temporary
differences that give rise to significant portions of the
deferred Federal tax assets and deferred Federal tax liabilities
are presented below.
|
|
|
|
|
|
|
|
|
|
|
At December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Deferred Federal tax assets:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
5,486
|
|
|
$
|
6,365
|
|
Deferred compensation
|
|
|
263
|
|
|
|
308
|
|
Minimum pension liability
|
|
|
758
|
|
|
|
889
|
|
Equity based compensation
|
|
|
90
|
|
|
|
69
|
|
Accrued loan fees and costs
|
|
|
431
|
|
|
|
241
|
|
New Market Tax Credit
|
|
|
|
|
|
|
430
|
|
Mark-to-market
adjustments
|
|
|
65
|
|
|
|
155
|
|
Other deferred tax assets
|
|
|
1,014
|
|
|
|
1,038
|
|
|
|
|
|
|
|
|
|
|
Total deferred Federal tax assets
|
|
$
|
8,107
|
|
|
$
|
9,495
|
|
|
|
|
|
|
|
|
|
|
Deferred Federal tax liabilities:
|
|
|
|
|
|
|
|
|
Bank premises and equipment depreciation
|
|
$
|
(106
|
)
|
|
$
|
(106
|
)
|
Net unrealized gain on securities available for sale
|
|
|
(1,792
|
)
|
|
|
(2,243
|
)
|
FHLB stock dividends
|
|
|
(254
|
)
|
|
|
(254
|
)
|
Intangible asset amortization
|
|
|
(1,052
|
)
|
|
|
(913
|
)
|
Accretion
|
|
|
(193
|
)
|
|
|
(181
|
)
|
Deferred charges
|
|
|
(303
|
)
|
|
|
(597
|
)
|
Prepaid pension
|
|
|
(763
|
)
|
|
|
(353
|
)
|
Other deferred tax liabilities
|
|
|
(315
|
)
|
|
|
(303
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred Federal tax liabilities
|
|
|
(4,778
|
)
|
|
|
(4,950
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred Federal tax assets
|
|
$
|
3,329
|
|
|
$
|
4,545
|
|
|
|
|
|
|
|
|
|
|
The Corporations income tax returns are subject to review
and examination by federal and state taxing authorities. The
Corporation is no longer subject to examination by the federal
taxing authority for years prior to 2009. The tax year 2009
remains open to examination by the U.S. taxing authority.
|
|
(15)
|
Shareholders
Equity
|
Preferred
Stock
The Corporation is authorized to issue up to
1,000,000 shares of Voting Preferred Stock, no par value.
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. The
Corporation has authorized 150,000 Series A Voting
Preferred Shares, none of which have been issued. As of
December 31, 2010 and 2009, 25,223 shares of the
Corporations Series B Preferred Stock were issued and
outstanding.
The Corporation issued 25,223 shares of Series B
Preferred Stock to the U.S. Treasury in a transaction
exempt from the registration requirements of the Securities Act.
The issued and outstanding shares of Series B Preferred
Stock were validly issued, have been fully paid and are
nonassessable. Holders of shares of Series B Preferred
Stock
65
are entitled to receive if, as and when declared by our Board of
Directors or a duly authorized committee of the Board, out of
assets legally available for payment, cumulative cash dividends
at a rate per annum of 5% per share on a liquidation preference
of $1,000 per share of Series B Preferred Stock with
respect to each dividend period from December 12, 2008 to,
but excluding, February 15, 2014. From and after
February 15, 2014, holders of shares of Series B
Preferred Stock are entitled to receive cumulative cash
dividends at a rate per annum of 9% per share on a liquidation
preference of $1,000 per share of Series B Preferred Stock.
Dividends are payable quarterly in arrears on each
February 15th, May 15th, August 15th and
November 15th on shares of Series B Preferred Stock. If any
dividend payment date is not a business day, then the next
business day will be the applicable dividend payment date, and
no additional dividends will accrue as a result of the
applicable postponement of the dividend payment date. Dividends
payable during any dividend period are computed on the basis of
a 360-day
year consisting of twelve
30-day
months. Dividends payable with respect to the Series B
Preferred Stock are payable to holders of record of shares of
Series B Preferred Stock on the date that is 15 calendar
days immediately preceding the applicable dividend payment date
or such other record date as the board of directors or any duly
authorized committee of the board determines, so long as such
record date is not more than 60 nor less than 10 days prior
to the applicable dividend payment date.
If the Corporation determines not to pay any dividend or a full
dividend with respect to the Series B Preferred Stock, the
Corporation is required to provide written notice to the holders
of shares of Series B Preferred Stock prior to the
applicable dividend payment date.
The Corporation is subject to various regulatory policies and
requirements relating to the payment of dividends, including
requirements to maintain adequate capital above regulatory
minimums. The Board of Governors of the Federal Reserve System,
or the Federal Reserve Board, is authorized to determine, under
certain circumstances relating to the financial condition of a
bank holding company, such as us, that the payment of dividends
would be an unsafe or unsound practice and to prohibit payment
thereof. In addition, we are subject to Ohio state laws relating
to the payment of dividends.
Common
Stock
The Corporation is authorized to issue up to 15,000,000 common
stock shares. Common shares issued were 8,172,943 at
December 31, 2010 and 7,623,857 at December 31, 2009.
Common shares outstanding were 7,844,749 and 7,295,663 at
December 31, 2010 and December 31, 2009, respectively.
Common
Shares Repurchase Plan and Treasury Shares
On July 28, 2005, the Board of Directors authorized the
repurchase of up to 5% of the outstanding common shares of the
Corporation, or approximately 332,000 shares. The
repurchased shares will be used primarily for qualified employee
benefit plans, incentive stock option plans, stock dividends and
other corporate purposes. At December 31, 2010 and
December 31, 2009, LNB Bancorp, Inc. held 328,194 common
shares as Treasury shares under this plan at a total cost of
$6,092. The terms of the Corporations sale of
$25.2 million of its Series B Preferred Stock to the
U.S. Treasury in conjunction with the TARP Capital Purchase
Program include limitations on the Corporations ability to
repurchase its common shares. For three years after the issuance
or until the U.S. Treasury no longer holds any
Series B Preferred Stock, the Corporation is prohibited
from repurchasing any of its common shares or preferred stock
without, among other things, U.S. Treasury approval,
subject to the availability of certain limited exceptions, such
as purchases in connection with the Corporations benefit
plans. Furthermore, as long as the Series B Preferred Stock
issued to the U.S. Treasury is outstanding, repurchases or
redemptions relating to certain equity securities, including the
Corporations common shares, are prohibited until all
accrued and unpaid dividends are paid on such preferred stock,
subject to certain limited exceptions.
Shareholder
Rights Plan
On October 25, 2010, the Board of Directors of the
Corporation adopted a Shareholder Rights Plan which replaced the
Corporations original rights plan adopted October 24,
2000 which expired in October 2010. The rights plan is designed
to prevent a potential acquirer from exceeding a prescribed
ownership level in the Corporation, other than in the context of
a negotiated acquisition involving the Board of Directors. If
the prescribed level is
66
exceeded, the rights become exercisable and, following a limited
period for the Board of Directors to redeem the rights, allow
shareholders, other than the potential acquirer that triggered
the exercise of the rights, to purchase Preferred Share Units of
the Corporation having characteristics comparable to the
Corporations common shares, at 50% of market value. This
would dilute the potential acquirers ownership level and
voting power, potentially making an acquisition of the
Corporation without prior Board approval prohibitively expensive.
The Shareholder Rights Plan provided for the distribution of one
Preferred Share Purchase Right as a dividend on each outstanding
Common Share of the Corporation held as of the close of business
on November 5, 2010. One Preferred Share Purchase Right
will also be distributed for each common share issued after
November 5, 2010. Each right entitles the registered holder
to purchase from the Corporation units of a new series of Voting
Preferred Shares, no par value, at 50% of market value, if a
person or group acquires 10% or more of the Corporations
Common Shares. Each Unit of the new Preferred Shares has terms
designed to make it the economic equivalent of one Common share.
LNBB
Direct Stock Purchase and Dividend Reinvestment Plan
The Board of Directors adopted the LNBB Direct Stock Purchase
and Dividend Reinvestment Plan (the Plan) effective June 2001,
replacing the former LNB Bancorp, Inc. Dividend Reinvestment
Plan. The Plan authorized the sale of 500,000 shares of the
Corporations common shares to shareholders who choose to
invest all or a portion of their cash dividends plus additional
cash payments for the Corporations common stock. The
Corporation did not issue shares pursuant to the Plan in 2010
and 13,791 shares were purchased in the open market at the
current market price. Similarly, the Corporation did not issue
shares pursuant to the Plan in 2009 while 43,314 shares
were purchased in the open market at the current market price.
Dividend
Restrictions
Dividends paid by the Bank are the primary source of funds
available to the Corporation for payment of dividends to
shareholders and for other working capital needs. The payment of
dividends by the Bank to the Corporation is subject to
restrictions by the Office of the Comptroller of Currency (OCC).
These restrictions generally limit dividends to the current and
prior two years retained earnings. In addition to these
restrictions, as a practical matter, dividend payments cannot
reduce regulatory capital levels below the Corporations
regulatory capital requirements and minimum regulatory
guidelines. Dividends declared and paid in 2010 were approved by
the OCC prior to declaration and payment. Future dividend
payments or debt issuance by the Corporation will be based on
future earnings and the approval of the OCC.
The terms of the Corporations sale of $25.2 million
of its Series B Preferred Stock to the U.S. Treasury
in conjunction with the TARP Capital Purchase Program include
limitations on the Corporations ability to pay dividends.
For three years after the issuance or until the
U.S. Treasury no longer holds any Series B Preferred
Stock, the Corporation will not be able to increase its
dividends above the level of its quarterly dividend declared
during the third quarter of 2008 ($0.09 per common share on a
quarterly basis) without, among other things, U.S. Treasury
approval. Furthermore, as long as the Series B Preferred
Stock issued to the U.S. Treasury is outstanding, dividend
payments and repurchases or redemptions relating to certain
equity securities, including the Corporations common
shares, are prohibited until all accrued and unpaid dividends
are paid on such preferred stock, subject to certain limited
exceptions.
The Corporation and the Bank are subject to risk-based capital
guidelines issued by the Board of Governors of the Federal
Reserve Board and the Office of Comptroller of Currency. These
guidelines are used to evaluate capital adequacy and include
required minimums as discussed below. The Corporation and the
Bank are subject to the FDIC Improvement Act. The FDIC
Improvement Act established five capital categories ranging from
well capitalized to critically
undercapitalized. These five capital categories are used
by the Federal Deposit Insurance Corporation to determine prompt
corrective action and an institutions semi-annual FDIC
deposit insurance premium assessments.
67
Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets,
liabilities, and certain off-balance sheet items calculated
under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors
and the regulators can lower classifications in certain cases.
Failure to meet various capital requirements can initiate
regulatory action that could have a direct material effect on
the consolidated financial statements.
The prompt corrective action regulations provide for five
categories which in declining order are: well
capitalized, adequately capitalized,
undercapitalized, significantly
undercapitalized, and critically
under-capitalized. To be considered well
capitalized, an institution must generally have a leverage
capital ratio of at least five percent, a Tier I risk-based
capital ratio of at least six percent, and a total risk-based
capital ratio of at least ten percent.
At December 31, 2010 and 2009, the capital ratios for the
Corporation and the Bank exceeded the ratios required to be
well capitalized. The well capitalized
status affords the Bank the ability to operate with the greatest
flexibility under current laws and regulations. The Comptroller
of the Currencys most recent notification categorized the
Bank as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions
or events since that notification that Management believes have
changed the Banks category. Analysis of the
Corporations and the Banks Regulatory Capital and
Regulatory Capital Requirements follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
December 31, 2009
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
(Dollars in thousands)
|
|
Total capital (risk weighted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
119,458
|
|
|
|
13.82
|
%
|
|
$
|
117,824
|
|
|
|
13.64
|
%
|
Bank
|
|
|
111,091
|
|
|
|
12.86
|
|
|
|
107,539
|
|
|
|
12.46
|
|
Tier 1 capital (risk weighted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
95,408
|
|
|
|
11.04
|
|
|
|
87,625
|
|
|
|
10.14
|
|
Bank
|
|
|
96,227
|
|
|
|
11.14
|
|
|
|
92,752
|
|
|
|
10.75
|
|
Tier 1 capital (average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
95,408
|
|
|
|
8.44
|
|
|
|
87,625
|
|
|
|
7.70
|
|
Bank
|
|
|
96,227
|
|
|
|
8.59
|
|
|
|
92,752
|
|
|
|
8.14
|
|
Well Capitalized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (risk weighted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
86,438
|
|
|
|
10.00
|
%
|
|
$
|
86,381
|
|
|
|
10.00
|
%
|
Bank
|
|
|
86,385
|
|
|
|
10.00
|
|
|
|
86,307
|
|
|
|
10.00
|
|
Tier 1 capital (risk weighted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
51,852
|
|
|
|
6.00
|
|
|
|
51,849
|
|
|
|
6.00
|
|
Bank
|
|
|
51,828
|
|
|
|
6.00
|
|
|
|
51,769
|
|
|
|
6.00
|
|
Tier 1 capital (average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
56,521
|
|
|
|
5.00
|
|
|
|
56,899
|
|
|
|
5.00
|
|
Bank
|
|
|
56,011
|
|
|
|
5.00
|
|
|
|
56,973
|
|
|
|
5.00
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
December 31, 2009
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
(Dollars in thousands)
|
|
Minimum Required:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (risk weighted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
69,151
|
|
|
|
8.00
|
%
|
|
$
|
69,105
|
|
|
|
8.00
|
%
|
Bank
|
|
|
69,108
|
|
|
|
8.00
|
|
|
|
69,046
|
|
|
|
8.00
|
|
Tier 1 capital (risk weighted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
34,568
|
|
|
|
4.00
|
|
|
|
34,566
|
|
|
|
4.00
|
|
Bank
|
|
|
34,552
|
|
|
|
4.00
|
|
|
|
34,512
|
|
|
|
4.00
|
|
Tier 1 capital (average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
45,217
|
|
|
|
4.00
|
|
|
|
45,519
|
|
|
|
4.00
|
|
Bank
|
|
|
44,809
|
|
|
|
4.00
|
|
|
|
45,578
|
|
|
|
4.00
|
|
|
|
(17)
|
Parent
Company Financial Information
|
LNB Bancorp, Inc.s (parent company only) condensed balance
sheets as of December 31, 2010 and 2009, and the condensed
statements of income and cash flows for the years ended
December 31, 2010, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Condensed Balance Sheets
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
659
|
|
|
$
|
2,106
|
|
Investment in The Lorain National Bank
|
|
|
120,777
|
|
|
|
118,053
|
|
Other investments
|
|
|
7
|
|
|
|
7
|
|
Note receivable The Lorain National Bank
|
|
|
4,000
|
|
|
|
4,000
|
|
Other assets
|
|
|
525
|
|
|
|
864
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
125,968
|
|
|
$
|
125,030
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Junior subordinated debentures
|
|
$
|
16,238
|
|
|
$
|
20,620
|
|
Other liabilities
|
|
|
266
|
|
|
|
269
|
|
Shareholders equity
|
|
|
109,464
|
|
|
|
104,141
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
125,968
|
|
|
$
|
125,030
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Condensed Statements of Income
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
267
|
|
|
$
|
363
|
|
|
$
|
390
|
|
Cash dividend from The Lorain National Bank
|
|
|
1,000
|
|
|
|
2,190
|
|
|
|
3,900
|
|
Other income
|
|
|
25
|
|
|
|
145
|
|
|
|
62
|
|
Gain on extinguishment of debt
|
|
|
2,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income
|
|
|
3,502
|
|
|
|
2,698
|
|
|
|
4,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
778
|
|
|
|
941
|
|
|
|
1,176
|
|
Other expenses
|
|
|
181
|
|
|
|
202
|
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expense
|
|
|
959
|
|
|
|
1,143
|
|
|
|
1,448
|
|
Income before income taxes and equity in undistributed net
income of subsidiary
|
|
|
2,543
|
|
|
|
1,555
|
|
|
|
2,904
|
|
Income tax expense (benefit)
|
|
|
520
|
|
|
|
(221
|
)
|
|
|
(335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net income (loss) of subsidiary
|
|
|
3,342
|
|
|
|
(3,777
|
)
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
5,365
|
|
|
$
|
(2,001
|
)
|
|
$
|
3,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Condensed Statements of Cash Flows
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Net Income (Loss)
|
|
$
|
5,365
|
|
|
$
|
(2,001
|
)
|
|
$
|
3,396
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net (income) loss of subsidiary
|
|
|
(3,342
|
)
|
|
|
3,777
|
|
|
|
(157
|
)
|
Share-based compensation expense, net of tax
|
|
|
102
|
|
|
|
79
|
|
|
|
71
|
|
Gain on extinguishment of debt
|
|
|
(2,210
|
)
|
|
|
|
|
|
|
|
|
Net change in other assets and liabilities
|
|
|
213
|
|
|
|
174
|
|
|
|
(1,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
128
|
|
|
|
2,029
|
|
|
|
2,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for advances to The Lorain National Bank
|
|
|
|
|
|
|
(25,223
|
)
|
|
|
|
|
Payments from The Lorain National Bank for subordinated debt
instrument
|
|
|
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
|
|
|
|
(23,223
|
)
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Extinguishment of debt, net
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of preferred stock
|
|
|
|
|
|
|
|
|
|
|
25,223
|
|
Dividends paid
|
|
|
(1,565
|
)
|
|
|
(2,625
|
)
|
|
|
(3,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(1,575
|
)
|
|
|
(2,625
|
)
|
|
|
21,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash equivalents
|
|
|
(1,447
|
)
|
|
|
(23,819
|
)
|
|
|
25,511
|
|
Cash and cash equivalents at beginning of year
|
|
|
2,106
|
|
|
|
25,925
|
|
|
|
414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
659
|
|
|
$
|
2,106
|
|
|
$
|
25,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
(18)
|
Retirement
Pension Plan
|
The Banks non-contributory defined benefit pension plan
(the Plan) covers substantially all of its employees. In
general, benefits are based on years of service and the
employees level of compensation. The Banks funding
policy is to contribute annually an actuarially determined
amount to cover current service cost plus amortization of prior
service costs. Effective December 31, 2002, the benefits
under the Plan were frozen and no additional benefits are
accrued under the Plan after December 31, 2002.
The net periodic pension costs charged to expense amounted to
$148 in 2010, $199 in 2009 and $(16) in 2008. The following
table sets forth the defined benefit pension plans Change
in Projected Benefit Obligation, Change in Plan Assets and
Funded Status, including the Prepaid Asset or Accrued Liability
for the years ended December 31, 2010, 2009, and 2008.
There were no losses recognized due to settlement in 2010, 2009
and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Change in projected benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at the beginning of the year
|
|
$
|
(5,716
|
)
|
|
$
|
(5,723
|
)
|
|
$
|
(5,559
|
)
|
Interest Cost
|
|
|
(314
|
)
|
|
|
(324
|
)
|
|
|
(324
|
)
|
Actuarial gain (loss)
|
|
|
(35
|
)
|
|
|
(218
|
)
|
|
|
(363
|
)
|
Settlement loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
455
|
|
|
|
549
|
|
|
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at the end of the year
|
|
$
|
(5,610
|
)
|
|
$
|
(5,716
|
)
|
|
$
|
(5,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
4,221
|
|
|
$
|
3,969
|
|
|
$
|
5,430
|
|
Actual gain on plan assets
|
|
|
590
|
|
|
|
401
|
|
|
|
(968
|
)
|
Employer contributions
|
|
|
1,400
|
|
|
|
400
|
|
|
|
|
|
Gain/(Loss)
|
|
|
|
|
|
|
|
|
|
|
30
|
|
Benefits paid
|
|
|
(455
|
)
|
|
|
(549
|
)
|
|
|
(523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
5,756
|
|
|
$
|
4,221
|
|
|
$
|
3,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status (included in accrued liabilities or prepaid
assets)
|
|
$
|
146
|
|
|
$
|
(1,495
|
)
|
|
$
|
(1,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized actuarial loss in accumulated other
comprehensive income
|
|
$
|
2,230
|
|
|
$
|
2,619
|
|
|
$
|
2,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated statements of income
consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Net Periodic Pension Cost (Benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost on projected benefit obligation
|
|
$
|
314
|
|
|
$
|
324
|
|
|
$
|
324
|
|
Expected return on plan benefits
|
|
|
(308
|
)
|
|
|
(275
|
)
|
|
|
(388
|
)
|
Amortization of Loss
|
|
|
142
|
|
|
|
150
|
|
|
|
48
|
|
Loss recognized due to settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Pension Cost (Benefit)
|
|
$
|
148
|
|
|
$
|
199
|
|
|
$
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
Pension liability adjustments recognized in other comprehensive
income include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Amortization of unrecognized actuarial loss
|
|
$
|
142
|
|
|
$
|
150
|
|
|
$
|
48
|
|
Current deferral of gains (losses)
|
|
|
247
|
|
|
|
(92
|
)
|
|
|
(1,688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension liability adjustments recognized in comprehensive income
|
|
|
389
|
|
|
|
58
|
|
|
|
(1,640
|
)
|
Tax effect
|
|
|
(132
|
)
|
|
|
(20
|
)
|
|
|
557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension liability adjustments
|
|
$
|
257
|
|
|
$
|
38
|
|
|
$
|
(1,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine net periodic
benefit cost for years ended December 31, 2010, 2009 and
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Weighted average discount rate
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected long-term rate of return on plan assets
|
|
|
7.50
|
%
|
|
|
7.50
|
%
|
|
|
7.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed rate of future compensation increases
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The actuarial assumptions used in the pension plan valuation are
reviewed annually. The plan reviews Moodys Aaa and Aa
corporate bond yields as of each plan year-end to determine the
appropriate discount rate to calculate the year-end benefit plan
obligation and the following years net periodic pension
cost.
Plan
Assets
The Banks Retirement Pension Plans weighted-average
assets allocations at December 31, 2010, 2009 and 2008 by
asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Assets at December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
62.61
|
%
|
|
|
57.48
|
%
|
|
|
47.53
|
%
|
Debt securities
|
|
|
35.53
|
|
|
|
41.82
|
|
|
|
52.25
|
|
Cash and cash equivalents
|
|
|
1.86
|
|
|
|
0.70
|
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LNB Bancorp, Inc. common stock to total plan assets
|
|
|
0.00
|
%
|
|
|
3.08
|
%
|
|
|
4.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The investment strategy for 2010 will continue to be an equity
security allocation percent of 60% and a debt security position
of 40%. This strategy will be employed in order to position more
assets to benefit from the anticipated increase in the equities
market in 2010.
The following estimated future benefit payments, which reflect
no expected future service as the plan is frozen, are expected
to be paid as follows:
|
|
|
|
|
|
|
Amount
|
|
|
(Dollars in thousands)
|
|
2011
|
|
$
|
310
|
|
2012
|
|
|
336
|
|
2013
|
|
|
367
|
|
2014
|
|
|
367
|
|
2015
|
|
|
368
|
|
2016-2020
|
|
|
1,869
|
|
72
|
|
(19)
|
Share-Based
Compensation
|
A broad-based stock option incentive plan, the 2006 Stock
Incentive Plan, was adopted by the Corporations
shareholders on April 18, 2006. Awards granted under this
Plan as of December 31, 2010 were stock options granted in
2007, 2008 and 2009 and long-term restricted shares issued in
2010. In addition, the Corporation has nonqualified stock option
agreements outside of the 2006 Stock Incentive Plan. Grants
under the nonqualified stock option agreements have been made
from 2005 to 2007.
As of December 31, 2010 and 2009, there was $298 and $17,
respectively, of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under
the Plan. That cost is expected to be recognized over a
weighted-average period of 2.3 years as of
December 31, 2010. The total fair value of shares vested
during the year ended December 31, 2010 and 2009 was $64
and $89, respectively.
Stock
Options
The expense recorded for stock options was $15, $79 and $78 for
the years ended December 31, 2010, 2009 and 2008,
respectively. The maximum option term is ten years and the
options generally vest over three years as follows: one-third
after one year from the grant date, two-thirds after two years
and completely after three years.
The fair value of options granted was determined using the
following weighted-average assumptions as of grant date.
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Risk free interest rate
|
|
|
2.27
|
%
|
|
|
2.94
|
%
|
Dividend yield
|
|
|
6.68
|
%
|
|
|
4.98
|
%
|
Volatility
|
|
|
22.97
|
%
|
|
|
15.68
|
%
|
The weighted-average fair value of options granted in 2009 and
2008 was $5.34 and $14.47, respectively.
Options outstanding at December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Life
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number
|
|
|
(Years)
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Range of Exercise Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$5.34-$14.46
|
|
|
2,500
|
|
|
|
8.37
|
|
|
|
833
|
|
|
$
|
5.34
|
|
$14.47-$15.34
|
|
|
82,000
|
|
|
|
7.10
|
|
|
|
54,663
|
|
|
|
14.47
|
|
$15.35-$16.50
|
|
|
52,500
|
|
|
|
6.21
|
|
|
|
52,500
|
|
|
|
15.78
|
|
$16.51-$19.10
|
|
|
30,000
|
|
|
|
5.09
|
|
|
|
30,000
|
|
|
|
19.10
|
|
$19.11-$19.17
|
|
|
30,000
|
|
|
|
4.09
|
|
|
|
30,000
|
|
|
|
19.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
197,000
|
|
|
|
6.11
|
|
|
|
167,996
|
|
|
$
|
16.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
A summary of the status of stock options at December 31,
2010 and changes during the year then ended is presented in the
table below:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Exercise
|
|
Options
|
|
Shares
|
|
|
Price per Share
|
|
|
Outstanding at beginning of period
|
|
|
198,000
|
|
|
$
|
16.12
|
|
Granted
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(1,000
|
)
|
|
|
14.47
|
|
Exercised
|
|
|
|
|
|
|
|
|
Stock dividend or split
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
197,000
|
|
|
$
|
16.12
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
167,996
|
|
|
$
|
16.50
|
|
|
|
|
|
|
|
|
|
|
There were no options exercised during the year ended
December 31, 2010 therefore the total intrinsic value of
options exercised was $0. The total intrinsic value of all
options outstanding for the year ended December 31, 2010
was $0 as a result of their anti-dilutive status.
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
Weighted Average
|
|
|
|
|
Exercise Price
|
|
|
Nonvested Shares
|
|
Per Share
|
|
Nonvested at January 1, 2010
|
|
|
75,335
|
|
|
$
|
14.45
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
45,331
|
|
|
|
14.77
|
|
Forfeited or expired
|
|
|
1,000
|
|
|
|
14.47
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2010
|
|
|
29,004
|
|
|
$
|
13.95
|
|
|
|
|
|
|
|
|
|
|
Restricted
Shares
In 2010, the Corporation issued 86,852 shares of long-term
restricted stock at a weighted average price of $4.42 per share.
Shares of long-term restricted stock generally vest in two equal
installments on the second and third anniversaries of the date
of grant, or upon the earlier death or disability of the
recipient or a qualified change of control of the Corporation.
The expense recorded for long-term restricted stock for the year
ended December 31, 2010 was $87.
The market price of the Corporations common shares at the
date of grant is used to estimate the fair value of restricted
stock awards. A summary of the status of restricted shares at
December 31, 2010 is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Nonvested Shares
|
|
|
Fair Value
|
|
|
Nonvested at January 1, 2010
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
86,852
|
|
|
|
4.42
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2010
|
|
|
86,852
|
|
|
$
|
4.42
|
|
|
|
|
|
|
|
|
|
|
Stock
Appreciation Rights (SARS)
In 2006, the Corporation issued an aggregate of 30,000 SARS at
$19.00 per share, 15,500 of which have expired due to employee
terminations. The SARS vest over three years as follows:
one-third after one year from the
74
grant date, two-thirds after two years and completely after
three years. Any unexercised portion of the SARS shall expire at
the end of the stated term which is decided at the date of grant
and shall not exceed ten years. The SARS issued in 2006 will
expire in January 2016. The expense recorded for SARS for the
years ended December 31, 2010, 2009 and 2008 was $0.
The Bank adopted The Lorain National Bank 401(k) Plan (the Plan)
effective January 1, 2001. The Plan allows for the purchase
of up to 80,000 shares of LNB Bancorp, Inc. treasury
shares. No shares were purchased out of Treasury during 2010,
2009 or 2008.
Under provisions of the Plan, a participant can contribute a
percentage of their compensation to the Plan. For plan years
prior to January 1, 2008, the Bank made a non-discretionary
50% contribution to match each employees contribution,
limited to the first six percent of an employees wage.
Effective January 1, 2008, the Plan changed to a
safe-harbor status with a 3% non-elective contribution for all
employees. The Plan uses the contributions of the Corporation to
purchase LNB Bancorp, Inc. common stock. Effective
January 1, 2001, the Plan permits the investment of plan
assets, contributed by employees as well as the Corporation,
among different funds.
The Banks matching contributions are expensed in the year
in which the associated participant contributions are made and
totaled $374, $370, and $374, in 2010, 2009 and 2008,
respectively.
|
|
(21)
|
Commitments
and Contingencies
|
In the normal course of business, the Bank enters into
commitments with off-balance sheet risk to meet the financing
needs of its customers. These instruments are currently limited
to commitments to extend credit and standby letters of credit.
Commitments to extend credit involve elements of credit risk and
interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The Banks exposure to credit
loss in the event of nonperformance by the other party to the
commitment is represented by the contractual amount of the
commitment. The Bank uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
Interest rate risk on commitments to extend credit results from
the possibility that interest rates may have moved unfavorably
from the position of the Bank since the time the commitment was
made.
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates of 30 to 120 days or other termination
clauses and may require payment of a fee. Since some of the
commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements.
The Bank evaluates each customers credit worthiness on a
case-by-case
basis. The amount of collateral obtained by the Bank upon
extension of credit is based on Managements credit
evaluation of the applicant. Collateral held is generally
single-family residential real estate and commercial real
estate. Substantially all of the obligations to extend credit
are variable rate. Standby letters of credit are conditional
commitments issued to guarantee the performance of a customer to
a third party. Standby letters of credit generally are
contingent upon the failure of the customer to perform according
to the terms of the underlying contract with the third party.
A summary of the contractual amount of commitments at
December 31, 2010 and 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Commitments to extend credit
|
|
$
|
67,095
|
|
|
$
|
68,770
|
|
Home equity lines of credit
|
|
|
76,668
|
|
|
|
75,791
|
|
Standby letters of credit
|
|
|
8,422
|
|
|
|
8,616
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
152,185
|
|
|
$
|
153,177
|
|
|
|
|
|
|
|
|
|
|
The nature of the Corporations business may result in
litigation. Management, after reviewing with counsel all actions
and proceedings pending against or involving LNB Bancorp, Inc.
and subsidiaries, considers that the aggregate liability or
loss, if any, resulting from them will not be material to the
Corporations financial position, results of operation or
liquidity.
75
|
|
(22)
|
Estimated
Fair Value of Financial Instruments
|
The Corporation discloses estimated fair values for its
financial instruments. Fair value estimates, methods and
assumptions are set forth below for the Corporations
financial instruments. The following methods and assumptions
were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
|
|
|
|
|
The carrying value of Cash and due from banks, Federal funds
sold, short-term investments, interest bearing deposits in other
banks and accrued interest receivable and other financial assets
is a reasonable estimate of fair value due to the short-term
nature of the asset.
|
|
|
|
The fair value of investment securities is based on the fair
value hierarchy described below.
|
|
|
|
For variable rate loans with interest rates that may be adjusted
on a quarterly, or more frequent basis, the carrying amount is a
reasonable estimate of fair value. The fair value of other types
of loans is estimated by discounting future cash flows using the
current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining
maturities.
|
|
|
|
The carrying value approximates the fair value for bank owned
life insurance.
|
|
|
|
The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings, money market,
checking and interest-bearing checking, is equal to the amount
payable on demand as of December 31, for each year
presented. The fair value of fixed-maturity certificates of
deposit is estimated using the rates currently offered for
deposits of similar remaining maturities. For variable rate
certificates of deposit, the carrying amount is a reasonable
estimate of fair value.
|
|
|
|
Securities sold under repurchase agreements, other short-term
borrowings, accrued interest payable and other financial
liabilities approximate fair value due to the short-term nature
of the liability.
|
|
|
|
The fair value of Federal Home Loan Bank advances is estimated
by discounting future cash flows using current FHLB rates for
the remaining term to maturity.
|
|
|
|
The fair value of junior subordinated debentures is based on the
discounted value of contractual cash flows using rates currently
offered for similar maturities.
|
|
|
|
The fair value of commitments to extend credit approximates the
fees charged to make these commitments since rates and fees of
the commitment contracts approximates those currently charged to
originate similar commitments. The carrying amount and fair
value of off-balance sheet instruments is not significant as of
December 31, 2010 and 2009.
|
Limitations
Estimates of fair value are made at a specific point in time,
based on relevant market information and information about the
financial instrument. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment
and therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Estimates of fair value are based on existing
on-and-off
balance sheet financial instruments without attempting to
estimate the value of anticipated future business and the value
of assets and liabilities that are not considered financial
instruments. For example, the Bank has a substantial Investment
and Trust Services Division that contributes net fee income
annually. The Investment and Trust Services Division is not
considered a financial instrument and its value has not been
incorporated into the fair value estimates. Other significant
assets and liabilities that are not considered financial
instruments include premises and equipment and deferred tax
assets. The
76
estimated fair values of the Corporations financial
instruments at December 31, 2010 and 2009 are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Estimated Fair
|
|
|
Carrying
|
|
|
Estimated Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks, Federal funds sold, short-term
investments and interest bearing deposits in other banks
|
|
$
|
48,568
|
|
|
$
|
48,568
|
|
|
$
|
27,292
|
|
|
$
|
27,292
|
|
Securities
|
|
|
221,725
|
|
|
|
221,725
|
|
|
|
255,482
|
|
|
|
255,482
|
|
Portfolio loans, net
|
|
|
796,443
|
|
|
|
801,585
|
|
|
|
784,405
|
|
|
|
786,154
|
|
Loans held for sale
|
|
|
5,105
|
|
|
|
5,105
|
|
|
|
3,783
|
|
|
|
3,783
|
|
Accrued interest receivable
|
|
|
3,519
|
|
|
|
3,519
|
|
|
|
4,072
|
|
|
|
4,072
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand, savings and money market
|
|
|
433,910
|
|
|
|
433,910
|
|
|
|
423,550
|
|
|
|
423,550
|
|
Certificates of deposit
|
|
|
544,616
|
|
|
|
551,832
|
|
|
|
547,883
|
|
|
|
555,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
978,526
|
|
|
|
985,742
|
|
|
|
971,433
|
|
|
|
978,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
932
|
|
|
|
932
|
|
|
|
1,457
|
|
|
|
1,457
|
|
Federal Home Loan Bank advances
|
|
|
42,501
|
|
|
|
43,613
|
|
|
|
42,505
|
|
|
|
43,708
|
|
Junior subordinated debentures
|
|
|
16,238
|
|
|
|
15,746
|
|
|
|
20,620
|
|
|
|
18,489
|
|
Accrued interest payable
|
|
|
1,434
|
|
|
|
1,434
|
|
|
|
2,074
|
|
|
|
2,074
|
|
Fair
Value Measurements
The fair value of financial assets and liabilities recorded at
fair value is categorized in three levels. The valuation
hierarchy is based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date.
These levels are as follows:
|
|
|
|
|
Level 1 Valuations based on quoted prices in
active markets, such as the New York Stock Exchange. Valuations
are obtained from readily available pricing sources for market
transactions involving identical assets or liabilities.
|
|
|
|
Level 2 Valuations of assets and liabilities
traded in less active dealer or broker markets. Valuations
include quoted prices for similar assets and liabilities traded
in the same market; quoted prices for identical or similar
instruments in markets that are not active; and model-derived
valuations whose inputs are observable or whose significant
value drivers are observable. Valuations may be obtained from,
or corroborated by, third-party pricing services.
|
|
|
|
Level 3 Assets and liabilities with valuations
that include methodologies and assumptions that may not be
readily observable, including option pricing models, discounted
cash flow models, yield curves and similar techniques.
Level 3 valuations incorporate certain assumptions and
projections in determining the fair value assigned to such
assets or liabilities, but in all cases are corroborated by
external data, which may include third-party pricing services.
|
77
The following table presents information about the
Corporations assets and liabilities measured at fair value
on a recurring basis as of December 31, 2010 and 2009, and
the valuation techniques used by the Corporation to determine
those fair values.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
Significant
|
|
|
|
Fair Value as of
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
for Identical
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
Description
|
|
2010
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(Dollars in thousands)
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and corporations
|
|
$
|
56,068
|
|
|
$
|
|
|
|
$
|
56,068
|
|
|
$
|
|
|
Mortgage backed securities
|
|
|
95,891
|
|
|
|
|
|
|
|
95,891
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
|
45,519
|
|
|
|
|
|
|
|
45,519
|
|
|
|
|
|
State and political subdivisions
|
|
|
24,247
|
|
|
|
|
|
|
|
24,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
221,725
|
|
|
$
|
|
|
|
$
|
221,725
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
Significant
|
|
|
|
Fair Value as of
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
for Identical
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
Description
|
|
2009
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(Dollars in thousands)
|
|
|
Trading Securities
|
|
$
|
8,445
|
|
|
$
|
|
|
|
$
|
8,445
|
|
|
$
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and corporations
|
|
|
45,215
|
|
|
|
|
|
|
|
45,215
|
|
|
|
|
|
Mortgage backed securities
|
|
|
127,312
|
|
|
|
|
|
|
|
127,312
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
|
51,467
|
|
|
|
|
|
|
|
51,467
|
|
|
|
|
|
State and political subdivisions
|
|
|
23,043
|
|
|
|
|
|
|
|
23,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
255,482
|
|
|
$
|
|
|
|
$
|
255,482
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers between Levels 1 and 2 of the fair
value hierarchy during the years ended December 31, 2010
and 2009. For the available for sale securities, the Corporation
obtains fair value measurements from an independent third-party
service or independent brokers.
The Corporation has assets that, under certain conditions, are
subject to measurement at fair value on a nonrecurring basis. At
December 31, 2010 and 2009, such assets consist primarily
of impaired loans and other property. The Corporation has
estimated the fair values of these assets using Level 3
inputs, specifically discounted cash flow projections.
The following table presents the balances of assets and
liabilities measured at fair value on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
|
|
|
Internal
|
|
|
|
|
|
|
|
|
|
|
|
|
Models with
|
|
|
Models with
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
Total Losses
|
|
|
|
Quoted Market
|
|
|
Market
|
|
|
Market
|
|
|
|
|
|
Recognized
|
|
|
|
Prices in Active
|
|
|
Parameters
|
|
|
Parameters
|
|
|
|
|
|
During the
|
|
December 31, 2010
|
|
Markets (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Year
|
|
|
|
(Dollars in thousands)
|
|
|
Impaired and nonaccrual loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
44,668
|
|
|
$
|
44,668
|
|
|
$
|
7,117
|
|
Other real estate
|
|
|
|
|
|
|
|
|
|
|
3,119
|
|
|
|
3,119
|
|
|
|
412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value on a nonrecurring basis
|
|
$
|
|
|
|
$
|
|
|
|
$
|
47,787
|
|
|
$
|
47,787
|
|
|
$
|
7,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
|
|
|
Internal
|
|
|
|
|
|
|
|
|
|
|
|
|
Models with
|
|
|
Models with
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
Total Losses
|
|
|
|
Quoted Market
|
|
|
Market
|
|
|
Market
|
|
|
|
|
|
Recognized
|
|
|
|
Prices in Active
|
|
|
Parameters
|
|
|
Parameters
|
|
|
|
|
|
During the
|
|
December 31, 2009
|
|
Markets (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Year
|
|
|
|
(Dollars in thousands)
|
|
|
Impaired and nonaccrual loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
38,837
|
|
|
$
|
38,837
|
|
|
$
|
12,218
|
|
Other real estate
|
|
|
|
|
|
|
|
|
|
|
1,264
|
|
|
|
1,264
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value on a nonrecurring basis
|
|
$
|
|
|
|
$
|
|
|
|
$
|
40,101
|
|
|
$
|
40,101
|
|
|
$
|
12,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired and nonaccrual loans: Fair value
adjustments for these items typically occur when there is
evidence of impairment. Loans are designated as impaired when,
in the judgment of Management based on current information and
events, it is probable that all amounts due according to the
contractual terms of the loan agreement will not be collected.
The measurement of loss associated with impaired loans can be
based on either the observable market price of the loan or the
fair market value of the collateral. The Corporation measures
fair value based on the value of the collateral securing the
loans. Collateral may be in the form of real estate or personal
property including equipment and inventory. The vast majority of
collateral is real estate. The value of the collateral is
determined based on internal estimates as well as third party
appraisals or non-binding broker quotes. These measurements were
classified as Level 3.
Other Real Estate: Other real estate includes
foreclosed assets and properties securing residential and
commercial loans. Foreclosed assets are adjusted to fair value
less costs to sell upon transfer of the loans to foreclosed
assets. Subsequently, foreclosed assets are carried at lower of
carry value or fair value less costs to sell. Fair value is
generally based upon internal estimates and third party
appraisals or non-binding broker quotes and, accordingly,
considered a Level 3 classification.
79
|
|
(23)
|
Quarterly
Financial Data (Unaudited)
|
Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Full Year
|
|
|
|
(Dollars in thousands, except per share amount)
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
13,293
|
|
|
$
|
12,975
|
|
|
$
|
12,463
|
|
|
$
|
12,641
|
|
|
$
|
51,372
|
|
Total interest expense
|
|
|
3,514
|
|
|
|
3,278
|
|
|
|
3,091
|
|
|
|
2,881
|
|
|
|
12,764
|
|
Net Interest income
|
|
|
9,779
|
|
|
|
9,697
|
|
|
|
9,372
|
|
|
|
9,760
|
|
|
|
38,608
|
|
Provision for loan losses
|
|
|
2,109
|
|
|
|
2,109
|
|
|
|
2,076
|
|
|
|
3,931
|
|
|
|
10,225
|
|
Net interest income after provision for loan losses
|
|
|
7,670
|
|
|
|
7,588
|
|
|
|
7,296
|
|
|
|
5,829
|
|
|
|
28,383
|
|
Noninterest income
|
|
|
2,651
|
|
|
|
2,896
|
|
|
|
5,044
|
|
|
|
3,186
|
|
|
|
13,777
|
|
Noninterest expense
|
|
|
8,693
|
|
|
|
8,958
|
|
|
|
8,768
|
|
|
|
9,150
|
|
|
|
35,569
|
|
Income tax expense (benefit)
|
|
|
297
|
|
|
|
283
|
|
|
|
842
|
|
|
|
(196
|
)
|
|
|
1,226
|
|
Net Income (Loss)
|
|
|
1,331
|
|
|
|
1,243
|
|
|
|
2,730
|
|
|
|
61
|
|
|
|
5,365
|
|
Preferred Stock Dividend and Accretion
|
|
|
319
|
|
|
|
318
|
|
|
|
320
|
|
|
|
319
|
|
|
|
1,276
|
|
Net Income (Loss) Available to Common Shareholders
|
|
|
1,012
|
|
|
|
925
|
|
|
|
2,410
|
|
|
|
(258
|
)
|
|
|
4,089
|
|
Basic earnings (loss) per common share
|
|
|
0.14
|
|
|
|
0.12
|
|
|
|
0.32
|
|
|
|
(0.03
|
)
|
|
|
0.55
|
|
Diluted earnings (loss) per common share
|
|
|
0.14
|
|
|
|
0.12
|
|
|
|
0.32
|
|
|
|
(0.03
|
)
|
|
|
0.55
|
|
Dividends declared per common share
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Full Year
|
|
|
|
(Dollars in thousands, except per share amount)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
14,523
|
|
|
$
|
14,356
|
|
|
$
|
14,523
|
|
|
$
|
14,245
|
|
|
$
|
57,647
|
|
Total interest expense
|
|
|
5,625
|
|
|
|
5,222
|
|
|
|
4,945
|
|
|
|
4,133
|
|
|
|
19,925
|
|
Net Interest income
|
|
|
8,898
|
|
|
|
9,134
|
|
|
|
9,578
|
|
|
|
10,112
|
|
|
|
37,722
|
|
Provision for loan losses
|
|
|
1,809
|
|
|
|
2,484
|
|
|
|
11,067
|
|
|
|
3,657
|
|
|
|
19,017
|
|
Net interest income (loss) after provision for loan losses
|
|
|
7,089
|
|
|
|
6,650
|
|
|
|
(1,489
|
)
|
|
|
6,455
|
|
|
|
18,705
|
|
Noninterest income
|
|
|
2,857
|
|
|
|
3,244
|
|
|
|
3,124
|
|
|
|
2,731
|
|
|
|
11,956
|
|
Noninterest expense
|
|
|
8,360
|
|
|
|
9,480
|
|
|
|
8,737
|
|
|
|
8,753
|
|
|
|
35,330
|
|
Income tax expense (benefit)
|
|
|
269
|
|
|
|
(102
|
)
|
|
|
(2,726
|
)
|
|
|
(109
|
)
|
|
|
(2,668
|
)
|
Net Income (Loss)
|
|
|
1,317
|
|
|
|
516
|
|
|
|
(4,376
|
)
|
|
|
542
|
|
|
|
(2,001
|
)
|
Preferred Stock Dividend and Accretion
|
|
|
299
|
|
|
|
319
|
|
|
|
319
|
|
|
|
319
|
|
|
|
1,256
|
|
Net Income (Loss) Available to Common Shareholders
|
|
|
1,018
|
|
|
|
197
|
|
|
|
(4,695
|
)
|
|
|
223
|
|
|
|
(3,257
|
)
|
Basic earnings (loss) per common share
|
|
|
0.14
|
|
|
|
0.03
|
|
|
|
(0.64
|
)
|
|
|
0.03
|
|
|
|
(0.45
|
)
|
Diluted earnings (loss) per common share
|
|
|
0.14
|
|
|
|
0.03
|
|
|
|
(0.64
|
)
|
|
|
0.03
|
|
|
|
(0.45
|
)
|
Dividends declared per common share
|
|
|
0.09
|
|
|
|
0.09
|
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
0.20
|
|
80
|
|
Item 9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosures
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
|
|
1.
|
Disclosure
Controls and Procedures
|
The Corporation maintains disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in the Corporations Exchange Act reports is
recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to the
Corporations management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
The Corporations management carried out an evaluation,
under the supervision and with the participation of the Chief
Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of LNB Bancorp,
Inc.s disclosure controls and procedures (as such term is
defined in
Rules 13a-15(e)
and
15d-15(e)
promulgated under the Securities Exchange Act of 1934) as
of December 31, 2010, pursuant to the evaluation of these
controls and procedures required by
Rule 13a-15
of the Securities Exchange Act of 1934.
Based upon that evaluation, management concluded as of the end
of the period covered by this Annual Report on
Form 10-K
that the Corporations disclosure controls and procedures
were effective as of December 31, 2010.
|
|
2.
|
Internal
Control over Financial Reporting
|
The Management of LNB Bancorp, Inc. is responsible for
establishing and maintaining adequate internal control over its
financial reporting. LNB Bancorp, Inc.s internal control
over financial reporting is a process designed under the
supervision of the Corporations Chief Executive Officer
and Chief Financial Officer to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of the Corporations financial statements for
external reporting purposes in accordance with
U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
LNB Bancorp, Inc.s management assessed the effectiveness
of the Corporations internal control over financial
reporting as of December 31, 2010 based on the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control Integrated
Framework. Based on this assessment, management determined
that at December 31, 2010, the Corporations internal
control over financial reporting was effective.
The Dodd-Frank Act includes a provision that permanently exempts
non-accelerated filers from complying with the
requirements of Section 404(b) of the Sarbanes-Oxley Act of
2002, which requires an issuer to include in its Annual Report
on
Form 10-K
an attestation report from the issuers independent
registered public accounting firm on the issuers internal
control over financial reporting. Since the Corporation was a
non-accelerated filer as of December 31, 2010, it is not
required to comply with the requirements of Section 404(b)
in this Annual Report on
Form 10-K.
However, if the market value of the Corporations common
shares held by non-affiliates equals $75 million or more as
of the end of the last day of the Corporations most
recently completed second quarter, the Corporation will be
required to provide an attestation report from its independent
registered public accounting firm on the Corporations
internal control over financial reporting in its Annual Report
on
Form 10-K
for the year in which it equals or exceeds the $75 million
threshold.
81
|
|
3.
|
Changes
in Internal Control over Financial Reporting
|
No change in the Corporations internal control over
financial reporting occurred during the fiscal quarter ended
December 31, 2010 that has materially affected, or is
reasonably likely to materially affect, the Corporations
internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers, Promoters and Control Persons of the
Registrant
|
Information regarding the executive officers of the Corporation
is set forth in Part I of this
Form 10-K.
Other information required to be included in this Item 10
is incorporated by reference herein from the information about
the Corporations directors provided in the section
captioned PROPOSAL 1 Election of
Directors, the information provided in the section
captioned Section 16(a) Beneficial Ownership
Reporting Compliance, and the information about the
Corporations Audit and Finance Committee, audit committee
financial expert and procedures for recommending nominees to the
Board of Directors and Corporate Governance provided in the
sections captioned Committees of the Board and
Corporate Governance in the Corporations Proxy
Statement for the 2011 Annual Meeting of Shareholders to be
filed with the SEC.
|
|
Item 11.
|
Executive
Compensation
|
The information required to be included in this Item 11 is
incorporated by reference herein from the information provided
in the sections captioned Executive Compensation and Other
Information, in the Corporations Proxy Statement for
the 2011 Annual Meeting of Shareholders to be filed with the SEC.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and
Management
|
The information regarding security ownership of certain
beneficial owners and management required to be included in this
Item 12 is incorporated by reference herein from the
information provided in the section captioned Ownership of
Voting Shares in the Corporations Proxy Statement
for the 2011 Annual Meeting of Shareholders to be filed with the
SEC. The following table shows information about the
Corporations common shares that may be issued upon the
exercise of options, warrants and rights under all of the
Corporations equity compensation plans as of
December 31, 2010:
Equity
Compensation Plan Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Securities
|
|
|
Number of
|
|
|
|
Remaining Available
|
|
|
Securities to be
|
|
Weighted-
|
|
for Future Issuance
|
|
|
Issued Upon
|
|
Average Exercise
|
|
under Equity
|
|
|
Exercise of
|
|
Price of
|
|
Compensation Plans
|
|
|
Outstanding
|
|
Outstanding
|
|
Excluding Securities
|
|
|
Options, Warrants
|
|
Options, Warrants
|
|
Reflected in Column
|
Plan Category
|
|
and Rights(1)
|
|
and Rights
|
|
(a)
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity compensation plans approved by security holders
|
|
|
105,500
|
|
|
$
|
14.42
|
|
|
|
407,648
|
(2)
|
Equity compensation plans not approved by security holders(3)
|
|
|
92,500
|
|
|
$
|
18.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
198,000
|
|
|
$
|
16.11
|
|
|
|
407,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
|
|
|
(1) |
|
Consists of common shares of the Corporation issuable upon
outstanding options. |
|
(2) |
|
Represents shares available for grant under the LNB Bancorp,
Inc. 2006 Stock Incentive Plan. The LNB Bancorp, Inc. 2006 Stock
Incentive Plan allows for the granting of an aggregate of
600,000 common shares in the form of awards under the plan, no
more than 400,000 of which may be granted in the form of stock
options and no more than 200,000 of which may be granted in the
form of restricted shares. |
|
(3) |
|
All common shares included in equity compensation plans not
approved by shareholders are covered by outstanding options
awarded to two current officers under agreements having the same
material terms. Each of these options is a nonqualified option,
meaning a stock option that does not qualify under
Section 422 of the Internal Revenue Code for the special
tax treatment available for qualified, or incentive,
stock options. Daniel E. Klimas was granted stock options on
February 1, 2005, February 1, 2006, and
February 1, 2007 each to purchase 30,000 shares which
vested in 10,000 share increments on the first, second and
third anniversaries of the date of grant. Frank A. Soltis was
granted an option to purchase 2,500 shares on June 27,
2005 which vested on the first year anniversary of the date of
grant. Each option may be exercised for a term of 10 years
from the date the option vests, subject to earlier termination
in the event of death, disability or other termination of the
employment of the option holder. The option holder has up to
12 months following termination of employment due to death
or disability to exercise the options. The options terminate
three months after termination of employment for reasons other
than death, disability or termination for cause, and immediately
upon termination of employment if for cause. The exercise price
and number of shares covered by the option are to be adjusted to
reflect any share dividend, share split, merger or other
recapitalization of the common shares of the Corporation. The
options are not transferable other than by will or state
inheritance laws. Exercise prices for these options are equal to
fair market value of the common shares at the date of grant. The
stock option for 30,000 shares awarded to Mr. Klimas
on February 1, 2005 has an exercise price of $19.17 per
share, the stock option for 30,000 shares awarded to
Mr. Klimas on February 1, 2006 has an exercise price
of $19.10 per share, the stock option for 30,000 shares
awarded to Mr. Klimas on February 1, 2007 has an
exercise price of $16.00 per share and the stock option for
2,500 shares awarded to Mr. Soltis has an exercise
price of $16.50 per share. The options expire 10 years from
the date of grant. |
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required to be included in this Item 13 is
incorporated by reference from the information provided in
section captioned Certain Transactions in the
Corporations Proxy Statement for the 2011 Annual Meeting
of Shareholders to be filed with the SEC.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required to be included in this Item 14 is
incorporated by reference herein from the information provided
in section captioned Principal Accounting Firm Fees
in the Corporations Proxy Statement for the 2011 Annual
Meeting of Shareholders to be filed with the SEC.
83
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
(a)(1) Consolidated Financial Statements included under
Item 8. The following Consolidated Financial
Statements and related Notes to Consolidated Financial
Statements, together with the report of Independent Registered
Public Accounting Firm dated March 9, 2011 appear on pages
42 through 78 of this annual report on
Form 10-K:
(a)(2) Financial Statement
Schedules. Financial statement schedules are
omitted as they are not required or are not applicable or
because the required information is included in the consolidated
financial statements or notes thereto.
(a)(3) Exhibits. The Exhibits that are filed
as part of this annual report on
Form 10-K
or that are incorporated by reference herein are set forth in
the Exhibit Index hereto.
(b) The exhibits referenced on the Exhibit Index hereto are
filed as part of this report.
84
Exhibit Index
|
|
|
S-K
|
|
|
Reference
|
|
|
Number
|
|
Exhibit
|
|
3(a)
|
|
LNB Bancorp, Inc. Second Amended Articles of Incorporation.
Incorporated by reference herein from Exhibit 3(a) of the
Corporations
Form 10-K
for the fiscal year ended December 31, 2005.
|
3(b)
|
|
Certificate of Amendment to the Amended Articles of
Incorporation, filed with the Ohio Secretary of State on
December 11, 2008. Incorporated by reference herein from
Exhibit 3.1 of the Corporations
Form 8-K
filed on December 17, 2008.
|
3(c)
|
|
Certificate of Amendment to Amended Articles of Incorporation,
filed with the Ohio Secretary of State on October 25, 2010.
Incorporated by reference herein from Exhibit 3.1 of the
Corporations
Form 8-K
filed on October 25, 2010.
|
3(d)
|
|
LNB Bancorp, Inc. Amended Code of Regulations. Incorporated by
reference herein from Appendix A to the Corporations
Definitive Proxy Statement on Schedule 14A filed
March 16, 2007.
|
4(a)
|
|
Rights Agreement between LNB Bancorp, Inc. and Registrar and
Transfer Company, as rights agent, dated October 25, 2010,
including the Form of Right Certificate and the Summary of
Rights to Purchase Preferred Shares. Incorporated by reference
herein from Exhibit 4.1 of the Corporations
Form 8-K
filed on October 25, 2010.
|
4(b)
|
|
Indenture, dated as of May 9, 2007, by and between LNB
Bancorp, Inc. and Wells Fargo Bank, National Association, as
Trustee, relating to floating rate Junior Subordinated Debt
Securities Due June 15, 2037. Incorporated by reference
herein from Exhibit 4.1 of the Corporations
Form 10-Q
for the fiscal quarter ended June 30, 2007.
|
4(c)
|
|
Indenture, dated as of May 9, 2007, by and between LNB
Bancorp, Inc. and Wells Fargo Bank, National Association, as
Trustee, relating to fixed rate Junior Subordinated Debt
Securities Due June 15, 2037. Incorporated by reference
herein from Exhibit 4.2 of the Corporations
Form 10-Q
for the fiscal quarter ended June 30, 2007.
|
4(d)
|
|
Amended and Restated Declaration of Trust of LNB Trust I,
dated as of May 9, 2007. Incorporated by reference herein
from Exhibit 4.3 of the Corporations
Form 10-Q
for the fiscal quarter ended June 30, 2007.
|
4(e)
|
|
Amended and Restated Declaration of Trust of LNB Trust II,
dated as of May 9, 2007. Incorporated by reference herein
from Exhibit 4.4 of the Corporations
Form 10-Q
for the fiscal quarter ended June 30, 2007.
|
4(f)
|
|
Amendment No. 1 to Amended and Restated Declaration of
Trust of LNB Trust I, dated as of August 4, 2010.
Incorporated by reference herein from Exhibit 99.2 of the
Corporations
Form 8-K
filed on August 6, 2010.
|
4(g)
|
|
First Supplemental Indenture, dated as of August 4, 2010,
between the Company and Wells Fargo Bank, National Association.
Incorporated by reference herein from Exhibit 99.3 of the
Corporations
Form 8-K
filed on August 6, 2010.
|
4(h)
|
|
Amendment No. 1 to Amended and Restated Declaration of
Trust of LNB Trust II, dated as of August 4, 2010.
Incorporated by reference herein from Exhibit 99.4 of the
Corporations
Form 8-K
filed on August 6, 2010.
|
4(i)
|
|
First Supplemental Indenture, dated as of August 4, 2010,
between the Company and Wells Fargo Bank, National Association.
Incorporated by reference herein from Exhibit 99.5 of the
Corporations
Form 8-K
filed on August 6, 2010.
|
4(j)
|
|
Form of Warrant for Purchase of Shares of Common Stock.
Incorporated by reference herein from Exhibit 4.1 of the
Corporations
Form 8-K
filed on December 17, 2008.
|
10(a)*
|
|
Form of Stock Appreciation Rights Agreement. Incorporated by
reference herein from Exhibit 10.1 to the
Corporations
Form 8-K
filed January 25, 2006.
|
10(b)*
|
|
LNB Bancorp, Inc. Stock Appreciation Rights Plan, as restated.
Incorporated by reference herein from Exhibit 10.2 of the
Corporations
Form 8-K
filed on December 18, 2009.
|
10(c)*
|
|
Stock Option Agreement, effective as of June 27, 2005,
between the Corporation and Frank A. Soltis. Incorporated by
reference herein from Exhibit 10.2 to the
Corporations quarterly report on
Form 10-Q
for the quarter ended September 30, 2005.
|
85
|
|
|
S-K
|
|
|
Reference
|
|
|
Number
|
|
Exhibit
|
|
10(d)*
|
|
Employment Agreement by and between Daniel E. Klimas and LNB
Bancorp, Inc. dated January 28, 2005. Incorporated by
reference herein from Exhibit 10(a) to the
Corporations
Form 10-K
for the fiscal year ended December 31, 2004.
|
10(e)*
|
|
Amendment to Employment Agreement by and between Daniel E.
Klimas and LNB Bancorp, Inc, dated as of July 16, 2008.
Incorporated by reference herein from Exhibit 10.1 of the
Corporations
Form 8-K
filed on July 18, 2008.
|
10(f)*
|
|
Amendment to Employment Agreement by and between Daniel E.
Klimas and LNB Bancorp, Inc, dated as of December 12, 2008.
Incorporated by reference herein from Exhibit 10(f) to the
Corporations
Form 10-K
for the fiscal year ended December 31, 2008.
|
10(g)*
|
|
Amendment to Employment Agreement by and between Daniel E.
Klimas and LNB Bancorp, Inc, dated as of December 15, 2009.
Incorporated by reference herein from Exhibit 10.3 of the
Corporations
Form 8-K
filed on December 18, 2009.
|
10(h)
|
|
Amendment to Supplemental Retirement Benefits Agreement by and
between Gary C. Smith and LNB Bancorp, Inc., and The Lorain
National Bank dated October 6, 2003. Incorporated by
reference herein from Exhibit (10a) to the Corporations
Form 10-K
for the year ended December 31, 2003.
|
10(i)*
|
|
The Lorain National Bank Retirement Pension Plan amended and
restated effective December 31, 2002, dated
November 19, 2002. Incorporated by reference herein from
Exhibit 10 to the Corporations annual report on
Form 10-K
for the year ended December 31, 2002.
|
10(j)
|
|
Lorain National Bank Group Term Carve Out Plan dated
August 7, 2002. Incorporated by reference herein from
Exhibit 10(a) to the Corporations quarterly report on
Form 10-Q
for the quarter ended September 30, 2002.
|
10(k)
|
|
Restated and Amended Employment Agreement by and between Gary C.
Smith and LNB Bancorp, Inc, and The Lorain National Bank dated
December 22, 2000. Incorporated by reference herein from
Exhibit 10(a) to the Corporations
Form 10-K
for the year ended December 31, 2001.
|
10(l)
|
|
Supplemental Retirement Benefits Agreement by and between Gary
C. Smith and LNB Bancorp, Inc, and The Lorain National Bank
dated December 22, 2000. Incorporated by reference herein
from Exhibit 10(n) of the Corporations
Form 10-K
for the fiscal year ended December 31, 2005.
|
10(m)
|
|
Amended Supplemental Retirement Agreement by and between Thomas
P. Ryan and LNB Bancorp, Inc. and The Lorain National Bank dated
December 23, 2000. Incorporated by reference herein from
Exhibit 10(o) of the Corporations
Form 10-K
for the fiscal year ended December 31, 2005.
|
10(n)
|
|
Amended Supplemental Retirement Agreement by and between Gregory
D. Friedman and LNB Bancorp, Inc. and The Lorain National Bank
dated December 23, 2000. Incorporated by reference herein
from Exhibit 10(p) of the Corporations
Form 10-K
for the fiscal year ended December 31, 2005.
|
10(o)*
|
|
Amended Supplemental Retirement Agreement by and between James
F. Kidd and The Lorain National Bank dated June 15, 1999.
Incorporated by reference herein from Exhibit 10(q) of the
Corporations
Form 10-K
for the fiscal year ended December 31, 2005.
|
10(p)*
|
|
Supplemental Retirement Agreement by and between James F. Kidd
and The Lorain National Bank dated July 30, 1996.
Incorporated by reference herein from Exhibit 10(t) of the
Corporations
Form 10-K
for the fiscal year ended December 31, 2005.
|
10(q)
|
|
Supplemental Retirement Agreement by and between Thomas P. Ryan
and The Lorain National Bank dated July 30, 1996.
Incorporated by reference herein from Exhibit 10(u) of the
Corporations
Form 10-K
for the fiscal year ended December 31, 2005.
|
10(r)
|
|
Supplemental Retirement Agreement by and between Gregory D.
Friedman and The Lorain National Bank dated July 30, 1996.
Incorporated by reference herein from Exhibit 10(v) of the
Corporations
Form 10-K
for the fiscal year ended December 31, 2005.
|
10(s)
|
|
Agreement To Join In The Filing of Consolidated Federal Income
Tax Returns between LNB Bancorp, Inc. and The Lorain National
Bank dated February 27, 2004. Incorporated by reference
herein from Exhibit 10(w) of the Corporations
Form 10-K
for the fiscal year ended December 31, 2005.
|
10(t)*
|
|
LNB Bancorp, Inc. 2006 Stock Incentive Plan, as restated.
Incorporated by reference herein from Exhibit 10.1 of the
Corporations
Form 8-K
filed on December 18, 2009.
|
86
|
|
|
S-K
|
|
|
Reference
|
|
|
Number
|
|
Exhibit
|
|
10(u)*
|
|
2008 Management Incentive Plan for Key Executives, as restated.
Incorporated by reference herein from Exhibit 10(ee) of the
Corporations
Form 10-K
for the fiscal year ended December 31, 2008.
|
10(v)
|
|
Guarantee Agreement, dated as of May 9, 2007, by and
between LNB Bancorp, Inc. and Wells Fargo Bank, National
Association, as Trustee, relating to securities of LNB
Trust I. Incorporated by reference herein from
Exhibit 10. 1 of the Corporations Form 1
0-Q for the
fiscal quarter ended June 30, 2007.
|
10(w)
|
|
Guarantee Agreement, dated as of May 9, 2007, by and
between LNB Bancorp, Inc. and Wells Fargo Bank, National
Association, as Trustee, relating to securities of LNB
Trust II. Incorporated by reference herein from
Exhibit 10.2 of the Corporations
Form 10-Q
for the fiscal quarter ended June 30, 2007.
|
10(x)*
|
|
Form of Nonqualified Stock Option Agreement under the LNB
Bancorp, Inc. 2006 Stock Incentive Plan. Incorporated by
reference herein from Exhibit 10.1 of the
Corporations
Form 8-K
filed February 6, 2008.
|
10(y)
|
|
Letter Agreement, dated December 12, 2008, between the
Corporation and the U.S. Treasury, which includes the Securities
Purchase Agreement Standard Terms attached thereto,
with respect to the issuance and sale of the Series B
Preferred Stock and Warrant. Incorporated by reference herein
from Exhibit 10.1 of the Corporations
Form 8-K
filed on December 17, 2008.
|
10(z)*
|
|
2009 Management Incentive Plan for Key Executives, as restated.
Incorporated by reference herein from Exhibit 10.1 of the
Corporations
Form 8-K
filed on November 10, 2009.
|
10(aa)*
|
|
Form of Restricted Stock Agreement under the LNB Bancorp, Inc.
2006 Stock Incentive Plan. Incorporated by reference herein from
Exhibit 10.1 of the Corporations
Form 8-K
filed February 25, 2010.
|
10(bb)
|
|
Exchange Agreement, dated as of August 4, 2010.
Incorporated by reference herein from Exhibit 10.1 of the
Corporations
Form 8-K
filed on August 6, 2010.
|
21.1
|
|
Subsidiaries of LNB Bancorp, Inc.
|
23.1
|
|
Consent of Plante & Moran, PLLC.
|
31.1
|
|
Certification of the Chief Executive Officer Pursuant to
Rule 13a-14(a)/15-d-14(a).
|
31.2
|
|
Certification of the Chief Financial Officer Pursuant to
Rule 13a-14(a)/15-d-14(a).
|
32.1
|
|
Certification of the Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as Enacted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
32.2
|
|
Certification of the Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Enacted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
99.1
|
|
Certification of the Chief Executive Officer Pursuant to
Sections 101(a)(1), 101(c)(5), and 111 of the Emergency
Economic Stabilization Act of 2008, as Amended by the American
Recovery and Reinvestment Act of 2009.
|
99.2
|
|
Certification of the Chief Financial Officer Pursuant to
Sections 101(a)(1), 101(c)(5), and 111 of the Emergency
Economic Stabilization Act of 2008, as Amended by the American
Recovery and Reinvestment Act of 2009.
|
|
|
|
* |
|
Management contract, compensatory plan or arrangement |
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LNB BANCORP, INC.
(Registrant)
Date: March 11, 2011
Gary J. Elek
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Daniel
E. Klimas
Daniel
E. Klimas
|
|
President and Chief Executive Officer and Director (Principal
Executive Officer)
|
|
March 11, 2011
|
|
|
|
|
|
/s/ Gary
J. Elek
Gary
J. Elek
|
|
Chief Financial Officer (Principal Financial and Accounting
Officer)
|
|
March 11, 2011
|
|
|
|
|
|
/s/ James
R. Herrick
James
R. Herrick
|
|
Chairman and Director
|
|
March 11, 2011
|
|
|
|
|
|
/s/ Terry
D. Goode
Terry
D. Goode
|
|
Vice Chairman and Director
|
|
March 11, 2011
|
|
|
|
|
|
/s/ Robert
M. Campana
Robert
M. Campana
|
|
Director
|
|
March 11, 2011
|
|
|
|
|
|
/s/ J.
Martin Erbaugh
J.
Martin Erbaugh
|
|
Director
|
|
March 11, 2011
|
|
|
|
|
|
/s/ Lee
C. Howley
Lee
C. Howley
|
|
Director
|
|
March 11, 2011
|
|
|
|
|
|
/s/ Daniel
G. Merkel
Daniel
G. Merkel
|
|
Director
|
|
March 11, 2011
|
|
|
|
|
|
/s/ Benjamin
G. Norton
Benjamin
G. Norton
|
|
Director
|
|
March 11, 2011
|
|
|
|
|
|
/s/ Thomas
P. Perciak
Thomas
P. Perciak
|
|
Director
|
|
March 11, 2011
|
|
|
|
|
|
/s/ Jeffrey
F. Riddell
Jeffrey
F. Riddell
|
|
Director
|
|
March 11, 2011
|
|
|
|
|
|
/s/ John
W. Schaeffer, M.D.
John
W. Schaeffer, M.D.
|
|
Director
|
|
March 11, 2011
|
|
|
|
|
|
/s/ Donald
F. Zwilling
Donald
F. Zwilling
|
|
Director
|
|
March 11, 2011
|
88